Unlocking Business Potential: Asset-Based Lending as a Business Financing Solution | 7 Park Avenue Financial

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A Financial Lifeline: How Asset-Based Lending Can Transform Your Business

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Explore this article because asset-based lending offers a fresh approach to funding your business in Canada

Breaking Barriers: Asset-Based Lending as an Alternative to Banks

Introduction    

Asset based lending in Canada is one solution that many Canadian business owners and financial managers might not be aware of. Although it's one of those business financing methods/alternatives you might not know that you should be aware of what it is and... how it works. Let's dig in.

A Bank Line of Credit Alternative  

We're examining asset based financing from the viewpoint of it being flexible financing via an alternative to a bank line of credit facility( a cash flow lending) solution, via instead an asset based loan solution. Another way of describing this type of facility is to view it as a full-service offering that is directly comparable to a Canadian chartered bank facility, commonly called an operating line of credit around a company's cash flow.

A Day-to-Day Business Credit Facility - How Does Asset Based Lending Work?

These types of facilities are of course not long term debt of term loan type scenarios. Can we put it any more simply than it’s your day-to-day business credit facility that facilitates payment to suppliers, employees, etc.? And by the way, it's a great way to grow your business lockstep with the financing you need.

 The 'Full Service' Asset Based Financing Model 

What we could call the 'full service' asset based financing lending model is a facility that is usually a non-bank financing arrangement with an independent finance firm that specializes in this type of facility for funding a company's assets.

 Monetizing Your Current Assets  

It monetizes your current assets, which are typically receivables and inventory. However, there is often what we could describe as an upside kicker to the asset based line of credit because it can also easily margin, from a working capital perspective any unencumbered equipment and real estate that you have.

Borrowing Against Equipment and Real Estate

The other unique way in which asset based lending addresses working capital is that it also allows you, if you so choose, to margin and borrow against your equipment and real estate, all under that revolving line of credit facility.

 Working Capital Line of Credit 

In discussing this financing alternative with clients we point out that the alternative to the full service type of facility (which is typically for larger firms) is an asset based financing lending facility that we call a working capital line of credit. It is generally under 250k and typically just finances receivables. Our favourite and in fact preferred type of facility is one in which your receivables are financed directly but you retain billing and collection control. We call that Confidential Receivable financing!

Determining Facility Size 

Depending on the size of your facility pricing for asset based lines of credit can be very competitive to bank rates. Larger facilities take 30-45 days to fully set up properly. It should be no secret to the reader that a typical application would include a business credit application, financial statements, and aged asset lists of receivables and inventory.

How Is the Size of the Facility Determined?  

How is the size of the facility determined? Receivables are margined at 90% and inventory, depending on your industry, can be margined from anywhere from 25-70% in our experience. Most firms could never get that amount of financing on inventory from a bank.

 The Benefits of Asset Based Lending 

So what’s all the hoopla? We can summarize it by saying its simply an alternative to bank financing when you can’t meet bank criteria, it's competitive if you have a solid asset base and business prospects, and it provides you with unlimited cash flow and working capital funding as your business grows.

Asset-Based Lending for Digital Businesses  

As the digital economy continues to grow, asset-based lending is evolving to cater to tech-savvy businesses. Instead of traditional physical assets, these lenders consider digital assets like intellectual property, patents, and software as collateral. This opens up new opportunities for software development companies, startups, and tech-focused businesses to secure financing based on the value of their intangible assets.

Key Takeaways  

1. asset-based lending is a financing solution that leverages your current assets, such as receivables, inventory, equipment, and real estate, as the pledged asset/assets as collateral for a credit facility.

2. Bank Line of Credit Alternative: Recognizing that asset-based lending serves as an alternative to unsecured loans via traditional bank lines of credit, offering similar financing capabilities.

3. Working Capital Enhancement: Realizing that asset-based lending primarily focuses on enhancing your working capital, allowing you to meet day-to-day business expenses, pay suppliers, and grow your business.

4. Facility Types: Distinguishing between the "full service" asset-based lending secured loan model, typically suitable for larger firms, and the working capital line of credit, which is designed for smaller businesses and often focuses on financing receivables.

5. Cost and Process: Understanding the cost structure and application process for asset-based lending, including factors such as competitive pricing, setup duration, and required documentation.

