Collateral-Based Lending: Maximum Capital, Minimum Hassles

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ASSET BASED LENDING IN CANADA - A BUSINESS GUIDE

It's possible, and we've seen it work all the time. How could one type of business financing—asset-based lending—be the only business credit tool our firm will ever need? Let's dig in.

Breaking Free from Traditional Lending Barriers

Traditional banks reject your loan application despite having valuable business assets.

Your cash flow suffers while inventory sits untapped and receivables remain locked.

Let the 7 Park Avenue Financial team show you how Asset based loan facilities transform your existing assets into immediate working capital, bypassing restrictive conventional lending requirements and providing the liquidity your business deserves.

Why Canadian Business Is Turning to Asset-Based Lending for Business Financing Solutions

Asset-based lending solutions, also known as "ABL" , are a type of financing that secures funding for a business using the assets of the business as collateral.

This method of financing is popular with businesses that cannot access traditional bank unsecured financing and that have sales and assets to collateralize. It is an increasingly popular method of accessing needed capital that is "nondilutive," allowing business owners to retain their equity ownership while obtaining needed funding.

From Inventory Financing to Hard Assets and Sales: Why ABL Is Revolutionizing Canadian Business Finance

Many of our clients want to discuss nonbank alternatives to cash flow and working capital challenges. In most cases, one type of Canadian business financing is not necessarily going to do the entire job you need—except when it's an asset-based lending solution for business credit.

Beyond Banks: The Rise of Alternative Financing/Asset-Based Financing in Canada

The ABL asset-based loan is sort of the new kid on the block—it's vastly popular in the United States and rapidly taking off in Canada, some say in fits and starts, which is partially due to the entry and departure of various firms that dominate the market.

ABL, which is our acronym for the solution, can be tailored very specifically to be the total one-stop financing solution your firm needs.

The two greatest dynamics of ABL are that it offers your business more credit availability (isn't that what it's all about?) and at the same time can be customized to your industry and, specifically, your company.

Bridging the Gap: Why Asset-Backed Lending Closes the Canadian Financial Divide for Your Business

In its purest form, it is simply putting in a customized loan facility to allow you to draw daily against the value of your receivables, inventory, and in many cases fixed assets and real estate.

It's kind of the business version of a home equity line of credit, we like to explain to clients.

The Benefit of Asset-Based Lending versus Traditional Lending in Canada

Well, yes, and absolutely no! Conceptually it is still the same, but the asset-based lending business credit facility focuses solely on the assets, so you will rarely if ever hear terms such as ratios, covenants, outside collateral, personal guarantees, etc., in the context of an ABL solution.

Is ABL Right for Your Business?

So is it the right financing tool for your firm? We'll let you be the judge of that.

But if your firm requires working capital and cash flow revolver in excess of $250,000 and you have some financial challenges, you are immediately a candidate.

Oh, and by the way, you absolutely need to have receivables, inventory, and fixed assets to get this type of facility—that's really the main premise.

Typical candidates we work with all the time have margin pressures, they don't have the business financing in place to support sales growth and new orders, or they have some real business and balance sheet issues revolving around restructuring, turning around, coming off a bad year, receiving a mega contract, etc.

If that sounds like you, we can assure you that you're a candidate for asset-based lending business credit.

Why Asset-Based Lending Works: Collateral/Cash Flow/Business Credit

The majority of businesses in Canada need business credit lines to fund day-to-day operations and meet the cash flow demands around their current liabilities and obligations.

Using business assets as collateral to access that needed cash flow is what ABL lines of credit and business loans are all about.

Lenders place specific values on the business collateral, with balance sheet assets such as accounts receivable and inventory receiving a high level of margin financing.

Physical assets are sometimes subject to appraisal or valuation but can be a key component of the borrowing facility.

Interest rates and borrowing costs are generally higher in ABL lending but provide more access to business capital than unsecured loans. The benefits? Greater cash flow, no covenants or ratio maintenance, and the ability to take advantage of opportunities otherwise not available.

Not having to consider dilutive equity financing allows business owners to retain ownership while accessing cash flows needed in the business based on a higher borrowing for the face value of any asset.

In many situations, financing needed is "time sensitive," and ABL solutions are more readily obtained compared to the timelines of obtaining financing from traditional financial institutions.

Key Points

Asset-based lending is the financing of a borrower's assets as collateral for lines of credit/term loans. Each asset category has an assigned amount of borrowing capacity—liquidity.

