Discover the Power of Asset-Based Lines of Credit: A Game-Changer for Business Financing
Canadian business owners and financial managers place great importance on their ability to achieve and maintain operating lines of credit.
Breaking Free from Traditional Lending Constraints
Traditional bank loans often leave Canadian businesses trapped in lengthy approval processes and rigid credit requirements.
Your growing company needs capital now, but banks focus on perfect credit histories rather than your valuable business assets.
Let the 7 Park Avenue Financial team show you how asset-based commercial loans solve this challenge by converting your inventory, receivables, and equipment into immediate working capital, bypassing traditional lending obstacles.
Asset-Based Lines of Credit: The Flexible Financing Solution Your Business Needs Now
Asset-based credit lines are part of the asset-based lending solution in Canada—they are a viable alternative to traditional bank lines of credit and allow companies to borrow under a revolving line of credit facility based on sales and assets.
This business credit line financing method is flexible and accessible to most companies utilizing credit lines to fund day-to-day operations. If your business has sales and physical assets and you need cash flow, ABL financing is the solution.
Understanding Bank Financing / Bank Credit Lines / Unsecured Loans
Traditionally in Canada, the bank line of credit is also called an "operating loan" and is structured as an unsecured loan.
It is short-term in nature, revolves day-to-day, and so many finance professionals also call the operating facility a "revolver."
It is simply a financing facility under which the bank agrees, in advance, to lend a maximum amount of money—typically against receivables and inventory as the pledged asset(s).
In bank lines of credit, certain conditions have to be met by your firm, and you are generally paying interest only on the amount outstanding daily.
Revolving lines of credit or operating lines work best when they fluctuate up and down. Typically, customers who are always at the top of their credit line are candidates for other financing options such as equity or cash flow term loans.
What Are the Optimal Uses for Asset-Based Credit Lines?
Many businesses are looking to refinance existing credit facilities, and asset-based loan solutions are often a more favorable and accessible option.
Businesses experiencing rapid growth can access the capital they need without violating existing financial covenants with existing lenders—allowing the company to expand on its business goals via liquid assets such as accounts receivable.
Some businesses that are focused on a turnaround or restructuring use the leverage of sales and assets to stabilize the business, access cash flow, and manage the turnaround process on the route back to more traditional financing.
Companies looking to acquire or buy out another competitor or business can access the capital in the target business to facilitate a business purchase/business transfer of ownership.
Most Canadian business owners know that the bank focuses more on receivables than inventory. Because inventory cannot easily be converted into cash by a bank (if it had to), you will typically get a much lower advance rate or margin rate on inventory.
Assessing the Need for a Solid Line of Credit Solution
So, what happens when this traditional type of financing doesn't work for your firm?
You will know it is not working when some or all of the following seem to occur:
- You are consistently maxed out on the operating line
- Collections are slow, which further exacerbates the line revolving to your and the bank's satisfaction
- You are worried that you do not consistently have enough cash flow and working capital to take on new orders or contracts
Is there a solution?
Absolutely—a new breed of business line of credit financing is gradually taking hold in Canada: ABL, or asset-based lines of credit.
The total focus of these facilities is to maximize the liquidity of your assets to a much greater extent—and when we say all assets, we mean inventory, receivables, equipment, potentially real estate, and new contracts and purchase orders.
The facility is short-term in nature, not a term loan, so it does not include equipment or commercial real estate, which is financed under other conditions by asset-based lenders via an asset-based facility.
That's true asset-based financing!
How Do Asset-Based Lending Solutions Increase Borrowing Power
Typical advances on accounts receivable are in the 90% range, and common advance rates on inventories and fixed assets tend to be in the 50-75% range, respectively.
That is more available cash for your business, allowing proper funding of current debt obligations under a flexible credit facility structure with simple loan compliance requirements.
One of our customers had a $100,000 line of credit with a Canadian chartered bank that grew into a $2 million asset-based financing arrangement.
