YOUR COMPANY IS LOOKING FOR AN ASSET BASED CREDIT FACILITY!
ASSET BASED LOANS AND LINES OF CREDIT IN CANADA
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Financing & Cash flow are the biggest issues facing businesses today.
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
"Unlocking Your Business's Potential with Asset-Based Lending in Canada"
ABL lending means different things to different business people. So asset based loan rates differ, but in our context, we are talking about a working capital credit facility, in effect a ' business line of credit ' that is a solid alternative to traditional Canadian chartered bank facilities. And as thousands of business owners and managers have discovered - they can often make the impossible... possible! Let's dig in.
WHAT IS ASSET BASED LENDING? YOUR COLLATERAL IS CASH IN ALLOWING YOUR BUSINESS TO THRIVE!
ABL (' asset based lending’) credit lines secure your business's assets and turn them into a working capital and cash flow facility via comprehensive financial solutions tailored to your business needs.
The most common physical assets financed under ABL include inventories, accounts receivable, and fixed assets - and asset based financing may also often include real estate. Asset based lenders establish a monthly borrowing base against your assets, allowing you to draw down on funding needs for day-to-day operations.
Accounts receivable inventory lines are your most liquid assets and are the main types of funding in asset-based loans, but all assets on the balance sheet are eligible and used as collateral.
(When real estate comes into lay in a business credit line, it's in effect the business version of a homeowner line of credit - the infamous ' HELOC’ that millions of Canadians borrow under.) But we digress because we're talking ' BUSINESS'! at 7 Park Avenue Financial
THE SMALL TO MEDIUM SIZE COMPANY WILL ALWAYS HAVE A FINANCING CHALLENGE - WHY ' ABL ' IS CANADA'S HIDDEN FINANCING GEM!
While public companies seemingly have access to more credit, Canada's SME sector often struggles with raising capital or monetizing assets. Enter ABL lending, which is a strong alternative to bank financing. The banks offer ABL lending; they're not big on TV commercials for this specific business borrowing product. The reasons for that we won’t explore today.
WHY BORROW UNDER ASSET BASED LOANS
Why do companies consider borrowing under asset-based loan rates and facilities? While the predominant reason seems to be the bank credit alternative, it's also a solid way to increase borrowing power via business collateral value or finance a merger and acquisition or management buyout via monetizing assets. It is sometimes used to pay down other debt when that makes sense.
ABL DELIVERS MORE BORROWING POWER - MAXIMIZING LOAN-TO-VALUE RATIOS FOR ASSET BASED LOANS IN CANADA
We referenced more ' borrowing power '. That's because 99% of all ABL lending provides stronger margining of receivables via accounts receivable financing and inventory, typically 90% and anywhere from 30-80%, respectively. And when the business owner or the financial manager throws fixed assets into the borrowing mix, increased cash flow ability happens. The type of asset and the value of the asset determines your final facility line.
LARGE CORPORATIONS USE ABL ALSO!
While we reference ABL finance as predominantly used in the SME COMMERCIAL FINANCE sector, it’s also used by some of Canada's largest successful and well-known public and private corporations. Typically large retail chains use the inventory finance component of ABL as their working capital facility, given they have no receivables as retailers are an ' all-cash ' business.
THE COST OF ASSET BASED LENDING VERSUS BANK FINANCING
While Asset-based non-bank financing rates are almost always (but not all the time), higher current rates are coming down and provide even more consideration to consider this type of financing for credit approval. So while Canadian business financing needs tend to gravitate by instinct to ' the bank,’ the business owner and financial manager should not forget that bridging assets into cash is also provided by ABL lending.
The asset based lender will perform the average level of due diligence to establish lines of credit that are custom-tailored to your company and industry. The interest rates on ABL loans are higher, and the final interest rate will be based on overall credit and asset quality.
