bankers-banks-the-role-of-central-banks-in-banking-crises

Bankers’ Banks- The Role of Central Banks in Banking Crises

Writen by Sam Vaknin, Ph.D.

Central banks are relatively new inventions. An American President (Andrew Jackson) even cancelled its country’s central bank in the nineteenth century because he did not think that it was very important. But things have changed since. Central banks today are the most important feature of the financial systems of most countries of the world.

Central banks are a bizarre hybrids. Some of their functions are identical to the functions of regular, commercial banks. Other functions are unique to the central bank. On certain functions it has an absolute legal monopoly.

Central banks take deposits from other banks and, in certain cases, from foreign governments which deposit their foreign exchange and gold reserves for safekeeping (for instance, with the Federal Reserve Bank of the USA). The Central Bank invests the foreign exchange reserves of the country while trying to maintain an investment portfolio similar to the trade composition of its client - the state. The Central bank also holds onto the gold reserves of the country. Most central banks have lately tried to get rid of their gold, due to its ever declining prices. Since the gold is registered in their books in historical values, central banks are showing a handsome profit on this line of activity. Central banks (especially the American one) also participate in important, international negotiations. If they do not do so directly - they exert influence behind the scenes. The German Bundesbank virtually dictated Germany’s position in the negotiations leading to the Maastricht treaty. It forced the hands of its co-signatories to agree to strict terms of accession into the Euro single currency project. The Bunbdesbank demanded that a country’s economy be totally stable (low debt ratios, low inflation) before it is accepted as part of the Euro. It is an irony of history that Germany itself is not eligible under these criteria and cannot be accepted as a member in the club whose rules it has assisted to formulate.

But all these constitute a secondary and marginal portion of a central banks activities.

The main function of a modern central bank is the monitoring and regulation of interest rates in the economy. The central bank does this by changing the interest rates that it charges on money that it lends to the banking system through its “discount windows”. Interest rates is supposed to influence the level of economic activity in the economy. This supposed link has not unequivocally proven by economic research. Also, there usually is a delay between the alteration of interest rates and the foreseen impact on the economy. This makes assessment of the interest rate policy difficult. Still, central banks use interest rates to fine tune the economy. Higher interest rates - lower economic activity and lower inflation. The reverse is also supposed to be true. Even shifts of a quarter of a percentage point are sufficient to send the stock exchanges tumbling together with the bond markets. In 1994 a long term trend of increase in interest rate commenced in the USA, doubling interest rates from 3 to 6 percent. Investors in the bond markets lost 1 trillion (=1000 billion!) USD in 1 year. Even today, currency traders all around the world dread the decisions of the Bundesbank and sit with their eyes glued to the trading screen on days in which announcements are expected.

Interest rates is only the latest fad. Prior to this - and under the influence of the Chicago school of economics - central banks used to monitor and manipulate money supply aggregates. Simply put, they would sell bonds to the public (and, thus absorb liquid means, money) - or buy from the public (and, thus, inject liquidity). Otherwise, they would restrict the amount of printed money and limit the government’s ability to borrow. Even prior to that fashion there was a widespread belief in the effectiveness of manipulating exchange rates. This was especially true where exchange controls were still being implemented and the currency was not fully convertible. Britain removed its exchange controls only as late as 1979. The USD was pegged to a (gold) standard (and, thus not really freely tradable) as late as 1971. Free flows of currencies are a relatively new thing and their long absence reflects this wide held superstition of central banks. Nowadays, exchange rates are considered to be a “soft” monetary instrument and are rarely used by central banks. The latter continue, though, to intervene in the trading of currencies in the international and domestic markets usually to no avail and while losing their credibility in the process. Ever since the ignominious failure in implementing the infamous Louvre accord in 1985 currency intervention is considered to be a somewhat rusty relic of old ways of thinking.

Central banks are heavily enmeshed in the very fabric of the commercial banking system. They perform certain indispensable services for the latter. In most countries, interbank payments pass through the central bank or through a clearing organ which is somehow linked or reports to the central bank. All major foreign exchange transactions pass through - and, in many countries, still must be approved by - the central bank. Central banks regulate banks, licence their owners, supervise their operations, keenly observes their liquidity. The central bank is the lender of last resort in cases of insolvency or illiquidity.