6. Size Determination: Grasping how the size of the credit facility is determined based on factors like the percentage of receivables and inventory that can be margined, providing insight into the available financing amount.

7. Benefits: Appreciating the benefits of asset-based lending, such as its flexibility as an alternative when traditional bank criteria can't be met and its ability to provide essential working capital and cash flow for business growth.

Conclusion  

Confused? Hopefully not. Interested? Hopefully so!

Speak to  7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor as to what business financing methods might alter your firm's success and investigate asset based financing lending as a solid choice or alternative.

FAQ  

What exactly is asset-based lending?

Asset-based lending is a financing method that uses your business assets, like receivables, inventory, and even real estate, as collateral to secure a credit facility, offering essential working capital.



How does it differ from traditional bank loans?

Asset-based lending is more flexible and accessible, even if you can't meet strict bank criteria. It provides a quicker way to access funds for your day-to-day operations and growth.



What are the primary benefits of asset-based lending?

Asset-based lending offers increased cash flow, working capital, and financing potential. It's an ideal solution for business expansion, supplier payments, and meeting immediate financial needs.



Are there size limitations for businesses looking into asset-based lending?

No, asset-based lending caters to businesses of all sizes. Larger firms can opt for full-service solutions, while smaller businesses can benefit from working capital lines of credit.



How can I determine if asset-based lending is right for my business?

Asset-based lending is a viable choice if you have valuable assets and a solid business outlook. Consult with a reputable Canadian business financing advisor for personalized guidance.



What industries benefit most from asset-based lending?

Asset-based lending can benefit various industries, including manufacturing, distribution, retail, and services, by providing flexible working capital via asset based secured loans.



Does asset-based lending affect my ownership or control of assets?

Generally, asset-based lending allows you to retain ownership and control of your assets while using them as collateral for financing.



Are there risks associated with asset-based lending?

Like any financing option, there are risks, such as potential asset loss if you can't repay the loan. However, responsible management minimizes these risks.



Can startups access asset-based lending?

Startups may face challenges since they often lack substantial assets. However, some lenders offer solutions tailored to new businesses.




What are the criteria for Asset Based Lending

Asset-based lending (ABL) criteria can vary depending on the lender and the specific circumstances of the borrower, but there are common criteria that lenders typically consider when evaluating whether to provide asset-based financing. Here are some key criteria:

Asset Quality: The most critical factor is the quality and value of the assets being used as collateral. Receivables, inventory, equipment, and real estate are common collateral types. Lenders assess the liquidity and marketability of these assets to determine their lending value.

Accounts Receivable Financing : The quality of accounts receivable is crucial. Lenders often require a certain level of creditworthiness in the accounts receivable ledger. Older or doubtful receivables may have a lower lending value.

Inventory: Lenders evaluate the inventory turnover rate, the age of inventory, and its market value. Fast-moving, current inventory is more favourable, while obsolete or slow-moving inventory may have reduced collateral value.

Equipment and Machinery: Lenders assess the condition, age, and market value of equipment and machinery. Well-maintained and relatively new assets typically have higher collateral value when it comes to equipment financing

Real Estate: If commercial real estate is part of the collateral, its location, condition, and market value are considered. Lenders may require appraisals to determine the property's value.

Financial Health: Asset based lenders examine the borrower's financial statements, including balance sheets, income statements, and cash flow statements, to assess their overall financial health and ability to meet debt obligations.

Creditworthiness: While asset-based lending is primarily collateral-based, lenders may also evaluate the borrower's creditworthiness to some extent. This can include assessing the borrower's credit history and financial stability.

Accounts Payable and Liens: Lenders may review the borrower's accounts payable and any existing liens on assets to understand the borrower's financial obligations and the priority of their claim on the collateral.

Debt Service Coverage: Lenders may calculate the borrower's debt service coverage ratio (DSCR) to ensure that the borrower has sufficient cash flow to cover interest and principal payments.

Industry and Business Model: Lenders consider the borrower's industry, business model, and competitive landscape to assess the overall risk of the loan. Certain industries may have specific requirements or risks.

Collateral Control: Lenders may require control over the collateral, such as holding accounts receivable in a lockbox or having a lien on specific assets. This ensures that they can access the collateral in case of default.