CONCLUSION - SECURED BUSINESS FINANCING OPTIONS IN CANADA
"The only way to permanently change the temperature in the room is to reset the thermostat. In the same way, the only way to change your level of financial success 'permanently' is to reset your financial thermostat. But it is your choice whether you choose to change." - T. Harv Eker
At 7 Park Avenue Financial we think Mr. Eker had it right - it just might be time to reset your financial thermostat regarding business financing and financial success!
So if you want impossible financing made ' possible ' regarding business credit lines, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with a feasible finance solution.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is asset-based lending, and how does it work in Canada?
Asset-based lending is a type of business financing where companies pledge business assets as loan collateral - ABL lenders then provide term loans or lines of credit financing based on loan-to-value ratio calculations on the assets that are pledged - Asset-based lenders have formulas in place based on how liquid assets such as receivables and inventory value for borrowing purposes, - Asset-backed financing, has less focus on cash flow financing offered by banks, so financing options to access more business capital and borrowing money are much more accessible.
How does asset-based lending compare to traditional loan options in Canada?
When comparing Asset-based lending rates to traditional loan options from financial institutions such as banks, interest rates on ABL business financing facilities are typically higher, although not always. While traditional loans focus on financial metrics such as past credit history and financial performance, profitability, balance sheet ratios, and external collateral ABL lending solutions focus on secured lending based on sales and asset values of the business. In almost all cases, businesses borrowing money under ABL will access higher loan amounts and borrowing capacity due to higher loan-to-value ratios than an unsecured bank loan.
What are some best practices for managing pledged assets in asset-based lending agreements in Canada?
Borrowers accessing financing under asset-based lending agreements should ensure they have a clear understanding of the loan agreement. In general, all business assets are pledged as collateral under an ABL facility. Businesses should ensure they prepare and maintain up-to-date financial statements and agings of accounts receivable, accounts payable, and inventory lists. Equipment and fixed assets secured under the facility should be adequately maintained.
How does asset based lending work?
Asset-based lending works because business borrowers can secure financing based on their sales revenues and physical assets as collateral for a business loan structured as term loans or business credit lines - Typical assets under asset-based lending borrowing include accounts receivables, inventories, and fixed assets/property plan and equipment - If companies have commercial real estate that can be financed separately or under the credit line facility. ABL lenders use different methods of valuing a company's assets, such as market value, net orderly liquidation value, etc.
Why do businesses choose asset-based lending over unsecured loans?
Businesses will choose asset-based lending over an unsecured loan when they cannot access all or any business financing from traditional financial institutions such as banks - As well, more capital and additional working capital can be accessed through ABL borrowing, so companies that cannot meet traditional borrowing criteria around cash flow and profit and debt to equity ratios can access financing otherwise not available - Asset-based lending loans are typically specifically tailored to each borrower concerning repayment. ABL lending is known as ' covenant light ' with fewer financial covenants typically demanded by banks. Existing assets, such as eligible accounts receivable, will have an 80-90% borrowing value. Financing accounts receivables via factoring is a subset of asset based lending.
What type of due diligence does the asset-based lender perform?
Asset-based lenders focus on the valuation and marketability of balance sheet assets that are used as borrowing collateral under credit facilities - In some cases, it will benefit both the lender and the borrower to have an asset appraised and inspected. Traditionally financial analysis is also typically performed around financial statements and other business and industry issues. Adequate due diligence will ultimately determine the loan amount and interest rates associated with the transaction.
What are asset-based lending rates in Canada? Comparing asset-based loan rates in Canada to Traditional Loan Rates
Asset-based lending interest rates in Canada vary for a variety of factors. Some factors include the actual business assets being financed and collateralized and the borrower's overall business credit quality. Most rates under ABL lending fall between 8% per annum to 1.25% per month. Some banks offer asset-based lending solutions at rates slightly higher than traditional bank borrowing. The size of the transaction will also be a factor in determining rates, fees, and other miscellaneous financing costs. Asset based lenders in Canada may include foreign-owned banks and commercial finance companies. The impact of creditworthiness on asset-based loan interest rates in Canada is less significant than the type and value of assets being financed.
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