When most people hear the words “air ball,” they probably think about when a basketball player shoots and the ball doesn’t touch the rim or the net — only air. Those of us in the commercial lending field have a different and less amusing interpretation.

An air ball in the context of commercial lending is the difference between a loan and the value of hard assets supporting that loan. If the loan is greater than the borrower’s hard asset value, then you have an air ball. So, if you have a $450,000 revolver supported by $350,000 in current assets, properly margined, then you have a $100,000 air ball.

Assets are, in many cases, overstated from a lender’s perspective, so an air ball may be even larger than it appears after an examination of dilution of A/R and age of inventory. Today, many community and commercial banks still find themselves in situations where some loans exceed the value of hard assets after those assets are closely examined.

An air ball situation places both the lender and the borrower in a difficult position. If your borrower’s business has stabilized and it simply doesn’t have the hard assets to cover the loan, you have a couple of options. First, if the borrower is in default, you could decide to move against the collateral. In this case, you will likely take a loss if you made an unmonitored or unmargined loan.

If the borrower is not in default, you can muddle along, but you’ll have to deal with regulatory requirements for reserving against bad loans. If loan covenants are tripped, your bank might be required to reserve as much as 10 percent of the commitment. If it is a rated loan showing current performance issues, this can require a 15-30 percent reserve. 

How a Commercial Finance Company Can Help
Bringing in a commercial finance company during the workout will help reduce overall exposure and provide your bank with accurate information feedback. A commercial finance company will provide a revolving line of credit based on the margining of current assets. This will reduce total loan exposure and reveal the true nature of the air ball, which can then be structured as a “last-out” air ball whereby the liquidity provided by a commercial finance company will help the company grow toward a solution. A commercial finance company can release any excess cash flow that is generated, which can used to pay down the airball via periodic cash flow sweeps.

The advantage to your bank is that you lower your overall credit exposure, put a floor on what the potential loss could be, and keep your client’s treasury management business in the process. The borrower gets access to liquidity and growth capital and the services and experience of a seasoned lender like a commercial finance company. Best of all, there is still the possibility of recouping the air ball and the client becoming bigger and better down the road.

If a loan situation is too far gone, it might not make sense to attempt a turnaround. Ownership must be fully committed to the success of the company before a turnaround is attempted. In this situation, a commercial finance company’s ongoing services will keep cash flow issues to a minimum while freeing up ownership to focus on the core issues of the turnaround.

Good Workout Candidates
The best commercial finance company workout candidates are small to mid-sized businesses in the manufacturing, distribution or business services industries that have the potential for an increase in sales. Businesses must also have a reasonable potential profit margin, committed management and ownership, and a patient and understanding banker.

The best thing to do is contact your local a commercial finance company Business Development Officer and discuss your particular air ball scenario. Be prepared to provide your BDO with the current loan balance and structure and a current borrower balance sheet and income statement, which will aid in determining the potential size of the air ball. If the situation warrants, we would then ask for a warm introduction.

The borrower would be asked to provide us with a standard package of financial information, and within a few days will provide a written proposal for discussion purposes. At this time, we will discuss the security issues all three parties must sign onto.

A commercial finance company will ask your bank to subordinate the current assets (A/R and inventory) to the commercial finance company’s lien’s position; in return, they will commit to directing all funds to a specified account at your institution. Your bank will keep its first position on all the other collateral while retaining a second position on the current assets. In addition, the client will be asked to allow your bank to have complete access to all the A/R reports.

A commercial finance company’s professional A/R management services ensure that your clients’ A/R aging reports are accurate and always up to date. We also ensure that proper credit policies are followed at all times.

Air ball situations can be difficult for all parties involved, but creative financing solutions can help.


Rodney Schansman serves as Ftrans’ CEO and member of the Board of Directors and is responsible for leadership and strategic direction of the company. He is a 25-year veteran of commercial finance, healthcare finance and private equity.

When it comes to the different types of business loans available in the marketplace, business owners and entrepreneurs can be forgiven if they sometimes get a little confused. Different types of business financing are offered by different lenders and structured to meet different financing needs.