The frequent claims of central banks all over the world that they were surprised by a banking crisis looks, therefore, dubious at best. No central bank can say that it had no early warning signs, or no access to all the data - and keep a straight face while saying so. Impending banking crises give out signs long before they erupt. These signs ought to be detected by a reasonably managed central bank. Only major neglect could explain a surprise on behalf of a central bank.

One sure sign is the number of times that a bank chooses to borrow using the discount windows. Another is if it offers interest rates which are way above the rates offered by other financing institutions. There are may more signs and central banks should be adept at reading them.

This heavy involvement is not limited to the collection and analysis of data. A central bank - by the very definition of its functions - sets the tone to all other banks in the economy. By altering its policies (for instance: by changing its reserve requirements) it can push banks to insolvency or create bubble economies which are bound to burst. If it were not for the easy and cheap money provided by the Bank of Japan in the eighties - the stock and real estate markets would not have inflated to the extent that they have. Subsequently, it was the same bank (under a different Governor) that tightened the reins of credit - and pierced both bubble markets.

The same mistake was repeated in 1992-3 in Israel - and with the same consequences.

This precisely is why central banks, in my view, should not supervise the banking system.

When asked to supervise the banking system - central banks are really asked to draw criticism on their past performance, their policies and their vigilance in the past. Let me explain this statement:

In most countries in the world, bank supervision is a heavy-weight department within the central bank. It samples banks, on a periodic basis. Then, it analyses their books thoroughly and imposes rules of conduct and sanctions where necessary. But the role of central banks in determining the health, behaviour and operational modes of commercial banks is so paramount that it is highly undesirable for a central bank to supervise the banks. As I have said, supervision by a central bank means that it has to criticize itself, its own policies and the way that they were enforced and also the results of past supervision. Central banks are really asked to cast themselves in the unlikely role of impartial saints.

A new trend is to put the supervision of banks under a different “sponsor” and to encourage a checks and balances system, wherein the central bank, its policies and operations are indirectly criticized by the bank supervision. This is the way it is in Switzerland and - with the exception of the Jewish money which was deposited in Switzerland never to be returned to its owners - the Swiss banking system is extremely well regulated and well supervised.

We differentiate between two types of central bank: the autonomous and the semi-autonomous.

The autonomous bank is politically and financially independent. Its Governor is appointed for a period which is longer than the periods of the incumbent elected politicians, so that he will not be subject to political pressures. Its budget is not provided by the legislature or by the executive arm. It is self sustaining: it runs itself as a corporation would. Its profits are used in leaner years in which it loses money (though for a central bank to lose money is a difficult task to achieve).

In Macedonia, for instance, annual surpluses generated by the central bank are transferred to the national budget and cannot be utilized by the bank for its own operations or for the betterment of its staff through education.

Prime examples of autonomous central banks are Germany’s Bundesbank and the American Federal Reserve Bank.

The second type of central bank is the semi autonomous one. This is a central bank that depends on the political echelons and, especially, on the Ministry of Finance. This dependence could be through its budget which is allocated to it by the Ministry or by a Parliament (ruled by one big party or by the coalition parties). The upper levels of the bank - the Governor and the Vice Governor - could be deposed of through a political decision (albeit by Parliament, which makes it somewhat more difficult). This is the case of the National Bank of Macedonia which has to report to Parliament. Such dependent banks fulfil the function of an economic advisor to the government. The Governor of the Bank of England advises the Minister of Finance (in their famous weekly meetings, the minutes of which are published) about the desirable level of interest rates. It cannot, however, determine these levels and, thus is devoid of arguably the most important policy tool. The situation is somewhat better with the Bank of Israel which can play around with interest rates and foreign exchange rates - but not entirely freely.

