The changing world of appraisals: globalization has had a major impact on appraisals, and so has the internet and the growing use of intellectual property as collateral. Borrowers need to be aware of these changes.

• Author: Maroney, Robert
• Position: Banking

Accurate appraisals are the very foundation of asset-based loans. Companies count on them to ensure that their borrowing power is maximized, while lenders rely on them to support the value of the credit they are extending. But since asset values and the forces that affect them fluctuate, approaches to valuation and asset disposition also must evolve to meet them.

Over the past several years, driven by the economy and increased globalization, the appraisal industry has changed significantly. How assets are sold and who is buying them are two of the most significant changes. The Internet and the growing use of intellectual property as collateral have also had an impact on deal structures and asset disposition recoveries. Lenders and borrowers need to be aware of these changes, which have substantially influenced the appraised value of inventory, equipment and other assets used to secure debt.

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Inventory Sell-through Brings Greater Recovery

Advance rates for asset-based lending deals historically were based on the forced liquidation value of the borrower's inventory--how much the inventory would bring if it were sold in bulk to wholesalers, competitors or liquidators. Today, advance rates are typically based on a percentage of the net orderly liquidation value (NOLV).

NOLV represents the gross orderly liquidation value recovery, less any expenses associated with the disposition. Rather than liquidating as much of the inventory as possible in bulk--at perhaps 40 to 50 percent of cost--most inventory appraisal companies attempt to sell some portion of the goods to the borrower's regular customers over a period of time.

This "sell-through" method typically produces a much higher gross recovery than a bulk sale, since a portion of the finished goods are sold at a higher percentage of cost and, in some cases, at a profit margin.

Expenses are much higher in a sell-through model versus a bulk sale, because of the costs associated with running the sale for a longer period. However, since finished goods are worth more to the borrower's normal customers, an inventory sell-through drives a much higher NOLV even after deducting the higher expenses. As a result, the sell-through approach has dramatically changed the way inventory is ultimately valued.

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