Asset Based Revolving Line of Credit: Guide for Canadian Businesses | 7 Park Avenue Financial

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YOUR COMPANY IS LOOKING FOR ASSET FINANCE AND ASSET-BASED LINE OF CREDIT FINANCING! 

ASSET-BASED FINANCING / TYPES OF ASSET-BASED FINANCING

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"The art of business is converting assets into cash at a profit." - Henry Ford

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer  asset based revolving lines of credit  and working capital solutions  – Save time, and focus on profits and business opportunities

7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”

Understanding the Asset-Based Revolving Line of Credit

Asset finance and revolving credit lines that can generate cash flow/working capital for businesses are almost always a top priority for Canadian business owners and financial managers. Your business assets hold untapped potential that could power your next growth phase.

Could your company benefit from an asset-based loan using this method of financing, which often includes a covenant-light structure to provide greater flexibility? We think so; let’s dig in.

Transform Business Assets Into Working Capital

Many Canadian businesses struggle with unpredictable cash flow cycles, watching growth opportunities disappear due to limited working capital. The stress of meeting payroll, managing inventory, and funding expansion can keep Canadian Business Owners awake at night.

Let the 7 Park Avenue Financial team show you how Asset-Based Revolving Lines of Credit convert your receivables, inventory, and equipment into immediate working capital, providing the flexibility your business needs to thrive.

3 Uncommon Takes on ' ABL':

1. Using an Asset Based Revolving Line of Credit can improve supplier relationships by enabling early payment discounts
2. This financing tool can serve as a hedge against interest rate fluctuations compared to traditional term loans
3. It can be strategically used to acquire competitors' assets during market downturns - Limits  are almost always significantly higher than traditional operating facility advances from conventional lending criteria

Did   You Know

• 78% of businesses using asset based lending report improved cash flow
• Average advance rates: 85% on receivables, 60% on inventory
• Market growth: 12% annually in Canadian asset based lending
• 65% reduction in cash flow gaps reported
• 92% renewal rate among established borrowers

WHAT IS ASSET-BASED LENDING ( ' ABL ' )

Independent finance firms are the real origin of asset credit lines - they are, therefore, ‘non-bank’ in nature and focus on funding your company’s assets via the maximum loan available to your business.

Entering into this type of facility should always be done with the expertise of a business financing advisor, your accountant, and, in some cases… your bank! Executing ABL transactions involves originating, structuring, and closing these transactions for a diverse client base. More on that last one later.

ASSET-BASED LOANS IN CANADA

The most important thing you can do when contemplating such a transaction is to understand the financial offering and how the Canadian marketplace works.

Asset finance or asset-based lines of credit allow your Canadian firm to maximize the utilization of asset values related to three possibly essential components of its asset base.

Those components?

Inventory

A/R

Equipment / Fixed assets facility limits

(In some cases,  asset lending values on real estate can be blended into your credit line)

So why does this facility work differently than unsecured loans via a traditional chartered bank line of credit under traditional commercial banking in Canada?

The answer?

Higher borrowing/margin limits via a higher loan-to-value ratio for growth financing funding!

What is meant by that? Your firm simply can leverage higher borrowing, when and if necessary, against those asset classes we have just mentioned.

In the case of receivables, 90% of receivables are less than 90 days, and in the case of inventory, it’s a case of understanding in advance the true value of your inventory on an ongoing basis, which is your costs and ultimate marketability.

Lenders often depend on the net orderly liquidation of inventory and accounts receivable to determine financing amounts.

The true cost benefit of an asset-based line of credit facility is that you use the facility when you want and to what extent you want - from a cost perspective, that equates to paying for only what you use. Lenders generally use the net orderly liquidation value (NOLV) as part of their appraisal methods to determine the inventory value companies can finance.

ASSET-BASED LENDING RATES

Asset finance and asset-based lines of credit tend to traditionally be more expensive than banks’ lines of credit due to higher interest rates. Let’s just understand the basics of that. Currently, banks pay between one or two percent, perhaps three percent to depositors in Canada.

If they can lend those funds to your firm at 2-300 basis points more—i.e., 5 or 6% rates, the banks consider that a winning proposition.

But they want to be secure on that transaction, so that involves your guarantee, lower margining of the asset, and strict rules and covenants around ratios, operating performance, etc.

Independent finance firms borrow from banks or raise capital themselves - they, therefore, mark up those funds, so in general, asset finance and asset-based lines of credit cost your firm more.

