When small companies buy big: The potential of asset-based lending

April 05, 2018

A small telecommunications logistics company wanted to acquire a new division which would more than double their size. Here’s how they were able to do it, thanks to asset-based financing.  

By Beth Limpert, Senior Vice President, U.S. Bank

 

In the fall of 2008, the financial industry sat on the cusp of a major economic downturn. It wasn’t the best time to engage in large-scale negotiations on mergers or acquisitions, yet that opportunity still appeared for one midsize telecommunications logistics company in Minnesota.

KGP Telecommunications, Inc., today KGPCo, aimed big and looked to acquire a division of a major telecom company. The division was greater than the company’s size, heavily focused on assets, and no longer a strategic fit for its parent company. How could this midsize, family-owned telecommunications company finance a major asset-intensive acquisition during the worst part of the economic downturn? 

 

First challenge: Finding a willing lender

Many banks weren’t willing to lend in the latter part of 2008, for obvious reasons. Lenders were pulling back from new business due to issues within their existing portfolios, which meant that KGPCo initially had difficulty finding the right lender. Beth Limpert, U.S. Bank senior vice president of Asset-Based Finance, who served as the portfolio manager for the KGPCo account, described the major hurdles for the company.

The first major challenge was to find a bank that would lend, finance the acquisition and take time to understand both the existing business and the acquisition target, a division of a bigger company,” Limpert said. “The target company also didn’t have stand-alone audited statements, which made things more challenging from a due diligence perspective.”

KGPCo found one major bank that could help them to pursue their goals: U.S. Bank. 

 

Second challenge: Evolving with a changing industry

KGPCo was founded in 1973 by the Putrah family, who still owns it today. The company built its business as a distributor of low-tech parts to major telecom companies. The telecommunications industry shifted away from landlines in the past decade, and KGPCo needed to diversify their portfolio. Phone lines alone weren’t enough. They needed to aim broader.

Limpert shares how they worked with U.S. Bank to expand their product lines through acquisitions and internal growth.

“The telecom industry was changing very rapidly,” Limpert said. “People were moving away from landlines, and their core business still served that market. The company bolstered its management team and brought in a new CFO. We worked together to evaluate growth opportunities for the company, allowing us to expand our credit facility.” 

 

The solution: Strategic asset-based lending for an asset-rich purchase

With a focus that lends well to asset-rich companies, we were able to extend a credit facility to KGPCo. This allowed them to complete their initial acquisition as well as some follow-on acquisitions, expand their borrowing base, and boost their working capital in line with growth.

“We added inventory to the borrowing base and hired a third-party appraiser during the process,” Limpert added. “With the help of the appraiser, we structured a borrowing base around SKU turnover categories. This encouraged the client to focus on inventory turnovers, which helped them manage their stock more effectively and provided a solid borrowing base structure for the Bank.”

Today, KGPCo has nearly six times the revenue of 2008. While the acquisition itself was part of that revenue spike, most has come from organic growth financed through their credit line. They have no debt, other than their revolving loan.

They’ve also been able to expand their relationship with U.S. Bank through treasury management, payments services, equipment finance, commercial letters of credit and interest rate swaps. The relationship has blossomed significantly in the past decade.

Most importantly, they were not only able to withstand the financial downturn of 2008, but they thrived.

For Limpert, the KGPCo relationship remains a compelling example for the U.S. Bank philosophy on asset-based financing.

“The fact that they were trying to buy this division in a severe downturn speaks volumes,” Limpert said. “Our asset-based financing product lends itself very well to company with a lot of assets. We can offer a lot of flexibility and credit capacity, since we focus less on borrower performance factors and more on borrower liquidity, generated by assets.”

“They still call me to discuss their growth plans and ideas,” Limpert added. “I’m always happy to take those calls. When other banks come looking for their business, KGPCo tells them U.S. Bank is their bank, and refers them to me.”

 

Are you considering an asset-heavy acquisition, or looking to maximize your borrowing capacity? Contact a U.S. Bank asset-based lending specialist for more information.