The National Bank of Macedonia (NBM) is highly autonomous under the law regulating its structure and its activities. Its Governor is selected for a period of seven years and can be removed from office only in the case that he is charged with criminal deeds. Still, it is very much subject to political pressures. High ranking political figures freely admit to exerting pressures on the central bank (at the same breath saying that it is completely independent).

The NBM is young and most of its staff - however bright - are inexperienced. With the kind of wages that it pays it cannot attract the best available talents. The budgetary surpluses that it generates could have been used for this purpose and to higher world renowned consultants (from Switzerland, for instance) to help the bank overcome the experience gap. But the money is transferred to the budget, as we said. So, the bank had to do with charity received from USAID, the KNOW-HOW FUND and so on. Some of the help thus provided was good and relevant - other advice was, in my view, wrong for the local circumstances. Take supervision: it was modelled after the Americans and British. Those are the worst supervisors in the West (if we do not consider the Japanese).

And with all this, the bank had to cope with extraordinarily difficult circumstances since its very inception. The 1993 banking crisis, the frozen currency accounts, the collapse of the Stedilnicas (crowned by the TAT affair). Older, more experienced central banks would have folded under the pressure. Taking everything under consideration, the NBM has performed remarkably well.

The proof is in the stability of the local currency, the Denar. This is the main function of a central bank. After the TAT affair, there was a moment or two of panic - and then the street voted confidence in the management of the central bank, the Denar-DM rate went down to where it was prior to the crisis.

Now, the central bank is facing its most daunting task: facing the truth without fear and without prejudice. Bank supervision needs to be overhauled and lessons need to be learnt. The political independence of the bank needs to be increased greatly. The bank must decide what to do with TAT and with the other failing Stedilnicas?

They could be sold to the banks as portfolios of assets and liabilities. The Bank of England sold Barings Bank in 1995 to the ING Dutch Bank.

The central bank could - and has to - force the owners of the failing Stedilnicas to increase their equity capital (by using their personal property, where necessary). This was successfully done (again, by the Bank of England) in the 1991 case of the BCCI scandal.

The State of Macedonia could decide to take over the obligations of the failed system and somehow pay back the depositors. Israel (1983), the USA (1985/7) and a dozen other countries have done so recently.

The central bank could increase the reserve requirements and the deposit insurance premiums.

But these are all artificial, ad hoc, solutions. Something more radical needs to be done:

A total restructuring of the banking system. The Stedilnicas have to be abolished. The capital required to open a bank or a branch of a bank has to be lowered to 4 million DM (to conform with world standards and with the size of the economy of Macedonia). Banks should be allowed to diversify their activities (as long as they are of a financial nature), to form joint venture with other providers of financial services (such as insurance companies) and to open a thick network of branches.

And bank supervision must be separated from the central bank and set to criticize the central bank and its policies, decisions and operations on a regular basis.

There are no reasons why Macedonia should not become a financial centre of the Balkans - and there are many reasons why it should. But, ultimately, it all depends on the Macedonians themselves.

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Locating ATMs Offsite

Writen by Eric Morris

An ATM cardholder in dire need of fast cash can sometimes find it hard to locate offsite ATMs. To address this need, banks offer two ways clients can locate ATMs offsite.

The first way to locate an offsite ATM is through Internet inquiry. Most banks have a Web site that contains all the locations of ATMs, including those that are located offsite or in remote areas. Knowing the locations of your bank’s ATMs before you travel to unfamiliar areas will save you a lot of time should you find yourself strapped for cash.

On most bank Web sites, ATM addresses can be found on a separate page that is usually tagged the ?ATM locator? page. On this page, ATM clients enter information, and search engine finds the closest ATM. Among the information required are the city, state and zip code of where they wish to do their ATM transactions. You can use additional filter parameters to narrow down the results. For instance, you may want to see only ATMs that have 24-hour access, wheelchair access, or Braille-coded keys.

Apart from individual bank Web sites, there are also banking ‘yellow page’ Web sites that specialize in providing online users with everything they need to know about banking, including ATM offsite locations. These banking ‘yellow page’ Web sites are independent sites that are fueled by advertising revenue.

