ABL Loans & Asset Finance Revolvers: Your Guide to Flexible Financing

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ABL Loans and Asset Finance Revolvers: A Winning Combination for Financial Stability

Let's get right to the point. Are you not surprised that many Canadian business owners and financial managers are unaware of the importance of asset-based loans via abl lenders in the asset finance arena in Canada?

INTRODUCTION

Asset-based lending, known as ' ABL ' is a financing method allowing a business to use its assets as collateral for a loan or revolving credit facility . The common assets secured are accounts receivable, inventories, fixed assets, and even commercial real estate.

As the company uses the facility it borrows and repays based on incoming collections/ cash flow receipts - The business can re-borrow as needed based on the credit limit that was assigned to the facility - This is a cost-effective means of financing a business as the companies pay for funds only as used and fluctuates based on business needs.

Business owners should focus on how these facilities work, what they cost, and what the eligibility criteria are.

WHY CONSIDER ASSET-BASED LOANS?

ABL loans continue to be a popular method of alternative financing in Canada for businesses unable to meet traditional financial institution approvals for business financing. Being able to use sales and a wide range of assets for collateral provides a business with a flexible financing solution as a funding source for their business.

Businesses can use ABl financing to stay competitive and access the financing they needed when traditional cash flow lending solutions cannot be achieved.

Asset-based lending, also known as asset-backed finance, ABL financing or an asset-based loan, is a flexible form of financing that provides small and medium businesses with the ability to optimize cash generation. The availability of this type of funding maximizes growth opportunities while managing successful turnarounds to maximize profits.

Are you not even surprised that this type of loan financing (actually, it’s not a loan - more on that later), called a 'revolver,' competes with Canadian chartered banking facilities on a day-to-day basis and wins !?

ABL LOANS FROM ASSET BASED LENDERS ARE COVENANT LIGHT

Asset finance offered a huge benefit to business borrowers, in that the covenant restrictions and ratio requirements required b banks are NOT a focus under ABL LOANS. Lenders offering asset finance solutions via a senior credit facility are focused on asset values, and, unlike banks place less focus on liquidity.

ABL LOANS ARE A NEW FORM OF FINANCING

Asset-based lending is a form of financing where you can access the funds whenever needed and pay them back as soon as possible. This means that there are no penalties for paying it off early, nor will interest be accrued at any point in time.

Part of the confusion, misconceptions, and misinformation around this type of financing actually comes from the name and terms around the ABL revolver, which can mean different things to different people when it comes to 'asset-based lenders'.

ABL FINANCING AND ' FACTORING ' - CLEARING UP THE CONFUSION

Invoice factoring, also known as accounts receivable financing, is when a lender advances funds to an organization based on outstanding invoices (usually <90 days old). Essentially this means that factoring companies lend money from your unpaid bills via a receivable finance solution. The company gets its cash up front, and you get paid soon after.

Factoring can be considered asset-based lending because the business’s receivables act as collateral for funding with lenders. While many traditional factors offer Accounts Receivable Financing services, they will not typically provide loans in other assets such as inventory or equipment finance options due to less chance of repayment owing to longer terms.

WHO USES AN ABL LOAN FACILITY?

Asset based loans are used by companies that need working capital to operate or grow. Often, these cash flow problems stem from rapid growth when a company requests the ABL facility and it helps position them for future success in managing their finances even if they have not yet reached a point of profitability.

In the pure sense and most relevant meaning of the term in Canadian asset finance, the ABL facility provides comprehensive asset financing or monetizing of current (and in some cases) fixed assets that significantly enhance their working capital facilities. This type of facility competes head-on with Canadian charted bank facilities. Unlike a cash flow loan or a term loan, this type of funding simply monetizes assets.

ABL loans are well suited to businesses that are asset focused and who have fluctuating cash flow needs while all the time still requiring capital to operate and access growth opportunities. Industries such as Manufacturing and retail and distribution and transportation are extensive users of asset-based finance.

In larger transactions the abl lender may require some form of appraisal/appraisals based on asset values - this helps maximize the borrower power of the business based on advance rates on the assets.

COMPARING BANK REQUIREMENTS FOR A REVOLVING CREDIT LINE?

At 7 Park Avenue Financial, we feel the primary reason is simply that their facilities offered enhanced borrowing with a focus on assets, unlike comparable chartered bank facilities, which come with a stringent requirement of a clean balance sheet, profitability, ability to maintain ratios and covenants, and in many cases requiring outside collateral.

The 2008 and 2009 global recessions enhanced the viability and visibility of ABL loans. Banks all over North America pulled back on commercial lines of credit and revolver finance.

That leaves thousands of companies with reduced, restricted, and in some cases no borrowing or operating facilities. And let's not even talk about post-pandemic Covid challenges to business and economic uncertainty.

