From Fixed Cost to Dynamic Asset: Industry Expertise Can Revolutionize Financing

Brian Cuttic

Last Modified : Aug 21, 2024

Fact-checked by: Bruce Sayer

Sourcing, qualifying, and securing the best financing solution to support a business’s growth objectives can feel like navigating a complex chess game. While understanding terms such as interest rates and loan covenants is crucial, an often overlooked but equally important factor can make all the difference – your financing partner’s industry expertise.

Partnering with a finance company with industry expertise can significantly enhance a company’s financial health and agility. Their comprehensive grasp of business models and industry dynamics within a vertical allows experienced lenders to maximize financing availability. By leveraging insights, analyzing data, and allocating assets effectively, specialized industry lenders excel in providing tailored solutions to get the deal done.

Undercapitalized businesses struggling to find financing in the current lending landscape can easily overlook a lender’s lack of industry expertise. Choosing the first lender that shows a willingness to provide credit is ill-advised. Instead, investigate leading alternative lenders with a proven track record in the industry.

Lender expertise was pivotal in a recent case involving eCapital, a leading alternative lender, and a commercial linen company. The scenario highlights how a lender’s industry expertise can shape success and transform a financing structure from restrictive to growth-enabling.

Case in Point: Asset Classification

Tripped Covenants and Reduced Availability

Following a successful acquisition, a commercial linen provider servicing diverse sectors, from hospitality to healthcare, faced a critical challenge. The substantial inventory investment required to integrate the new entity triggered covenant violations with their existing bank lender. The bank treated the company’s linen inventory as a fixed cost, significantly reducing the available credit line. This classification and resulting credit restrictions threatened the company’s ability to maintain operations and fulfill its obligations to stakeholders, including a financial sponsor and a mezzanine lender. Collaboration with a specialty lender having the industry knowledge and financial expertise to maximize access to credit was required to support the company’s growth objectives.

How Industry Knowledge Makes All the Difference

Fixed-cost inventory typically ties up capital, is at risk of becoming obsolete, and often hampers liquidity. Due to the perceived risks, many lenders impose stricter terms or higher interest rates for financing fixed-cost inventory. eCapital’s comprehensive understanding of the commercial linen industry proved invaluable in this case.

Although inventory is typically categorized as a fixed cost, a one-time expense reflected on the balance sheet, it is not a hard and fast rule. Unlike raw materials or finished goods, linen inventory undergoes a distinct lifecycle. It requires continuous acquisition, laundering, distribution, and, eventually, replacement. Linen inventory’s continuous lifecycle and operational importance justify considering it a dynamic asset. Its ongoing management, maintenance, and replacement needs make it more akin to operating assets that require active management and investment throughout its lifecycle. By understanding this cyclical nature, eCapital categorized the linen as dynamic asset inventory. This reclassification enabled eCapital to get the deal done by maximizing access to credit via a tailored financing solution.

Tailoring Solutions to Industry Needs

Recognizing industry nuances when arranging a financial structure is key to maximizing credit availability. In this example, reclassifying the inventory as a dynamic asset enabled eCapital to structure an asset-based lending facility with the company’s required credit availability to fuel the acquisition and continue to grow the business. The flexible facility provided the commercial linen provider with:

• Access to more credit: Recognizing that linen inventory is constantly in motion, eCapital fit this asset class into the financing structure appropriately. This ensured the company could access the credit needed to maintain proper stock levels without encountering limitations based on a fixed-cost assumption.
• Flexibility Tailored for the Industry: With an understanding of the lifecycle associated with linen inventory (wear and tear, loss, obsolescence), eCapital designed an effective strategy aligned with the company’s operational reality.

By recognizing the dynamic nature of linen inventory, eCapital provided essential credit and tailored a strategy that effectively supported the company’s operational needs and industry nuances. The company could support its expanded operations and pursue growth objectives with this enhanced financing structure.

Collaboration Creates Success

This success story illustrates more than the benefits of a lender’s industry expertise; it underscores the power of partnership in crafting effective financial solutions. Collaboration between eCapital, the bank mezzanine group, the financial sponsor, and the linen company was instrumental in achieving a positive outcome. This collaborative spirit can be seen in two key aspects:

• Referral Network: The bank mezzanine group, impressed by eCapital’s track record in the linen industry, facilitated the initial introduction, demonstrating the value of a solid professional network built on specialized knowledge.
• Shared Objectives: All parties involved – the lenders, the financial sponsor, and the company – prioritized the business needs and worked together to find a solution that benefitted everyone. This collaborative approach ensured a successful outcome for all stakeholders.

Building a relationship with a lender who understands the industry and can collaborate with others to ensure optimum results can lead to beneficial long-term partnerships. In such scenarios, the lender can evolve into a strategic advisor and a pivotal partner in the company’s growth and success.

Investing in the Right Partner

While competitive rates and attractive terms are essential, collaborating with a financing partner solely based on these factors can be a short-sighted approach. Business can secure a more comprehensive financial solution by prioritizing lenders with deep industry knowledge and a collaborative spirit.

Here’s how partnering with a company like eCapital can benefit a business:

• Tailored Solutions: Industry know-how and an array of flexible financing options enable the best alternative lenders to structure financing that aligns with your specific business model, operational needs, and asset types. eCapital offers a variety of specialized credit options structured as tailored asset-based lending or invoice factoring facilities.
• Proactive Support: Finance partners with industry expertise can anticipate potential challenges and guide financing, understanding the specific risks associated with your inventory.
• Long-Term Relationship: Beyond the immediate transaction, such partnerships can foster enduring collaborations, support future growth initiatives, and ensure financing solutions adapt to your evolving needs.

Industry-experienced lenders often have a robust network of industry contacts, tools, and data sources, which can be valuable additional benefits of collaborating with these specialty lenders.

Conclusion

The story of eCapital’s involvement with the linen company is a powerful reminder that securing the right financing partner goes beyond the bottom line.

Partnering with a specialty finance company with deep industry knowledge can profoundly enhance a business’s financial health and operational agility. By leveraging their understanding of industry-specific dynamics, these lenders can offer tailored solutions, superior financing strategies, and strategic guidance that align closely with business goals. This collaborative approach optimizes credit utilization and fosters long-term relationships that support sustained growth and resilience in a competitive market landscape.

Choosing the right financing partner goes beyond the immediate transaction—it’s about securing a strategic ally invested in your company’s success.

Contact us today to request a free financing consultation and see what we can do for your business.

Key Takeaways

• Partnering with a financing company that understands the industry can significantly enhance a company’s financial health and agility.
• By leveraging their understanding of industry-specific dynamics, specialized lenders can offer tailored solutions, superior financing strategies, and strategic guidance that align closely with business goals.
• Follow a recent case involving eCapital, a leading alternative lender that leveraged industry expertise and collaboration to transform a commercial linen provider’s financing strategy from restrictive to growth-enabling.

Brian Cuttic

As Chief Executive Officer of the Asset-based Lending division, Brian Cuttic brings over 25 years of experience to his role, focusing on delivering results with the speed and certainty both he and eCapital have become synonymous for.

Respected within the industry for his ability to think creatively and strategically for his clients, Brian skillfully combines his background in both the traditional and alternative lending space alongside his own entrepreneurial experience. This results in a unique and beneficial perspective when applied to eCapital’s diverse portfolio of commercial clients.

Prior to eCapital, Brian has held executive level positions at organizations such as Bank of America, First Capital, Veritas Financial Partners, and Synovus Bank. Brian holds a Bachelor of Science, Accounting, from Virginia Commonwealth University.