However, ATM offsite locators on the web can only assist those who have Internet access. To fulfill the needs of clients who might not be as technologically savvy as others, some banks have also put up their own customer care centers. Through these centers, bank clients can contact bank customer representatives to ask for information regarding nearby ATM locations. By dialing a toll-free number, bank clients can gain information about where they can perform their ATM transactions.

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Turning Your Trash Into Cash

Writen by Jeffrey Strain

Junk. We all have some of it lying around the house. Whether it’s boxed items cluttering the attic or everyday items that just don’t fit with the room’s decorating theme anymore, many of us have more than we need. At some point it all gets to be too much and in a fit of energy we decide that our place needs to be cleaned. Then the junk gets moved, typically to the nearest trash can. But wait. Before you throw out all that stuff, it pays to take head of the saying “one person’s junk is another person’s treasure.”

If you are about to throw out something because you think it has little value, you may come to regret it later. Those things that you consider to be trash many times have great value to collectors. If you have an item and have no idea if it has any worth, a quick first step is to head to the online auction sites like eBay. Input the item you have into their search engine. If similar items come up and there are bids on them, then someone out there thinks that the item you were about to trash has some worth.

If you are trying to get rid of a few select items, the online auction sites may be the perfect place. Simply place the item on auction for a minimum price and let others bid away on it. This is where you may find that old, ugly toy you could no longer stand the sight of looks like a perfect jewel to somebody else. You don’t even have to know how to list the items yourself anymore since sites like eBay offer services that will match you with someone who will list the auction for you for a small fee.

Even if the item doesn’t sell at auction, it still may be worth some money to you. If you have a large number of items that didn’t manage to sell on the online auctions, having a garage sale or heading off to sell at a local flea market for a day may bring in some extra cash. This is also a good way of getting rid of those everyday items that still have life, but you are certain are not worth a lot of money.

If you have an item that you suspect has some value, it pays to do a little research before placing it on auction. While the auction sites are a good place to see if something may have worth, they are not a good place to determine what the true value of something. Auctions can easily turn more emotional than sensible, and items may go for far more than their true worth. In the same vein, unique items that may not be familiar to those frequenting the online auctions may sell for far less than their true worth.

If you want to find the general true worth of something, the least expensive alternative is to head to your local library and check out collectible books and price guides on the subject. You can also search for Internet sites dedicated to the particular item in hand that can give you a good approximation of what the item may be worth. Another low cost alternative for those who don’t want to take the time researching is to take it to a pawn shop and see if, and how much, the shop would be willing to give you for it. Pawn shops will buy the item for a fraction of it’s true worth, so if you are offered a decent amount, you know that you have something of value.

For items that you believe may be worth quite a bit such as antiques or if you have a lot of items and want to make sure the gems don’t get accidentally placed with the ordinary items, it may be worthwhile to hire an appraiser. Appraisers charge between $150 and $300 an hour and you want to make sure that you get an independent appraiser that has no interest in purchasing the items you are having appraised (if the appraiser is interested in the items, he or she will be tempted to lowball their true worth in order to get them for a good price). You can get references for appraisers from organizations like the Appraisers Association of America: http://www.appraisersassoc.org

Even if you are not willing to put in the time and effort for any these events, there is always a better place than the trash can for most items. Simply load them up in your car and take them to a local charitable organization or the larger nationwide organizations like Goodwill and the Salvation Army. Not only will you be extending the life of the item, your donation will entitle you to receive a tax deduction for it if you itemize your tax return, and that’s certainly better than getting nothing at all.

Copyright (c) 2004, by Jeffrey Strain

This article may be freely distributed so long as the copyright, author’s information and an active link (where possible) are included.

A complimentary copy of any newsletter or a link to the site where the article is posted would be greatly appreciated.

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Going Public via Initial or Direct Public Offering: The Role of the Stock Exchange

Writen by Joel Arberman

While stock exchanges provide a number of services and functions within the financial world, their basic purpose can be summed up in two words: monitoring and marketplace. As a corporation looking to raise funds by going public, access to that marketplace is of the utmost importance.

