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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
"Assets are not so much what you own but what you do with what you own." - J. Paul Getty
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ABL Lender and working capital solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
ABL Lender: Asset-Based Loans in Canada
An Asset-Based Lending Loan.
When it comes to a business line of credit via an ABL lender, we sometimes think there is a conspiracy theory about the information the Canadian business owner or manager has regarding Canadian business financing.
Businesses can use asset-based lending to secure additional working capital to improve operational capabilities and facilitate growth.
Why is that? Well, we certainly didn’t read it in the National Enquirer, so we suppose it’s just a notional feeling when talking to clients that they have been misinformed about alternatives in a commercial business credit facility. Let’s explain.
WHAT IS ASSET-BASED LENDING (ABL)?
Asset-based lending is a financial strategy that allows businesses to leverage their assets as collateral to secure a loan.
This type of lending is particularly beneficial for companies that possess substantial physical assets like inventory, equipment, or real estate but may not have a robust cash flow.
By using asset-based lending, businesses can unlock the value of their assets to gain access to capital. This capital can be used to manage cash flow, invest in new opportunities, or refinance existing debt.
Unlike traditional lending, which primarily focuses on a company’s creditworthiness and cash flow, asset-based lending emphasizes the value of the assets being pledged.
This makes it an attractive option for businesses experiencing rapid growth, seasonal sales fluctuations, or operating in industries subject to commodity price changes.
Essentially, asset-based lending provides a flexible financing solution that aligns with the dynamic needs of modern businesses.
THE ASSET-BASED LOAN SOLUTION
In the U.S., and certainly less in Canada! Asset-based credit lines are an absolute cornerstone in commercial borrowing. They, in effect, replace Canadian chartered bank lines of credit and are essentially ‘non-bank in nature.
Businesses might choose asset-based lending as an alternative financing option because it allows them to use their assets as collateral to unlock significant capital. This provides flexibility and freedom from traditional covenant restrictions typically associated with cash-flow lending.
There’s an interesting sidebar to the information we’re sharing in that the banks are actually in the ABL business. Still, it’s a bit of stealth marketing, we feel, given that none of our clients certainly seem to know that! But we digress..!
DID YOU KNOW?
- ABL lending market grew 10.8% in 2023
- Average facility size: $1-10 million
- 73% of borrowers report improved cash flow
- 85% renewal rate industry-wide
- 40% lower default rate vs traditional lending
APPLICATIONS OF ASSET-BASED LENDING
Asset-based lending offers a versatile financing solution that can be tailored to meet various business needs.
Here are some typical applications:
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Managing Cash Flow: For businesses facing cash flow challenges, asset-based loans can provide the necessary liquidity to cover operational expenses, payroll, and other immediate financial obligations. By leveraging accounts receivable and inventory, companies can maintain smooth operations even during lean periods.
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Growth and Expansion: Companies looking to expand their operations, whether through new product lines, additional locations, or entering new markets, can use asset-based financing to fund these initiatives. The flexibility of asset-based loans allows businesses to seize growth opportunities without being constrained by traditional credit limits.
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Seasonal Fluctuations: Businesses with seasonal sales cycles, such as retail or agriculture, can benefit from asset-based lending to manage the peaks and troughs in their cash flow. Using their assets as collateral, they can secure funding to stock up on inventory before the busy season and repay the loan during high sales periods.
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Refinancing Existing Debt: Companies burdened with high-interest debt can use asset-based loans to refinance and consolidate their obligations. This can result in lower interest rates and more manageable repayment terms, improving overall financial health.
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Acquisition Financing: Asset-based lending can provide the necessary capital when looking to acquire another business. By leveraging the assets of both the acquiring and target companies, businesses can secure funding for mergers and acquisitions, facilitating growth and market expansion.
In summary, asset-based lending offers a flexible and practical financing solution for businesses across various industries.
By leveraging their assets, companies can access the capital needed to navigate financial challenges, pursue growth opportunities, and maintain a healthy cash flow.
ASSET-BASED FINANCING VERSUS BANK FINANCING
These commercial credit facilities are conceptually the same bank credit lines, but they often collateralize more assets.
Here’s the kicker: They provide more working capital, cash flow, and liquidity pretty well 99.999% of the time. We personally, with clients, have NOT seen the ABL loan provide the same or less business cash flow. It’s always been more! Intrigued?