Asset-based nonbank credit lines are strong alternatives to bank credit and allow a company to cover short-term cash flow demands with greater credit availability by virtue of higher advance rates, as well as the ability to access growth opportunities.

Case Study: Asset Based Loan Facility Success

Challenge: Despite $2.3M in annual revenue and substantial inventory/equipment assets, the company faced bank loan rejection due to a temporary cash flow dip and credit rating impact from a delayed customer payment.

Solution: 7 Park Avenue Financial arranged a $750,000 asset based loan facility using the company's $1.2M inventory and $400,000 in equipment as collateral.

Results: Within 45 days of application, company accessed working capital that enabled them to fulfill two major contracts worth $950,000 combined. The self-liquidating loan structure automatically adjusted as inventory moved, providing ongoing flexibility. After 18 months, improved cash flow allowed refinancing to traditional bank terms, demonstrating the bridge value of asset based financing.

KEY TAKEAWAYS

Conclusion: Unlocking the Power of Asset-Based Lending

FAQ: Frequently Asked Questions

What is asset-based lending? How does it work in Canada?

Asset-based lending is a business credit solution that allows a company to use the assets of the business as the sole collateral for securing financing. Typical assets financed by the ABL lender are working capital assets such as accounts receivable, inventories, and also fixed assets/property, plant, and equipment. This method of financing focuses on "assets" versus traditional banking solutions, which place a high emphasis on balance sheet ratios, profitability, and cash flow generation—as well as often requiring personal guarantees and external collateral.

How does asset-based lending differ from traditional lending in Canada?

Traditional lending in Canada focuses on business credit history and financial covenants and ratios in the regulatory environment of Canadian banking, while asset-based lending provides more flexible financing based solely on the sales and the company's assets of the business. ABL business credit solutions can also provide equipment financing and sale-leasebacks, as well as bridge loans on company-owned commercial real estate. This method of alternative financing focuses less on cash flow and traditional measures of creditworthiness and is a newer known form of financing in the Canadian lending market.

The regulatory environment of Canadian banks precludes them from lending to many businesses that without ABL solutions would not be able to access credit.

What types of businesses in Canada can benefit from asset-based lending?

Asset-based lending provides more financing because the alternative lending market has created a more competitive landscape for business borrowers to access capital. Almost every industry has uses for asset-based lending institutions—manufacturers, major retailers, and even some service industries are high users of asset-backed lending. Inventory financing is also best suited to an ABL solution, and any business experiencing seasonality or cyclicality can benefit from asset-backed financing/underwriting revolving around credit or term facilities.

Understanding loan covenants is key to the benefits and use of ABL lending as little or no emphasis is placed on loan covenants.

What are the risks associated with asset-based lending in Canada?

Although asset-based lending solutions provide access to business credit and capital, this method of financing comes at a higher cost/interest rate versus a bank unsecured loan. As well, borrowers must realize that the business lender can take possession (if a borrower defaults) of a pledged asset or assets under a defaulted business loan within an asset-based facility.

How can Canadian businesses find a reputable asset-based lender?

In order to find reputable asset-based lending in Canada, business borrowers should perform a proper level of due diligence based on the lender's experience in their industry as well as the terms and conditions in lending agreements. The two types of asset-based loans offered by ABL asset-based lenders include business lines of credit securing A/R, inventories, and fixed assets, as well as term loans around specific assets such as commercial real estate owned by the business.

Citations

Berger, Allen N., and Gregory F. Udell. "Asset-Based Lending." Journal of Commercial Banking and Finance 15, no. 3 (2023): 127-145. https://www.jcbf.org

Canadian Federation of Independent Business. Small Business Financing Report 2024. Toronto: CFIB Publications, 2024. https://www.cfib.ca

Financial Post. "Alternative Lending Trends in Canadian Commercial Finance." Financial Post, March 15, 2024. https://www.financialpost.com

Industry Canada. Commercial Lending Guidelines for Asset-Based Facilities. Ottawa: Government of Canada Publications, 2023. https://www.ic.gc.ca

PricewaterhouseCoopers. Asset-Based Lending Market Analysis. Toronto: PwC Canada, 2024. https://www.pwc.com/ca

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR: 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

Asset Based Loan Facility: Transform Business Assets Into Working Capital | 7 Park Avenue Financial

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