Beth Limpert is a portfolio team leader for the asset-based finance team at U.S. Bank, responsible for the Upper Midwest region. She has 35 years of experience working with middle market companies.

 

U.S. Bank is not affiliated with KGPCo.

Related content

10 uses for a home equity loan

Is a home equity line of credit (HELOC) right for you?

These small home improvement projects offer big returns on investment

What is a home equity line of credit (HELOC) and what can it be used for?

What is refinancing a mortgage?

How to maximise your infrastructure finance project

4 benefits of independent loan agents

Changes in credit reporting and what it means for homebuyers

What’s the difference between Fannie Mae and Freddie Mac?

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

How to apply for federal student aid through the FAFSA

Understanding the true cost of borrowing: What is amortization, and why does it matter?

How jumbo loans can help home buyers and your builder business

Is a home equity loan for college the right choice for your student

Practical money skills and financial tips for college students

Maximizing your infrastructure finance project with a full suite trustee and agent

The A to Z’s of college loan terms

Financial steps to take after the death of a spouse

5 tips to help you land a small business loan

Take the stress out of buying your teen a car

How to fund your business without using 401(k) savings

Opening a business on a budget during COVID-19

Personal loans first-timer's guide: 7 questions to ask

Co-signing 101: Applying for a loan with co-borrower

Be careful when taking out student loans

Key considerations for launching an ILP

What you need to know before buying a new or used car

What is a CLO?

How I did it: Paid off student loans

Money Moments: How to finance a home addition

How to choose the best car loan for you

How a small business is moving forward during COVID-19

Tech lifecycle refresh: A tale of two philosophies

When to consider switching banks for your business

6 tips for trust fund distribution to beneficiaries

Dear Money Mentor: What is cash-out refinancing and is it right for you?

At your service: outsourcing loan agency work

Gifting money to adult children: Give now or later?

Do I need a financial advisor?

Renewing your custody contracts? Negotiate the fees.

Resources for managing financial matters after an unexpected death

Evaluating interest rate risk creating risk management strategy

Overcoming high interest rates: Getting your homeownership goals back on track

An investor’s guide to marketplace lending

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

Prioritizing payroll during the COVID-19 pandemic

Middle-market direct lending: Obstacles and opportunities

6 questions to ask before buying a new home

What you should know about buying a car

Your financial aid guide: What are your options?

How to get started creating your business plan

Webinar: Mortgage basics: How much house can you afford?

Is it the right time to refinance your mortgage?

Protecting cash balances with sweep vehicles

What are conforming loan limits and why are they increasing

How I did it: My house remodel

How do I prequalify for a mortgage?

8 steps to take before you buy a home

Common unexpected expenses and three ways to pay for them

How to use debt to build wealth

How I did it: Deciding whether to buy an RV

Streamline operations with all-in-one small business financial support

What’s a subordination agreement, and why does it matter?

Parent checklist: Preparing for college

Should you get a home equity loan or a home equity line of credit?

How to establish your business credit score

How to choose the right custodian for your managed assets

4 questions to ask before you buy an investment property

How to use your home equity to finance home improvements

What to know when buying a home with your significant other

Webinar: Mortgage basics: Buying or renting – What’s right for you?

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

Webinar: Mortgage basics: Finding the right home loan for you

Webinar: Mortgage basics: 3 Key steps in the homebuying process

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

Is online banking safe?

Everything you need to know about consolidating debts

7 steps to keep your personal and business finances separate

Your quick guide to loans and obtaining credit

Test your loan savvy

ABL mythbusters: The truth about asset-based lending

Collateral options for ABL: What’s eligible, what’s not?

How liquid asset secured financing helps with cash flow

When small companies buy big: The potential of asset-based lending

Questions to ask before buying a car

Can you take advantage of the dead equity in your home?

Costs to consider when starting a business

Investing in capital expenditures: What to discuss with key partners

Can ABL options fuel your business — and keep it running?

Alternative assets: Advice for advisors

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.