Most Canadian business owners and financial managers are unaware of who the ABL asset finance lender is. Typically they are smaller boutique firms, often subsidiaries of major U.S. corporations and banks. Their teams are small, highly focused on one thing (monetizing assets for cash flow and working capital!) and offer facilities anywhere from 250k to hundreds of millions of dollars.

Many Canadian companies are also unaware that several Canadian chartered banks have created asset finance lenders within their banks. The ultimate irony is that when a chartered bank calls a loan, a competing division within the bank can often rescue the company. We'll let you mull that one over!

As we noted, facilities are available for any amount over 250k. Still, the pure-play ABL revolver typically comes in at 3 to 5 Million dollars as an entry point, with loans typically secured by accounts receivable, inventory, fixed assets, and finally, real estate if applicable. It is these key assets that are used as collateral and they become your ongoing ' borrowing base '.

A SIMPLIFIED REPORTING PROCESS

Businesses using asset-based loan solutions are required to provide monthly reports on their business - typically that is an interim balance sheet and income statement and proper agings of accounts receivables, inventories, and accounts payable. Current technologies allow companies to simplify reporting via various digital solutions to upload necessary information in an efficient manner.

THE BORROWING POWER OF AN ASSET-BASED REVOLVER FACILITY

Lenders are flexible on the loan-to-value ratio. For example, they may give up to 90% of the face value for highly marketable security such as receivables- As a general rule, your asset-based loan is calculated on up to 90% of your accounts receivable, up to 90% of the net realizable value of inventory and equipment you own, as well as 75% for pre-sold merchandise.

Your assets are evaluated based on their estimated worth to provide a lending limit that can be used by businesses like yours with specialized needs or unsecured credit issues. This way, entrepreneurs get what they need without being penalized for not having perfect credit! - Bottom line? Enhanced borrowing power!

Asset-based loans are designed to cover the borrower's assets in case of default, but they never total 100% of the estimated value. The margin is held as a buffer for liquidation costs should that be necessary--and this includes things like discounting and paying any accrued interest on top if it will help them sell faster.

WHAT ARE ASSET BASED LENDING RATES?

The interest rates on asset-based loans vary greatly from one transaction to the next. Typically, these are based on what type of assets you have available as collateral and your business's financial performance.

Rates on an asset-based abl loan revolver facility are higher but competitive to overall credit quality. Small firms can pay a significant premium in financing charges, the offset being able to access working capital to facilitate growth and profits.

In summary, every business owner or financial manager concerned with operating finance should investigate and consider an asset-based financing solution. Normal banking criteria do not apply, and you have the ability to grow, restructure, and in some cases easily acquire a competitor using this finance strategy with your company's assets being the key focus.

You consider your firm unique and different, so investigate a new and unique type of short-term business financing via a revolver credit line that works! One of the key benefits of asset based loans is their ability to provide working capital.

This type of financing is ideal for companies that need extra cash, especially rapid growth start-ups or those with existing cash flow problems from rapidly growing too quickly and needing more money upfront than regular bank financing can offer them.

CONCLUSION

ABL loans and asset finance revolvers are a solid alternative to traditional bank cash flow lending . By understanding and focusing on the eligibility of the financing and the advantages business owners can make informed decisions around access to capital needed for growth.

Any company have seasonal or fluctuating cash flows are a potential beneficiary of ABL loan solutions.

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

What is asset-based lending?

Asset-based lending is a collateral-based loan for businesses. Financing solutions via Asset-based loans or lines of credit / revolving credit agreement are secured by inventory, accounts receivable, equipment or other property owned by the loan applicant. Asset-based lending maximizes cash flow for small and medium-sized businesses. Whether looking to grow or manage a successful turnaround, asset-backed financing provides maximum flexibility.

What are the qualifications for asset-based lending?

There is a general misconception about who qualifies for asset-based financing. In reality, the company must be stable and have assets that can be financed in order to qualify. The company's current debts cannot already be pledged to another lender - small and middle market companies are large users of ABL finance.

What are some uses of asset-based loans?

What is the main difference between ABL loans and traditional cash-flow lending?

ABL loans focus on the value of business assets used as collateral, while traditional cash-flow lending focuses on historical and present company cash flows.

What types of assets can be used as collateral for ABL loans?

Common types of collateral financed by the asset based lender include common physical assets such as receivables, inventories, fixed assets and real estate - in some cases, intellectual property can be monetized within a facility.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

ABL Loans and Asset Finance Revolvers: Guide to Flexible Business Financing Via Asset Based Lenders | 7 Park Avenue Financial

A Smarter Approach to Business Funding: Exploring ABL Loans and Asset Finance Revolvers