Many individuals and companies seeking funding have a tendency to think of their issue in very self-centered terms. Some believe that once funding is obtained, the goal is accomplished and the importance of involvement with the stock exchange is minimal. If anything, though, the opposite is true. The importance of the stock exchange lies in the fact that it allows investors to maintain liquidity for their investment. When a stock is listed on a major exchange, it allows any shareholder to sell his or her shares almost instantly. In most cases, immediate small sales are available at or very near the quoted price per share.

Shares that aren’t listed through major exchanges are far less liquid, and could involve a great sacrifice or time or price to actually complete the sale. For this reason, investors pay less for stocks that can’t be readily traded on a major stock exchange. With an initial public offering, liquidity is rarely a problem. Where liquidity is an problem, a market maker fills in the gaps between supply and demand.

For direct public offerings, access to some form of stock exchange becomes more of an issue. In order for a direct public offering to be traded on an exchange, certain filings must be submitted with the SEC. If a company is able to get its offering listed on an exchange like the NASDAQ Over-the-Counter Bulletin Board system, the increased liquidity will be appreciated and rewarded by investors.

In addition to providing liquidity, stock exchanges also serve as a form of monitoring agency. In order for a stock to be listed with a particular exchange, it must complete a series of requirements and SEC filings. Presence on any given exchange indicates that all qualifying criteria have been met. Ability to qualify for listing on a stock exchange can signal a certain amount of stability in a company. While it’s certainly not a guarantee of the stock’s future performance, it does lend the company some credibility.

Because listing requirements vary for each exchange, listing on certain stock exchanges can be an even greater indicator of the quality of the company. For example, it is relatively easy for a company to be traded on over-the-counter bulletin board systems, but it is much more difficult to qualify for listing with the New York Stock Exchange. Educated investors are aware of this, and will take it into account when considering an investment.

Although the role of stock exchanges may seem peripheral at times, they serve an important function for companies considering going public. Their monitoring procedures and open marketplace ensure that qualifying companies get the most out of their offerings.

OPC-3 And Antioxidants

OPC-3

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Business Banking - Keeping Your Accounts Healthy

Writen by Joseph Kenny

There’s no room for complacency when it comes to running a business, and running your account is no different. You should check your statements carefully, and have a periodic review of the market to make sure your account is still the best one for your needs.

New accounts and special offers crop up all the time, and it may be worth your while to change banks. You can also point out the competition’s rates when negotiating terms with your own bank - often these are flexible and a bank may offer you improved rates if you hint that you are considering taking your business elsewhere. Stay on top of bank charges, and if any show on your account that you do not understand, contact the British Bankers’ Association for more detailed explanations on charges and interest: www.bba.org.uk

There are ways to minimise charges and run your account as smoothly as possible:

1. Automate Your Account

If you have frequent customers, you could encourage them to make payments by direct debit or standing order. The more electronic payments you have, the fewer charges you will incur. The same goes for your expenses - try to use automated services for all your regular payments.

2. Bank Online

If your bank account has online facilities, make use of them. It is both more efficient and cost effective. Larger businesses may be offered ‘PC banking’, which involves special software being installed on your accounting computer, so that your accounting system is linked directly to your bank.

If you find yourself struggling, for example if cash is short and it’s becoming difficult to meet the repayments on your loan, the best course of action is to visit your bank and renegotiate your account. You should do your best not to exceed any overdraft limit that has been agreed, and stick to the terms of your account. If you break the terms of your agreement there can be stiff penalties, such as referral fees and administration costs.

If you accept a cheque which then bounces, you will lose the money owed to you and also incur a charge. Be sure to write the number of the cheque guarantee card on the back of all cheques

You should also keep your records scrupulously accurate - noting all transactions and crosschecking your records with your bank statements. Not only will this mean you can query any discrepancies, but it will make filling in your tax return much quicker and easier!

budgeting-when-your-paycheck-varies

Budgeting When Your Paycheck Varies

Writen by Terry Rigg

How can you decide how much you have for bills and expenses when your paycheck varies from one payday to the next? That’s a question a lot of people struggle with.

