Asset Based Finance: Complete Guide for Canadian Business Owners | 7 Park Avenue Financial

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YOUR COMPANY IS LOOKING FOR BUSINESS CREDIT AND ASSET BASED FINANCE – CONSIDER ABL AS A NEW STRATEGY! 

Unlocking Liquidity: The Power of Asset-Based Financing

UPDATED O7/13/2025

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        Financing & Cash flow are the biggest issues facing business today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

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Financing Beyond Banks: The Promise of Asset-Based Credit   

Asset-Based Lending in Canada: A Growing Alternative to Traditional Financing  

Business credit and financing alternatives are dramatically different in Canada when compared to the U.S.

One reason is that asset-based finance alternatives abound south of the border. Stop us if you've heard this, but the good news is that the trend is reversing and new transactions are being completed every day in this asset financing category for business growth.

Breaking Free from Traditional Lending Limitations 

Canadian business owners face mounting pressure when banks reject loan applications due to credit concerns or insufficient operating history.

This financing gap leaves viable businesses struggling to grow, manage seasonal fluctuations, or seize time-sensitive opportunities.

Let the 7 Park Avenue Financial team show you how Asset-based finance solves this challenge by unlocking the hidden value in your existing business assets, providing immediate capital when you need it most.

3 Uncommon Takes on Asset-Based Finance

1. Asset-based finance works as a "business growth accelerator" rather than just emergency funding - Many business owners view it as a last resort, but forward-thinking companies use it strategically to fuel expansion, acquire competitors, or stock up for peak seasons without depleting cash reserves.

2. Your assets become your credit score - Traditional lending relies heavily on past financial performance, but asset-based finance flips this model by making your current assets the primary qualification criteria, allowing newer businesses with valuable inventory or receivables to access capital that would otherwise be unavailable.

3. It creates a self-improving cycle - As you use asset-based finance to grow your business, you naturally accumulate more assets, which increases your borrowing capacity and creates a sustainable growth pattern that traditional term loans cannot match.

Relevance for Canadian Businesses  

Canadian businesses who need financing for an asset-based loan in excess of $250,000 (the upper limit is almost unlimited) can benefit from this relatively new Canadian financing strategy.

Understanding ABL: What Is It?  

Clients we talk to always have questions as to what the financing actually is and, more importantly, how it works, and whether their firm qualifies.

It is always surprising to us that asset-based lending is still probably less than 5 percent of Canadian business credit while in the U.S. it accounts for hundreds of billions of dollars of ongoing business financing.

ABL, the acronym for asset-based finance, is simply loans secured by collateral (assets)—i.e., an asset-based line of credit that is secured by inventory, accounts receivables, and/or other balance-sheet assets. Typically these loans are "non-bank" in nature. You may not have heard that the banks actually have small divisions within the bank that also focus on asset-based lending—offering more borrowing capacity.

Qualifying for ABL

Let's address the qualification issue first—the reality is that if your firm has business assets in receivables, inventory, equipment, and even real estate, those assets can be monetized into a business line of credit that focuses on the asset.

Bottom line? Less emphasis is placed on the overall quality or condition of your balance sheet and income statement. You got it—it's all about... the assets! In certain cases on larger deals, asset appraisals might be required.

ABL Versus Traditional Bank Financing  

No secret those Canadian chartered bank lines of credit cash flow financing solutions provide a similar and more often than not, less expensive form of financing via revolving lines of credit.

Banks offer this type of financing outside their normal business banking, but qualifications and deal size are still somewhat challenging to meet in our opinion.

When it comes to the banks, most business owners know those facility offerings focus on the balance sheet and income statement strength, ratios that must be met, and heavy emphasis on personal covenants and outside collateral. That's the key difference!  

What Is the Difference Between Asset-Based Finance and Cash Flow Lending?  

• Both types of loans are typically secured.

• Cash flow-based loans focus on a company's cash flows when setting loan terms.

• Asset-based loans emphasize balance sheet assets during loan underwriting.

• Service companies or businesses with high margins might prefer cash flow-based loans due to a lack of tangible assets.

• Companies with strong balance sheets, tighter margins, or variable cash flow might benefit more from asset-based loans.

• Both loan types can offer efficient credit cost management due to their secured nature, often resulting in better credit terms.

ABL Advantages

When you negotiate an ABL facility, you and the lender agree up front on the market value of your ongoing receivables, inventory, and unencumbered equipment.

That collateral becomes the essence of your financing and drawdown capability.

So why is this all different from a bank? The answer is simply—banks have regulated formulaic methods of financing business.

In fact, many would agree that bank business credit has become increasingly difficult to get since the 2008 worldwide debacle. No question that things are getting better though with financial markets and business credit becoming a lot more accessible.

Profile of ABL Players  

So about these ABL players.

Finance firms offering asset-based lending are not regulated in the same manner, do business in almost every industry in Canada, even those that are deemed "out of favor," and the management of these firms typically have years of experience in lending against receivables, inventory (yes, inventory!), with the additional enhancement of allowing you to monetize your credit facility by including some borrowing against your equipment for ongoing working capital and cash flow.

Some Uncommon Takes on Asset-Based Finance in Canada

Transforming Idle Assets into Strategic Leverage:

While most discussions around asset-based finance focus on the immediate liquidity it provides, an unconventional perspective is to view it as a strategy for utilizing dormant assets.

For businesses with assets that aren't core to their operations or are underutilized, asset-based financing can transform these idle assets into powerful leverage tools.

This not only provides immediate financial relief but also encourages businesses to optimize asset utilization continually.