Exit Strategy: Borrowers may need to provide an exit strategy or plan for repaying the loan. This can include strategies for selling assets or generating cash flow to retire the debt



Do Canadian banks offer asset based lending?


Yes, many banks offer asset-based lending (ABL) services to businesses, especially larger financial institutions. Asset-based lending is a common form of commercial financing provided by banks and specialized financial institutions. Here's how banks typically approach asset-based lending versus an unsecured loan:

Commercial Banking Divisions: Large banks often have dedicated commercial banking divisions that offer a range of financial services to businesses, including asset-based lending. These divisions work with businesses of varying sizes to structure ABL deals based on their unique needs.

Lines of Credit: Banks can provide businesses with revolving lines of credit secured by their accounts receivable, inventory, equipment, or real estate. This allows businesses to access working capital as needed, using their assets as collateral.

Risk Assessment: Banks conduct thorough risk assessments to evaluate the quality and value of the assets being used as collateral. They assess factors such as accounts receivable aging, inventory turnover, equipment condition, and market values.

Financial Analysis: Banks review the borrower's financial statements, including balance sheets, income statements, and cash flow statements, to assess their overall financial health and ability to service the debt.

Creditworthiness: While asset-based lending is primarily collateral-based, banks may also consider the borrower's creditworthiness and credit history to some extent.

Customized Solutions: Banks work with businesses to customize asset-based lending solutions that align with their financing needs. These solutions can vary in terms of size, structure, and collateral types.

Monitoring and Reporting: Banks typically require regular reporting and monitoring of the collateral and financial performance of the borrower throughout the loan term.

Relationship-Based: Many banks prioritize building long-term relationships with their business clients. They often provide ongoing financial services beyond asset-based lending, such as treasury management, cash management, and other banking services.

It's important to note that while banks offer asset-based lending, there are also specialized non-bank financial institutions and commercial finance companies that focus exclusively on ABL. These specialized lenders may be more flexible or have a deeper understanding of specific industries and asset types.

Businesses seeking asset-based lending should carefully assess their options, compare terms and conditions, and choose the lender that best meets their financing needs and objectives.


What is the interest rate for asset based lending


The interest rate for asset-based lending (ABL) can vary widely depending on several factors, including the lender, the borrower's creditworthiness, the quality and type of collateral, and the overall terms of the loan. Here are some key points to consider regarding interest rates when you consider of choose asset-based lending:

Variable Rates: ABL interest rates are often variable, meaning they can fluctuate over the life of the loan. These rates are typically tied to a benchmark interest rate, such as the prime rate, the London Interbank Offered Rate (LIBOR), or another reference rate.

Risk Profile: Lenders assess the risk associated with the borrower and the collateral. Businesses with stronger financials and higher-quality assets may qualify for lower interest rates, while those with higher risk profiles may face higher rates.

Collateral Value: The value and liquidity of the collateral used to secure the loan play a significant role in determining the interest rate. Lenders may advance a certain percentage (e.g., 70-90%) of the collateral's appraised value, and the interest rate is applied to the outstanding balance.

Credit Facility Structure: The structure of the ABL facility can also impact interest rates. For example, a revolving line of credit secured by accounts receivable may have a different interest rate than a term loan secured by real estate.

    Market Conditions: Economic conditions and market interest rates can influence ABL rates. In a rising interest rate environment, ABL rates may increase, while they may decrease in a declining rate environment.

    Lender's Policy: Each lender has its own pricing policies and risk assessment criteria. Some lenders may be more competitive than others in terms of interest rates.

Fees and Costs: In addition to interest rates, borrowers should consider other costs associated with ABL, such as origination fees, underwriting fees, and ongoing servicing fees. These fees can affect the overall cost of borrowing.

Negotiation: Borrowers often have some room for negotiation when it comes to ABL interest rates and terms. A strong credit profile, a solid relationship with the lender, and competitive bidding among lenders can provide leverage for borrowers.

Due to the variability in interest rates for asset-based lending, it's essential for businesses to shop around, obtain multiple quotes, and carefully evaluate the terms and conditions offered by different lenders. Working with an experienced financial advisor or broker can also help businesses secure the most favorable ABL terms.