A bank is usually the first place business owners go when they need to borrow money, but not all businesses will qualify for a bank loan or line of credit. In particular, banks are hesitant to lend to new start-up companies that don’t have a history of profitability, to companies that are experiencing rapid growth, and to companies that may have experienced a loss in the recent past.

Where can businesses like these turn to get the financing they need? There are several options, including borrowing money from family members and friends, selling equity to venture capitalists, obtaining mezzanine financing, or obtaining an asset-based loan (ABL) from a commercial finance company.

Borrowing from family and friends is usually fraught with potential problems and complications, and has the potential to significantly damage close friendships and relationships. And the raising of venture capital or mezzanine financing can be time-consuming and expensive. Also, both of these options involve giving up equity in the company and perhaps even a controlling interest.

Balance Sheet vs. Cash Flow Lending
Often, the most attractive financing alternative for companies that don’t qualify for a traditional bank loan or line of credit is an asset-based loan from a commercial finance company. Unlike banks, commercial finance asset-based lenders look at a business’ balance sheet and assets — primarily, its accounts receivable and inventory — when analyzing financing requests. In other words, they are balance sheet lenders.

ABL lenders lend money based on the liquidity of the inventory and quality of the receivables, carefully evaluating the profile of the company’s debtors and their respective concentration levels. They will also look to the future to see what the potential impact is to accounts receivable from projected sales. It’s what we call “looking out the windshield.”

Banks, on the other hand, look primarily at a business’ income statement to determine if it can generate sufficient cash flow in the future to service the debt. In other words, banks are cash flow lenders, looking primarily at what a business has done financially in the past and using this to gauge what it can realistically be expected to do in the future. We call this “looking in the rearview mirror.”

An example helps illustrate the difference: Suppose ABC Company has just landed a $12 million contract that will pay out in equal installments over the next year, resulting in $1 million of revenue per month. It will take 12 months for the full contract amount to show up on the company’s income statement and for a bank to recognize it as cash flow available to service debt. However, an asset-based lender would view this as receivables sitting on the balance sheet and consider lending against them, depending on the creditworthiness of the debtor company.

In this scenario, a bank might lend on the margin generated from the contract. At a 10 percent margin, for example, a bank lending at 3x margin might loan the business $300,000. Because it looks at the trailing cash flow stream, an asset-based lender could potentially loan the business much more money — perhaps up to 80 percent of the receivables, or $800,000.

Comparing Apples and Oranges
As you can see, traditional bank lending and asset-based lending are really two different animals that are structured, underwritten and priced in totally different ways. Therefore, comparing banks and asset-based lenders is kind of like comparing apples and oranges.

For businesses that do not qualify for a traditional bank loan, the relevant comparison isn’t between ABL and a bank loan. Rather, it’s between ABL and one of the other financing options — friends and family, venture capital or mezzanine financing. Or, it might be between ABL and foregoing the opportunity.

For example, suppose XYZ Company has an opportunity for a $3 million sale, but it needs to borrow $1 million in order to fulfill the contract. The margin on the contract is 30 percent, resulting in a $900,000 profit. The company doesn’t qualify for a bank line of credit in this amount, but it can obtain an asset-based loan at a total cost of $200,000.

However, the owner tells his sales manager that he thinks the ABL is too expensive. “Expensive compared to what?” the sales manager asks him. “We can’t get a bank loan, so the alternative to ABL is not landing the contract. Are you saying it’s not worth paying $200,000 in order to earn $900,000?” In this instance, saying “no” to ABL would effectively cost the business $700,000 in profit.


Rodney Schansman serves as Ftrans’ CEO and member of the Board of Directors and is responsible for leadership and strategic direction of the company. He is a 25-year veteran of commercial finance, healthcare finance and private equity.

It takes money to make money. All businessmen know that. The most fundamental explanation is the Cash Cycle or the Cash Conversion Cycle. When thinking about your company, understanding how quickly you turn cash outflows into cash inflows is as important as how much profit you are booking. This is one of the first metrics I check when I’m hunting for understanding of a business. Today, we’ll see how it applies to a manufacturer I looked at the other day and a distributor that is one of our clients.