But if your firm can grow revenues and increase profits with a higher borrowing cost, is that not okay? We think the evidence suggests that proper consideration of an asset finance and asset-based line of credit warrants significant merit.

The bottom line is as follows:

You should consider asset-based facilities if your company is growing or has growth opportunities that need good financing solutions. Bank lending is still difficult for many small and medium-sized firms to access.

KEY TAKEAWAYS

• Borrowing Base Calculations determine your available credit by evaluating eligible assets.

• Monthly Collateral Reporting ensures continuous access to working capital

• Asset Eligibility Requirements define which assets qualify as security

• Advance Rates vary by asset type and quality

• Covenant Compliance maintains your borrowing privileges

CONCLUSION - ASSET-BASED LINES OF CREDIT

Investigate asset finance, determine your needs - 

Call 7 Park Avenue Financial,  a trusted, credible and experienced business financing advisor, to ensure your Canadian asset facility and financing solution can help your firm grow revenues and profits.

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

What is asset based lending

Asset-based lending, also known as asset-based financing, is a financing agreement that secures a business's collateral / physical assets via credit and term loans, a business line of credit, or, in some cases, a term loan. This method of financing a business utilizes assets such as accounts receivable, inventories, fixed assets/equipment, and, in some cases, commercial real estate.

More liquid assets, such as receivable financing, provide more financing, providing valuable working capital financing to fund day-to-day operations. If a borrower defaults, the specific assets secured under the financing are the collateral for the loans or lines of credit. Other assets, such as real estate or intellectual property, can be financed under the same facilities.

What is an asset line of credit?

Asset-based Lending is a business revolving line of credit that is typically secured via a/r, inventories, and fixed assets/equipment. These assets are margined to determine a borrowing base under which the company can borrow.

What is the difference between a loan and a line of credit?

A business line of credit typically has a credit limit attached to the facility—funds are paid back as the facility revolves and fluctuates according to the business's cash flows. Term loans are for the purchase of assets and have fixed payments or installments.

Is factoring accounts receivable a form of lending?

Factoring is a form of commercial financing under the umbrella of asset-based lending. It is a monetization of receivables on the balance sheet—it is not a loan/term loan per se. As businesses generate sales and issue invoices via the accounts receivable process, a firm can leverage cash flow as it requires.

How does an Asset-Based Revolving Line of Credit provide flexibility?

• Access funds as needed, pay only for what you use

• Credit line grows with your business

• No fixed monthly payments

• Seasonal adjustments available

• Multiple asset types are accepted

• Refinance  existing debt

What makes this financing option better than traditional loans?

• Higher advance rates available

• No fixed payment schedule

• Credit line grows with sales

• Faster approval process

• Lower personal guarantees required

How can this improve my cash flow management?

• Immediate access to working capital

• Reduced payment pressure

• Better supplier terms possible

• Seasonal flexibility

• Improved forecasting ability

What businesses benefit most from this type of financing?

• Manufacturing companies

• Wholesale distributors

• Service providers

• Seasonal businesses

• Growth-focused enterprises

How does the application process work?

• Initial asset evaluation

• Document submission

• Collateral audit

• Credit line establishment

• Ongoing monitoring setup

What documentation is required for approval?

• Financial statements

• Asset listings

• Tax returns

• Business plans

• Bank statements

How long does approval typically take?

• Pre-qualification: 24-48 hours

• Due diligence: 1-2 weeks

• Final approval: 2-3 weeks

• Documentation: 1 week

• First funding: 24-48 hours

What ongoing requirements exist?

• Monthly financial reporting

• Regular collateral updates

• Annual reviews

• Borrowing base certificates

• Covenant compliance

What costs are involved?

• Interest on borrowed amounts

• Monitoring fees

• Audit expenses

• Setup charges

• Unused line fees

How secure is this type of financing?

• Fully regulated

• Bank monitored

• Asset protected

• Insurance required

• Compliance overseen

What determines my credit limit?

• Asset quality and value

• Historical performance

• Industry type

• Management experience

• Financial strength

How does the revolving feature work?

• Continuous access to funds

• Automatic credit restoration

• Payment flexibility

• Usage-based costs

• Dynamic limit adjustments

What differentiates asset based from traditional lending?

• Asset focus vs credit score

• Flexible terms

• Higher advance rates

• Growth accommodation

• Reduced covenants