A Hidden Way to Evaluate Business Health:

Unlike traditional financial metrics that emphasize revenue, profit margins, and other income statement figures, the ability to secure asset-based financing can serve as a unique barometer of a company's health.

This form of financing offers a reflection of the tangible value a business holds, irrespective of its current market conditions or short-term profitability struggles.

Essentially, if a company consistently qualifies for and manages asset-based loans well, it indicates strong operational management and asset value preservation.

Case Study

Company: Canadian Manufacturing Co (Toronto)

Challenge: Needed $500,000 for seasonal inventory buildup but was declined by banks due to recent expansion debt

Solution: 7 Park Avenue Financial arranged asset-based financing using the company's equipment and expected inventory as collateral

Benefits:

• Received $500,000 credit line within 48 hours
• Purchased inventory at 15% bulk discount
• Increased seasonal revenue by 40%
• Established ongoing relationship for future growth needs

Result: The company not only met its seasonal demand but also gained a strategic financing partner that grows with their business needs.

Key Takeaways  

Definition of Asset-Based Financing (ABF): This is a loan or line of credit that's secured by a company's assets. These assets can include accounts receivable, inventory, machinery, real estate, and other company assets. If the borrower defaults, the lender can seize and sell the assets to recover the loan.

Key Instruments:

• Asset-Based Loans (ABL): A revolving credit facility that allows companies to borrow against the value of their assets. This provides liquidity for working capital and other needs.

• Factoring: A financial transaction in which a business sells its accounts receivable to a third party at a discount. The third party, called a factor, then assumes the risk of the receivables and provides immediate cash to the business.

Determining Borrowing Base: Lenders evaluate and appraise the physical assets being used as collateral to determine how much they're willing to lend.

Typically, the amount lent won't be the full value of the assets, but a percentage, depending on the type and liquidity of the asset. Commercial real estate can also be included in the borrowing base of the facility.

Benefits & Risks:  

• Benefits: Asset-based financing can provide businesses with immediate cash flow and is especially useful for companies that might not qualify for traditional lending because of a lack of credit history or financial challenges. The higher loan-to-value ratio is key.

• Risks: If a business cannot repay, the lender can seize the assets. This can be detrimental, especially if those assets, like machinery, are essential for business operations.

Differences between ABF and Traditional Lending:  

Traditional bank loans often rely more heavily on a company's creditworthiness, profitability, and financial ratios.

In contrast, ABF primarily focuses on the value and quality of the assets being used as collateral. The borrower's credit score is significantly less important in ABL. No minimum monthly payments are required in asset-based facilities.

Conclusion  

Call 7 Park Avenue Financial, a trusted, credible, and experienced business financing advisor in this specialized area and find out how a new financing facility can put your head and shoulders above your competition in overall financing strategy.

P.S. Don't forget also that several other key asset finance strategies can enhance your business financing success—they include SR&ED tax credit financing, confidential A/R financing, equipment loans, sale-leasebacks, securitization, purchase order financing, etc.

FAQ: Frequently Asked Questions   

What exactly is asset-based financing? Asset-based financing is a loan or credit line secured by a company's tangible assets, such as accounts receivable, inventory, or machinery, providing immediate liquidity.

How does asset-based lending differ from a traditional bank loan? While traditional bank loans focus on creditworthiness and financial health, asset-based lending emphasizes the value and quality of assets being used as collateral.

Can asset-based financing benefit new businesses? Absolutely! Asset-based financing can be a lifeline for new businesses lacking a lengthy credit history, offering them immediate cash flow based on their assets.

Are there risks associated with asset-based financing? Yes, if a business fails to repay, the lender can seize the assets used as collateral. It's vital to understand the terms and conditions before opting for such financing.

How do lenders determine how much to lend in asset-based financing?

Lenders appraise the assets being used as collateral to determine the borrowing base, lending a percentage of the asset's value based on its type and liquidity.

Are there specific industries that benefit more from asset-based financing? While any business with tangible assets can benefit, industries with significant accounts receivable or inventory, like manufacturing or wholesale, often find it especially advantageous.

What happens if the value of my assets depreciates over time? If assets depreciate, the borrowing base might be reduced by the asset-based lender, leading to a lower loan amount. Regular appraisals ensure the loan aligns with current asset values.

Can intangible assets be used in asset-based financing? Typically, asset-based financing focuses on tangible assets. However, some lenders might consider intangibles, like intellectual property, under special conditions as part of asset debt.

How quickly can businesses access funds through asset-based financing? Once the initial setup and appraisal are done, businesses can usually access funds faster than traditional loans, often within days of submitting a borrowing request. Most asset-based loans can be approved quickly.

Are the interest rates higher for asset-based loans compared to traditional loans? Rates from asset-based lenders can be higher for an asset-based business loan, compared to an unsecured loan, due to the perceived risk, but they vary based on the lender, industry, quality of assets, and prevailing market conditions.

Citations

1. Bank of Canada. "Business Credit Conditions Survey." Bank of Canada Publications, 2024. https://www.bankofcanada.ca
2. Canadian Federation of Independent Business. "Alternative Lending in Canada: Market Analysis." CFIB Research Reports, 2024. https://www.cfib-fcei.ca
3. Industry Canada. "Small Business Financing Profile." Government of Canada Publications, 2024. https://www.ic.gc.ca
4. Commercial Finance Association. "Asset-Based Lending Market Report." CFA Publications, 2024. https://www.cfa.com
5. Statistics Canada. "Business Financing and Growth Survey." Statistics Canada Business Reports, 2024. https://www.statcan.gc.ca
6. 7 Park Avenue Financial ." Asset Based Loan Solutions"  https://www.7parkavenuefinancial.com/asset-finance-asset-based-lending-cash-flow.html