A few of the occupations that I can think of off hand that could fall into this category are waitresses or waiters working for salary and tips, truck drivers that are paid by the mile and never know how many miles they are going to get, the self-employed that their business income varies from season to season, and the list could go on.

Trying to manage your finances with a steady income is hard enough but when you never know what your paycheck will be seems almost impossible, but it’s not. It is, however, going to be a little more tricky.

In my Budget and Bill Organizer I talk about averaging your expenses like your phone and electric bills that vary from month to month. The same principle can be used to average your income.

The first step you need to take is to find records of your pay for as far back as you can. It would be best if you had records going back for at least 6 months.

Take these records and total the amounts you were paid for the entire period. Then divide that by the number of months you have records for. This will give you your average monthly income.

If you don’t have any record of your previous pay you may need to go to your employer to get the information. If there is no way to get this information you should start a log of how much you get paid and use this to develop your budget.

Once you have determined your average monthly income you will need to develop your budget just as if this was your regular pay.

Here’s where it gets tricky. You aren’t always going make the amount you have budgeted. The only way to handle this is to save when you make more than what you have budgeted.

Here’s an example:

You have determined that your monthly budget is $2000 per month;

In January you earn $2500. You will need to put away $500 of that money so that you can make up for any month that your income falls below $2000.

This sounds like a simple solution to a complex problem but it may not be as easy as it sounds unless you accustomed to saving money. It will take some discipline to make sure that money is there when you need it.

There could be a bright side to this method. If you are able to put the extra money away and you have several months that you make more than your budget you could end up with a sizable savings account.

When setting up your budget make sure that you don’t underestimate your bills and expenses. This is one of the major reasons many budgets fail.

By averaging your income it will prevent the “Feast to Famine” approach to your spending. It only makes sense to spread your income out so that you can cover all of your bills and expenses every month.

discover-the-hidden-gold-riches-revealed-in-the-honest-money-principle

Discover The Hidden Gold Riches Revealed In The Honest Money Principle

Writen by Jerry Sakala

By Jerry Sakala

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September 14, 2008 · Posted in Finance · Comment 

Set A Family Budget With Professional Assistance

Writen by Mike Whitehead

After working for months the idea of a family vacation can seem like the ideal reward. A week or two in a sunny climate in the middle of a cold and snowy winter is the icing on their yearly cake. Vacations are usually costly though and if your job is set a family budget, you’ll want to get the most out of each dollar you’ve allocated to the vacation fund.

There are many important factors to consider if you’ve decided to set up a financial plan that includes money for vacations. It isn’t enough to just take a percentage of each paycheck and put it in a separate bank account that you’ll turn to at the end of the year. With the proper planning techniques in place when you set a family budget you’ll be able to execute a trip that will be unforgettable.

One important consideration is timing. Most people want to venture out on a holiday at the same time each year. The travel industry refers to these times as peak periods and they generally fall in December, March and again during the summer months. The reason for this is because more people are tempted to take off on a trip when their children aren’t in school. The travel industry knows this and prices are considerably higher during these times.

Although school work is most important, planning a trip during a non-peak time and preparing beforehand might be the most economical answer. Research is fundamental when planning any trip. There is an abundance of information on the internet that can give you an idea of the total cost you will be facing for your trip.

If you do decide to travel during a non-peak time and you have children enrolled in school, there are steps you can take to assist them with their studies. Talk to their teachers and have them assign homework for the trip. This is a wonderful method of not only keeping the children up to par in class but it gives them something to focus on during the car or airplane ride. Children can become agitated easily when expected to sit still for prolonged periods of time, but if they are engrossed in studies, the time moves along much more quickly.

Another consideration when you set a family budget that includes a vacation fund is to consider traveling to a destination that offers all-inclusive vacation packages. This includes not only your airfare and accommodations but can also include meals and beverages. The savings with this type of vacation plan can be considerable. It also offers up the benefit of pre-planning all related costs. You’ll know how much you need to save each month to reach your vacation goal.

