An asset-based line of credit is a newer business financing tool/solution that owners and financial managers keep hearing about, and they want more information, so let's dig in.
INTRODUCTION
When your business needs capital but traditional banks say no, asset-based lending companies offer a lifeline that many Canadian business owners don't fully understand.
These specialized lenders look beyond credit scores and focus on what you already own – your inventory, equipment, accounts receivable, and real estate.
Unlike conventional financing that scrutinizes your past, asset-based lending companies evaluate your present assets to unlock the working capital your business desperately needs.
For business owners who've faced rejection after rejection, understanding how these lenders operate can be the difference between surviving a cash crunch and thriving through expansion.
Breaking Free from Traditional Lending Barriers
Traditional banks reject 70% of small business loan applications, leaving you scrambling for alternatives.
Your cash flow suffers while opportunities slip away.
Let the 7 Park Avenue Financial team show you how Asset based lending companies solve this by using your existing assets as collateral, providing faster approvals and flexible terms that keep your business moving forward.
Similar to other forms of business financing that are newer and not yet in fullest use in Canada, asset-based financing, also called "ABL" financing, evolved from the U.S. and the U.K.
The industry originally started as a simple "factoring" or receivables finance arrangement.
HOW DOES AN ASSET-BASED LINE OF CREDIT WORK?
What asset-based lending does is take that basic concept of factoring and include all your other "assets," which traditionally are inventory, equipment, and in some cases the actual purchase orders and contracts that your firm receives and wishes to fulfill.
When we sit down with our customers and they ask us for information on asset-based lending, we find ourselves often explaining right out of the gate that asset-based lending is not "lending of last resort." Most of our customers are surprised to hear that some of the largest corporations in Canada and the U.S. finance their businesses through asset-based lending.
Unlock Hidden Capital
The fact that you as a Canadian business owner can leverage not only your receivables for liquidity, but also your inventory, contracts, equipment, and real estate naturally brings true liquidity to the table.
Many customers we work with immediately see asset-based financing as a major competitive advantage, enabling them to improve relations with suppliers and grow sales with new or existing customers.
In some instances, we have pointed out to clients that our best financing solution for a merger or acquisition scenario is an asset-based lending arrangement, as it maximizes the true asset and capital power of both firms.
In 2008 and 2009, Canada, like many other countries—or in fact, all the world—experienced a major liquidity crisis. As banks and independent finance companies pulled back on business lines of credit, not always because they wanted to but because they had to, asset-based lending continued to offer more liquidity to customers who were working capital and cash flow challenged.
And let's not talk about the COVID pandemic !!
Asset Based Lending Companies: When Banks Say No, They Say Yes
Naturally, as many Canadian firms had balance sheet and income statement erosion (i.e., financial losses), the challenge of what one could call "traditional" financing became even greater.
Many of our customers scrambled to get their balance sheets in order, as for the first time in many years, loan covenants were in breach, etc.
We don't want to say that the banks and other large finance firms in Canada let Canadian business owners down, but certainly many times it felt like that, and the welcome comfort of an asset-based lending arrangement saved the day for many firms of all sizes.
Bottom line? Asset-based lending has risen to the top of the pile with respect to being a robust, full financing option for Canadian firms looking for financing for a combination of one or all of the following: receivables, inventory, equipment, real estate, and contracts.
Case Study
Company: Canadian Manufacturer
Challenge: Seasonal cash flow gaps during slow winter months
Solution: $2M asset based credit line using equipment and receivables
Results: Maintained year-round operations, increased winter production capacity by 40%, improved supplier relationships with consistent payments, and achieved 25% revenue growth within 18 months. The flexible credit line expanded automatically with spring sales increases, supporting the company's strongest growth period.
CONCLUSION
Call 7 Park Avenue Financial, a credible, experienced, and trusted advisor in asset-based lending to determine if it's your firm's "holy grail" of Canadian financing!
FAQ
What types of assets do asset based lending companies accept as collateral? Asset based lending companies typically accept accounts receivable, inventory, equipment, machinery, real estate, and even intellectual property. The key is that these assets must have verifiable value and be readily marketable if needed.
How quickly can asset based lending companies approve and fund my loan? Asset based lending companies usually complete the approval process within 2-4 weeks, significantly faster than traditional banks which can take 2-3 months. Funding often occurs within days of final approval.
What are the typical interest rates charged by asset based lending companies? Asset based lending companies typically charge rates between 8-18% annually, depending on your assets, industry, and risk profile. While higher than traditional bank rates, the speed and flexibility often justify the cost.
Do asset based lending companies require personal guarantees? Asset based lending companies often require personal guarantees from business owners, but these are typically limited guarantees rather than full personal liability. The primary security comes from your business assets.
How much can I borrow from asset based lending companies? Asset based lending companies typically lend 70-90% of your accounts receivable value, 30-50% of inventory value, and up to 80% of equipment value. Total credit lines can range from $100,000 to several million dollars.
Who qualifies for asset based lending? Asset based lending companies serve businesses with substantial tangible assets, typically requiring annual revenues of $1 million or more. Companies in manufacturing, distribution, retail, and service industries often qualify.