Let’s break this down We measure how swiftly a company turns cash into goods or services and back into cash. To do this, compute the cash conversion cycle, or CCC.

CCC = DIO + DSO – DPO   where:

DIO = days inventory outstanding

DSO = days sales outstanding

DPO = days payable outstanding

DIO = 365*Average Inventory/COGS. Days inventory outstanding is how many days it takes to sell inventory. Shorter is better. The more quickly a company can sell its inventory, the less time that cash is tied up as inventory sitting in the warehouse.

DSO = 365*Average Accounts Receivables/Revenue.  Days sales outstanding is how many days it takes to collect accounts receivable. Shorter is better. Quickly collecting the cash for sales means more quickly putting that cash back to work rather than lending it out to its customers (at 0% interest).

DPO = 365*Average Accounts Payable/COGS.  Days payables outstanding is how many days it takes the company to pay the bills to its suppliers. Longer is better. That is, extending payment of accounts payable acts as an interest-free loan to the company and keeps more cash within the company – until they quit extending terms.

Why does the CCC matter? The less time it takes a firm to convert outgoing cash into incoming cash, the less cash you need to run the profit engine. The less money tied up in inventory and accounts receivable, the more available to grow the company, pay investors, or both. To calculate the cash conversion cycle, add ‘days inventory outstanding’ to ‘days sales outstanding’, then subtract ‘days payable outstanding’. Like golf, the lower your score here, the better.

Example: a small distributor

Cash Conversion Cycle
Period 1 Period 2 Period 3
DIO 1.04 0.00 0.00
DSO 51.27 67.19 33.57
DPO 57.09 64.53 33.52
CCC -4.78 2.66 0.04

You can see that, as with most distributors, their cash cycle is balanced as they negotiate terms with their suppliers that let them pay for goods about the time they are able to collect on sales. They’ve pretty much averaged zero days cash conversion over these three periods. In that way they avoid needing large amounts of cash to support their profit engine.

For most small businesses, the CCC can give you valuable insight into how much cash is needed to sustain the business, where it is coming from, and whether or not that is a suitable place. It will also tell you how long it takes to turn a profit into cash. A company that’s taking longer to make cash will need to tap financing to grow faster than its profit reinvestment allows.

Many companies have poor basic capital structures where there is no real source of financing for the needed cash to operate the business, and this needs to be corrected.

Example: a small manufacturer

Cash Conversion Cycle
Period 1 Period 2 Period 3
DIO 299.10 375.04 525.18
DSO 175.03 33.17 24.72
DPO 171.76 210.53 312.80
CCC 302.38 197.68 237.10

This firm needs to do work on its policies and operations. Its position improved somewhat over the three time periods, but it still needs to have 237 times its average daily revenue in cash to finance its operation! Mostly this is due to excessively large inventories that are being financed on the back of paying its suppliers very slowly – almost a year on average! – and collecting from its clients very quickly. One look at this would lead us to go look at the inventory to see if it is still useful or if they’ve accumulated a bunch of inventory that will have to be thrown away.

For other firms, especially firms under duress, the CCC can tell you how well the company is managed or, at least, the degree of distress. Firms that begin to lose control of the CCC may be losing their clout with their suppliers (who might be demanding stricter payment terms) and customers (who might be demanding more generous terms). This is an important signal of future heightened distress — one that is key to investors and lenders.

How much capital do I need to operate my Cash Cycle?

You must have come up with the cash to pay for the inventory not when it is delivered, but when the invoice is due. Normally this is 30 days after delivery, but specific to the terms you negotiated with your supplier. Then, to the extent those terms are sooner than it turns into a sale (i.e. DIO > DPO), you need to finance your cost of inventory per day for that number of days. Additionally, you need to finance your receivables balance for the duration it is outstanding.

Where does it come from

Mostly, you’ve built this up from the original investment in the business, and accumulated profits. Conversely, you can borrow against your receivables and inventory assets (on the balance sheet) to finance them. This financing is called a working capital line of credit, or factoring.

