Alternative Financing Solutions: Asset-Based Credit Lines in Canada
Asset-Based Credit Lines, or "ABL" credit facilities offer a viable alternative to traditional financing through chartered banks in Canada.
The Canadian market, encompassing small, medium, and large enterprises (SMEs), has witnessed a notable tightening of credit accessibility from a financial institution such as a chartered bank. Given these constraints, business owners and their financial managers have been compelled to contemplate alternative funding options. Let's dig in!
Breaking Free from Cash Flow Constraints
Traditional financing often fails when businesses need it most.
Your valuable inventory sits while bills pile up. Accounts receivable stretch your patience thin. Equipment purchases drain working capital.
Let the 7 Park Avenue Financial team show you how Asset based business lines of credit solve this by converting your existing assets into immediate, flexible funding that grows with your business needs.
The Potential of Asset-Based Credit Lines
What would happen if your company had unrestricted access to business credit sufficient to fuel sales expansion and cash flows?
Asset-Based Credit Lines can undoubtedly provide that solution to your financing needs. Strangely, new clients at 7 Park Avenue Financial are unfamiliar with this financing mechanism or its potential benefits via financing the company's assets at their net realizable value.
Asset lending values are always higher than banks and traditional financing facility advances. These credit lines are also sometimes used to refinance existing debt when conventional lending criteria can't provide financing for business needs.
Several businesses are compelled to consider asset-based lending due to apprehensions among their owners, lenders, and suppliers regarding their financial viability. Complications inevitably arise when suppliers and other lenders become aggressive, including placing accounts into a 'special loans' category if an unsecured loan has breached ratios or covenants.
The Importance of Understanding Your Financing Options
We consistently advise our clients, and it is advice we extend to all, to familiarize themselves with alternative financing options before they become a necessity.
In layman's terms, it pays to comprehend Asset-Based Lending. Though ABL has existed for many years, some people link it with distressed lending, which is not entirely accurate. Also, an asset-based line isn't about taking on additional debt either!
Defining Asset-Based Credit Lines
So, what is the ABL credit line?
Simply put, it uses all your current (and sometimes fixed) assets as total collateral for borrowing. Predominantly, this type of financing is facilitated through accounts receivable and inventory, but it can also easily extend to fixed assets and commercial real estate.
As you borrow more than conventional financing arrangements permit, additional reporting requirements with an asset-based credit line are required. However, our clients often find that this supplementary reporting enhances their understanding of their business—that's good.
The Practical Use of Asset-Based Credit Lines
Interestingly, many businesses employ this type of financing for extended periods, viewing it as a stellar funding source.
Conversely, some owners and financial managers perceive it as a bridge to overcome the always challenging working capital and financial access to credit hurdles.
Businesses contemplating asset-based credit lines often cannot fulfill the financial ratios and restrictive covenants required for traditional banking and debt service.
But simultaneously, they must acquire new contracts and business assets or expand their sales and workforce. Asset-based financing provides a sturdy solution to facilitate this additional capital.
Short Case Study
Manufacturing Success: Precision Parts Inc.
A Toronto-based automotive parts manufacturer, faced a classic growth challenge. Despite securing a major contract with a tier-one supplier, they lacked working capital to purchase raw materials and maintain operations during the 60-day payment cycle.
Traditional bank financing was declined due to recent equipment purchases that impacted their debt-to-income ratios. However, their $2.3 million in inventory and $1.8 million in accounts receivable represented substantial untapped value.
7 Park Avenue Financial structured and originated an asset based business line of credit providing:
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$2.8 million credit facility
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75% advance rate on receivables
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50% advance rate on inventory
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Flexible draw schedule matching production cycles
Results After 12 Months:
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Revenue increased 340% from $8M to $27M annually
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Maintained 98% on-time delivery despite 3x volume increase
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Improved supplier relationships through early payment discounts
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Created 23 new manufacturing jobs
The asset based credit line grew naturally with their expanding receivables and inventory, providing the flexible capital needed to scale operations without restrictive loan covenants.
Conclusion: Asset-Based Credit Lines
When your business needs immediate access to working capital but traditional lending falls short, an asset based business line of credit transforms your company's valuable assets into a flexible financing lifeline.
Asset-based credit lines are a viable and commonly used option for business financing.
Hundreds, even thousands of medium and large firms in Canada use these secured facilities. This non-traditional lending method is fast becoming a mainstream solution.
Asset-Based Credit Lines offer the maximum working capital against your operating assets, such as accounts receivable, inventory, and equipment.
Call 7 Park Avenue Financial, a trusted, credible business financing advisor experienced in this specific facet of Canadian business financing and executing ABL transactions for existing clients.
FAQ: Frequently Asked Questions
Q1: What are Asset-Based Credit Lines?
Asset-Based Credit Lines, or ABL is a type of financing that uses a business's current and sometimes fixed assets as collateral for borrowing. This financing is typically done through receivables and inventory, providing growth financing funding for a business.
Q2: How does an Asset-Based Credit Line differ from traditional bank financing?
Unlike traditional bank financing, where borrowing limits are often based on a company's creditworthiness and past performance, asset-based credit lines offer more flexible financing and are determined by the value of the company's current assets and fixed assets, and any other valuable assets, with facility limits allowing potentially higher borrowing limits via these asset-based loans.
Q3: Who can benefit from Asset-Based Credit Lines?
Businesses of all sizes can benefit from asset-based credit lines or an asset-based loan, especially those unable to meet the ratios required for traditional bank financing or those needing additional capital for expansion, new contracts, or increased workforce. Companies needing flexible equipment financing should pursue lease finance solutions, which tend to match useful equipment life with term financing, which assists with the company's cash flow.
Fixed asset facility limits are provided in Asset based financing for equipment already owned by the company.
Businesses in a cyclical or seasonal industry frequently use ABL financing.
Q4: Are there any additional requirements for Asset-Based Credit Lines?
Yes, businesses that use asset-based credit lines from asset-based lenders often have additional reporting requirements (although with fewer financial covenants), which some enterprises find helpful in better understanding their financial position. Asset based lending offers a covenant light structure with finance terms generally not available via traditional bank lines that come with traditional operating facility advances from chartered banks. This places less reliance on cash flow projections and business plans often required by banks for unsecured lines and traditional loans.
Q5: Is an Asset-Based Credit Line considered distressed lending?
While some associate ABL lines of credit and term loans with distressed lending, it's not just for distressed businesses. It's a viable alternative financing solution for companies seeking to maximize their borrowing power based on the value of their assets when conventional lenders can't deliver on such business needs.
Citations / More Information
- Equipment Finance & Leasing Association. (2024). "Asset-Based Lending Market Trends." ELFA.org - https://www.elfaonline.org
- Commercial Finance Association. (2024). "Annual Asset-Based Lending Survey." CFA.com - https://www.cfa.com
- Federal Reserve Bank of St. Louis. (2024). "Small Business Credit Survey." FRED Economic Data - https://www.stlouisfed.org
- Statistics Canada. (2024). "Business Credit Conditions Survey." StatCan.gc.ca - https://www.statcan.gc.ca
- Bank of Canada. (2024). "Business Outlook Survey - Credit Conditions." BankofCanada.ca - https://www.bankofcanada.ca
- Canadian Bankers Association. (2024). "SME Financing Report." CBA.ca - https://www.cba.ca