Unlike unsecured loans, asset-based loans are secured by collateral, allowing larger capital access and typically lower interest rates.
COMBINING ASSETS INTO ONE FACILITY IS THE ABL SOLUTION
The cornerstone of the ABL credit is the flexibility it provides, as you can monetize all your business assets under one umbrella.
We were thinking about this the other day. Perhaps another way to explain it is that this type of commercial borrowing is similar to the home equity credit line, where you can draw your funds for any purpose under one security agreement.
The assets that are monetized under an Asset Based credit on the balance sheet are:
Accounts Receivable
Inventory
Equipment
Real Estate - if applicable
The equipment must, of course, be unencumbered, and the real estate, if applicable to your firm’s situation, uses the equity left in your real estate, i.e., the un-mortgaged amount.
Some readers might think that all of this might sound a little complex.
Still, the reality is that the ABL line operates 100% in the same manner as a bank line of credit, i.e. the same security agreements and the same daily method of usage as you draw down on the facility as you sell and collect your products and services.
UTILIZING ACCOUNTS RECEIVABLE IN ASSET-BASED LENDING
ASSET-BASED SOLUTIONS PROVIDE MORE LIQUIDITY
That difference, again, is more liquidity, as A/R is typically margined at 90%, inventory in the 25-75% range, and the bonus of throwing your fixed assets into the borrowing mix.
Although interest rates are higher in asset-based lending, they provide substantially more liquidity to firms that cannot access any or all the financing they need from a bank due to insufficient company cash flow.
Typical ABL loans are more often structured as a revolving line of credit than term loans, but in certain circumstances, a term loan is a viable option for an ABL loan.
We’ve talked a lot about similarities in the facility. But are there some differences? Two major differences are pricing and reporting. Briefly speaking, pricing can vary. While it can be the same or less expensive than bank financing, it’s usually more expensive. The benefit is the additional cash flow it brings into your company.
Secondly, there is more monthly reporting on the assets that fall under the credit facility. Trust us! In our experience, that additional reporting often makes your company a much sharper-run machine, as you understand your business a lot better.
KEY TAKEAWAY
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Understanding asset valuation drives successful ABL relationships
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Borrowing base calculations determine available credit
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Monthly financial reporting maintains facility health
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Collateral monitoring ensures continuous funding access
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Professional relationships maximize facility flexibility
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The terms and conditions of an asset-based loan depend on the type and value of the collateral provided by the borrower
CONCLUSION
So, back to that conspiracy theory! We're still not sure we can prove it, so can we leave it up to you to investigate an asset-based lending loan via an ABL lender?
Discover the difference in commercial borrowing in a manner you just may have never been told about. Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor.
FAQ: FREQUENTLY ASKED QUESTIONS
What is asset-based lending / ABL?
As a business grows and transitions from small-scale to medium, the need for cash flow optimization becomes increasingly important. When a bank loan doesn’t cut it due to an urgent lack of liquidity or overwhelming time constraints, asset-based lending (ABL) can be beneficial in maintaining healthy capitalization levels for unforeseen market changes. This financing option gives business owners maximum flexibility and access to working capital, which is paramount in maximizing growth opportunities while effectively managing critical transitional periods within a company’s life cycle.
How does ABL lending improve cash flow flexibility?
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Immediate access to working capital
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Revolving credit availability
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Growth-focused funding structure
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Seasonal adjustment capability
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Minimal fixed payment obligations
What advantages do ABL lenders offer over traditional banks?
How can ABL lending support business growth?
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Immediate working capital access
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Inventory purchase funding
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Equipment acquisition options
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International expansion support
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Acquisition financing capability
When is ABL lending most beneficial?
What makes ABL lending unique in the Canadian market?
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Cross-border funding capability
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Multi-currency options
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Canadian-specific compliance
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Regional market understanding
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Industry-specific expertise
What is the difference between an unsecured loan and an asset-based loan?
An unsecured loan is not backed by collateral and is typically more constrained by credit scores and financial ratios. In contrast, an asset-based loan is secured by collateral, such as inventory or receivables, allowing for larger capital access. This makes asset-based loans a more flexible and scalable option for businesses needing significant funding.