One of the things that people often overlook when considering vacation expenses as they set a family budget is the benefit of visiting relatives. A destination that involves family members can result in a considerable savings in accommodation costs. Most people welcome the company of relatives for a few days and if you buy them dinner or surprise them with a thank-you gift they’ll invite you back time and time again

M Whitehead is a leader in Debt Management for the family. He will show you all the tricks for family debt management. Visit us at http://www.debtmanagementsupport.com

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September 13, 2008 · Posted in Finance · Comment 

Asset Based Lending as a Financing Tool

Writen by Kent Harlan

But as companies confront a tight credit market coupled with lower than expected results, many CFOs are viewing asset based lending as a viable option in the financing tool kit. Even successful companies with strong banking relationships can quickly fall out of favor with lenders and lose access to unsecured financing, especially if they’ve shown recent losses. A few bad quarterly results doesn’t necessarily mean that a company is in bad shape, but stringent bank underwriting parameters can cause existing loans to be called and prevent the firm from qualifying for new financing. A company facing such a scenario can use asset based lending (ABL) arrangements as bridge loans to pay off banks and provide liquidity until bank financing is achievable.

What is asset based lending?

An asset-based loan is secured by a company’s accounts receivable, inventory, equipment, and/or real estate, whereby the lender takes a first priority security interest in those assets financed. Asset-based loans are an alternative to traditional bank lending because they serve borrowers with risk characteristics typically outside a bank’s comfort level. These assets typically have an easily determined value. The financing can take the form of loans to revolving credit lines to equipment leases and can range from $100,000 to $1 billion, depending on needs and circumstances.

How can ABL be a beneficial financing option?

Acquisition

To grow a business, a company may look to acquire a strategic partner or even a competitor. Asset-based financing is often an efficient means to obtain funding for business acquisitions.

Turnaround Financing

Turnaround financing is often used by under-performing businesses that are not achieving their full potential. In some cases, it is used for businesses that are either insolvent or on their way to becoming insolvent. Asset-based lenders are accustomed to the bankruptcy process and asset-based financing is ideal for turnarounds because of its flexibility.

Capital Expenditures

Capital expenditure is the money spent to acquire and/or upgrade physical assets such as buildings and machinery. Capital expenditure is also commonly referred to as capital spending or capital expense.

Debtor-in-Possession (DIP) Financing

Debtor-in-possession (DIP) refers to a company that has filed for protection under Chapter XI of the Federal Bankruptcy Code and has been permitted by the bankruptcy court to continue its operations to effect a formal reorganization. A DIP company can still obtain loans–but only with bankruptcy court approval. DIP financing, which is new debt obtained by a firm during the Chapter XI bankruptcy process, allows the company to continue to operate during a reorganization process. Asset-based lenders also provide exit financing or confirmation financing to companies coming out of bankruptcy.

Growth

Typically, as a company grows so does its need for financing. Also, as a company’s collateral grows, its assets can strengthen its ability to borrow. An experienced and creative asset-based lender can assemble a credit facility that can scale to grow with a company.

Recapitalization

Recapitalization is the process of fundamentally revising a company’s capital structure. A company might recapitalize due to bankruptcy or replacing debt securities with equity in order to reduce the company’s ongoing interest obligation. A leveraged recapitalization typically achieves just the opposite–by taking on a material amount of debt, the company increases its ongoing interest obligation but is able to pay its shareholders a special dividend.

Refinancing/Restructuring

When a company enters or exits a growth stage, refinancing or restructured financing may be key to creating a capital structure that better meets the needs of the company. This type of financing is often used for market expansion, completing an acquisition, restructuring operations, or following a successful corporate turnaround.

Buyout

A buyout is the purchase of a controlling percentage of a company’s stock. In a leveraged buyout (LBO), the acquiring company uses the minimum amount of equity to purchase the target company. The target company’s assets are used as collateral for debt, and its cash flow is used to retire debt accrued by the buyer to acquire the company. A management buyout (MBO) is an LBO led by the existing management of a company.

What are the advantages to ABL?

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