What change over time tells me

For a firm in distress or need of capital, I’m highly interested in comparing a company’s CCC to its prior performance. Here’s where I believe all owners, managers, investors, and lenders need to become trend-watchers. Sure, there may be legitimate reasons for an increase in the CCC, but all things being equal, I want to see this number stay steady or move downward over time. Because of the seasonality in some businesses, the CCC for the TTM period may not be strictly comparable to other fiscal periods. Even the steadiest-looking businesses on an annual basis will experience some quarterly fluctuations in the CCC.

Though the CCC is easy to calculate, it’s definitely worth watching every quarter. You’ll be better informed about potential problems, and you’ll improve your odds of finding the right capital structure for your business.

If you want to get really sophisticated, you can add the amount tied up in property, plant and equipment, call that tangible capital employed, set it as the denominator under profit, and see what returns you are earning on the capital you have tied up in the business. Perhaps you’ll find you’d be better off buying a Treasury bond and sitting on the beach.

Cash is King. Profit numbers live in the accounting fantasy world we call “earnings” and have all sorts of things in them. Understand where your cash is coming from and what it is being consumed by and you’ll be a long way down the path of being able to keep some of it for yourself.

You may know that AdvancedAR (www.AdvancedARfunding.com) has quietly become the direct lending division of Ftrans over the last several months.   Ftrans continues our growth and significantly expands  our efforts in this area by creating a distinct funding operation, AdvancedAR, a provider of business lines of credit to small and mid-sized businesses. In conjunction with this launch of AdvancedAR, FNB Bank (www.yourfnbbank.com) joins with us as our new financing partner.  Ftrans, with over $6 billion in receivables transactions processed, continues to serve as the operations and transaction processor of Advanced AR.
AdvancedAR provides business lines of credit to SMB owners, supported by enhanced trade credit management and collection capabilities that have been developed by Ftrans over the last eight years.   These best-in-class practices and procedures are usually only available to the largest, most sophisticated businesses and help AdvancedAR’s clients collect receivables more quickly and reduce bad debt expense.
“The success that Ftrans has seen over the past few years is a true testament to the value our service provides small businesses,” said Dan Drechsel, CEO of Ftrans. “We believe that the official launch of AdvancedAR, which will now incorporate the direct lending division of Ftrans with FNB as our partner, will allow us to reach more businesses and help them solve their trade credit management and funding challenges.”
 “We believe AdvancedAR will significantly enhance our ability to build communities by helping small businesses grow,” explains Alan Gay, Chairman of FNB Bank.  “Partnering with Ftrans will allow us to serve existing and new clients with loan products that make use of Ftrans’ unique collateral monitoring and trade credit management capabilities.”
About FNB Bank
For over 111 years, FNB has been dedicated to making the community better by helping people reach their financial goals. Originally organized in 1900 in Scottsboro, Alabama, FNB now serves a three-county area through ten branch office locations.  FNB currently provides small business with financing exceeding $137,000,000.  FNB’s founders established FNB as an independent hometown bank and FNB continues to pursue that mission today.

A Simple but Costly Mistake

When looking for a business loan it is critical to present a professional appearance to potential lenders. Everyone knows to be organized, thorough and courteous, but many make a common mistake that ensures lenders won’t take them seriously. The fix is inexpensive and simple but if you aren’t aware of the problem it can be a costly mistake.

Many business owners underestimate the need for a custom email address for their company. Often, the first piece of information a lender sees about you and your company is an email address. Your first impression should be that you have taken the time to structure your business communications correctly. Sending business correspondence from a free email service like Gmail, Yahoo, or AOL undermines professional image.

Additionally, creating a simple web site to go along with your domain provides an extra edge of credibility. Savvy lenders, partner companies and consumers will check your site. Having a professional site not only shows that you are a legitimate business, but provides more information about your company. Consider it a low-cost opportunity to present your sales pitch to each visitor to your page. Most companies that sell domain names will also provide hosting, and many will set up a simple page for you.

A custom business domain name and email service is easy to set up. Some solutions cost less than $10 a year. Owning your domain shows lenders that you are running an established and legitimate company, and that you plan to stay that way. Take the time to set up a custom domain for your business emails. Start your conversation with lenders on the right note.

(The following services provide simple, affordable solutions for small to mid-size businesses)