What documentation do asset based lending companies require? Asset based lending companies require financial statements, accounts receivable aging reports, inventory listings, equipment appraisals, and detailed asset documentation. The focus is on asset verification rather than credit history.
When should businesses consider asset based lending? Asset based lending becomes essential when businesses need working capital quickly, face seasonal cash flow challenges, experience rapid growth, or encounter traditional bank lending restrictions.
Where can Canadian businesses find reputable asset based lending companies? Asset based lending companies operate throughout Canada, with major providers including traditional banks' specialty divisions, independent finance companies, and specialized asset based lenders serving specific industries.
Why do businesses choose asset based lending over traditional loans? Asset based lending offers faster approval, higher advance rates, more flexible terms, and availability when traditional credit is unavailable. The asset-focused approach provides solutions for businesses with credit challenges.
How do asset based lending companies evaluate loan applications? Asset based lending companies focus primarily on asset quality, collectibility, and marketability rather than credit scores. They conduct detailed asset audits and establish advance rates based on collateral value.
Which industries benefit most from asset based lending? Asset based lending companies serve manufacturing, wholesale distribution, retail, healthcare, staffing, and service industries. Any business with substantial receivables, inventory, or equipment can benefit.
What costs are associated with asset based lending? Asset based lending companies charge interest rates, origination fees, audit fees, and ongoing monitoring costs. Total costs typically range from 10-20% annually, depending on complexity and risk.
How does asset based lending differ from factoring? Asset based lending companies provide revolving credit lines secured by multiple assets, while factoring involves selling receivables. Asset based lending offers more comprehensive financing solutions.
What happens if I can't repay an asset based loan? Asset based lending companies have the right to collect receivables directly, take possession of inventory, or sell collateral assets. However, they typically work with borrowers to restructure terms before taking drastic action.
How does asset based lending improve my cash flow? Asset based lending companies provide immediate access to capital tied up in receivables and inventory, converting these assets into working capital that smooths seasonal fluctuations and supports growth initiatives.
What advantages do asset based lending companies offer over traditional banks? Asset based lending companies offer faster decisions, higher advance rates, more flexible structures, and continued availability even when credit ratings decline. They focus on asset quality rather than credit history.
How can asset based lending support my business growth? Asset based lending companies provide scalable financing that grows with your business. As receivables and inventory increase, available credit automatically expands, supporting acquisition financing and market expansion.
What flexibility do asset based lending companies provide? Asset based lending companies offer revolving credit lines for help with the company's cash flow, seasonal adjustments, and customized reporting requirements. They work with businesses to structure payments and terms that match cash flow patterns.
How do asset based lending companies help during difficult times? Asset based lending companies provide stability during challenging periods by maintaining credit availability when traditional lenders withdraw. They offer restructuring options and work collaboratively to preserve business relationships.
Can startups access asset based lending? Asset based lending companies typically require established businesses with proven assets and operating history. Startups usually need alternative financing until they develop sufficient collateral.
Is asset based lending available for seasonal businesses? Asset based lending companies excel at serving seasonal businesses by adjusting credit lines based on inventory cycles and receivables patterns. They understand seasonal cash flow challenges.
What happens to existing bank relationships when using asset based lending? Asset based lending companies can complement existing banking relationships or serve as primary lenders. Many businesses maintain deposit accounts with traditional banks while using asset based lenders for working capital.
How often do asset based lending companies audit my business? Asset based lending companies typically conduct monthly reporting reviews and quarterly field audits. High-risk situations may require more frequent monitoring, while stable relationships may have reduced oversight.
Can I pay off asset based lending early without penalties? Asset based lending companies usually allow early repayment without penalties, though some may have minimum commitment periods. Terms vary by lender and should be negotiated upfront.
What is the fundamental difference between asset based lending and traditional lending? Asset based lending companies focus on flexible financing based on collateral value and asset quality as primary underwriting criteria, while traditional lenders emphasize credit history, cash flow, and debt service coverage ratios.
How do asset based lending companies determine loan amounts? Asset-based lending companies establish advance rates based on asset type and quality. Asset rich businesses typically qualify for 70-90% of receivables, 30-50% of inventory, and up to 80% of equipment value for fixed asset facility limits, creating revolving credit lines based on the asset class. These far exceed traditional operating facility advances.
What makes asset based lending companies profitable? Asset based lending companies generate profits through higher interest rates, fees, and asset-secured positions that reduce risk. Their specialized expertise in asset valuation and collection enables sustainable lending models.
Citations / More Information
- Canadian Bankers Association. "Commercial Lending Trends Report 2024." https://www.cba.ca
- Secured Finance Network. "Asset Based Lending Market Analysis." https://www.securedfinancenetwork.com
- Bank of Canada. "Business Credit Conditions Survey." https://www.bankofcanada.ca
- Commercial Finance Association. "Asset Based Lending Industry Report." https://www.cfa.com
- Statistics Canada. "Business Financing Patterns Study." https://www.statcan.gc.ca