What Are the Benefits of Asset-Based Financing for Your Business?
- Financing that is flexible, tailored, and structured to your unique needs
- Access to business capital based on sales and eligible assets as collateral for ongoing borrowing
- No focus on historical cash flow/financial covenants
- Encourages financing for high-growth firms
- Allows the company to leverage business opportunities
The asset-based lending industry is robust in Europe and the U.S. It is slowly gaining traction in Canada. Although one or two of the banks offer these facilities, most of this type of financing is independent of the banks.
Short Case Study - Manufacturing Success Story
A Toronto-based custom fabrication company, faced a growth challenge when a major contract required $500,000 in raw materials upfront. Traditional banks required extensive documentation and 90-day approval timelines.
Through asset-based commercial loans, the company leveraged their $1.2 million equipment value and $300,000 in receivables to secure a $750,000 credit line within three weeks. The flexible structure allowed them to draw funds as needed, paying interest only on amounts used.
Results: Contract completed successfully, 40% revenue increase, improved supplier relationships through prompt payments, and established credit line for future opportunities. The asset-based approach provided both capital and operational flexibility that traditional lending couldn't match.
Conclusion
Business owners should recognize they have financing options for growth capital and the ability to overcome constant cash flow challenges.
Asset-based lines of credit—they are newer to Canada, they work, and you should investigate the possibilities to maximize your cash flow and working capital needs.
Alternatives to bank finance offer access to working capital for any growing or leveraged business unable to meet traditional financial institution requirements.
Call 7 Park Avenue Financial for the experience, advice, and credibility that comes with talking to a business advisor in this area of Canadian financing for comprehensive financial solutions for your business needs.
FAQ: Frequently Asked Questions
Why Choose Asset-Based Lending Over Secured Loans?
Asset-based lending solutions will almost always provide access to more capital versus unsecured bank loans, with lower margins on borrowing, the need for financial covenants and outside collateral, and a focus on personal guarantees.
- Asset-based financing is flexible and tailored to business assets and sales
- Secured loan financing is quicker to process for credit approval—requirements are based on collateral versus overall creditworthiness
- Interest rates are competitive and sometimes, but not always, lower than bank rates under certain conditions
What Is the Asset-Based Lending Due Diligence Process?
- Asset-based lenders focus on evaluating financial assets, including reviews of financial statements and relevant business documents
- Assets financed must not be subject to any existing liens by other lenders or the government
- An industry review will typically be done around the company's business model
What Is the Difference Between Asset-Based Lending and Factoring?
- Asset-based loans focus on collateral around receivables from sales and other specific business assets—factoring is the sale of the accounts receivable to a third-party finance firm
- Companies maintain ownership and control of assets in asset-based loan solutions—when receivables are sold in a factoring facility, the factoring company owns the receivable
- Asset-based lending solutions offer higher financing given that all business collateral is secured under a loan facility, while factoring is limited to accounts receivable sold by the company. Flexible equipment financing solutions such as sale-leasebacks can also enhance working capital in a company's cash flow needs
- In factoring, no regular payments are required; as receivables are collected, a fee is taken by the factoring company to advance the funds at the time of sale of the receivable
- Factoring and asset-based lending offer short-term financing solutions for businesses—differences arise around the cost of financing, the amount of achievable funding, and the ownership of assets financed
What types of businesses qualify for asset-based commercial loans?
Asset-based commercial loans work for manufacturers, wholesalers, distributors, and service companies with significant receivables, inventory, or other valuable assets. Your business assets determine eligibility more than credit scores.
How quickly can I access funds through asset-based commercial loans?
Asset-based commercial loans typically close within 2-4 weeks, significantly faster than traditional bank financing. The key factor is asset verification rather than lengthy financial analysis.
What interest rates should I expect for asset-based commercial loans?
Asset-based commercial loans generally carry higher rates than traditional bank loans but offer greater flexibility and faster access. Rates vary based on asset quality and loan structure.
