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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
"Asset Based Lending offers a lifeline to businesses, unlocking the power of their assets to secure the funding they need for growth and stability."
"Struggling with financing? Discover how your assets can be the key to unlocking essential business funding."
INTRODUCTION: WHAT IS ASSET-BASED LENDING
Asset-based lending in Canada offers some of the most flexible financings that many companies need in the current challenging corporate finance environment.
When it comes to business loans that make sense, ' ABL lending ‘(short for asset-based lending’) delivers. Let's dig in.
THE ROLE OF ABL IN MODERN BUSINESS FINANCING
There are not too many firms that aren't focused on growing revenues or simply trying to ' hang in' in today’s competitive environment. Much cash can be consumed in acquiring new assets or strengthening the overall equity base of your firm - that's where asset-based lending, aka ' ABL, 'comes in. It's business loan collateral 101!
ABL FINANCE: A CASH FLOW SOLUTION
What distinguishes many companies today from their competition is their willingness to check out new sources of cash flow financing such as ABL finance previously not considered. Although collateral asset-based lending may be considered one of the new ' alternate financing sources' in Canada, the reality is that it's been around for years. Oh, and by the way, it’s been utilized by some of the most successful and well-known corporations, not just smaller firms in the SME marketplace.
THE CHALLENGE WITH TRADITIONAL FINANCING AND THE ABL ADVANTAGE
While Canadian chartered banks get most of the ' mind share ' when it comes to Canadian business financing competition, the reality is that not all firms can satisfy the credit quality required to obtain low-cost/flexible finance solutions offered by our banks such as an unsecured loan faclity.
That's where the understanding of where asset-based lending companies and asset-based lending banks can assist! Click here for a great article by Business Insider on non-bank lending - although it is U.S.-focused the majority of points are applicable in Canadian business financing.
OVERCOMING CASH FLOW CHALLENGES
Traditional cash flow and working capital challenges revolve around firms growing their revenues and being unable to find the ' current asset ' financing for cash that comes with the requirement to fund additional sales, inventories and receivables (let alone equipment/technology acquisition needs).
THE APPEAL OF ABL - FLEXIBILITY!
Business owners and financial managers are often pleasantly surprised at the flexibility of asset-based financing business lines of credit. Why? Simply because they combine the following assets such as your accounts receivable, inventory and equipment, and even equity in commercial real estate, into one ABL borrowing facility that fluctuates with your sales growth.
As sales grow, you can borrow more, pretty well automatically. In many situations, real estate can also be added to the borrowing mix.
The bottom line is it's balance sheet financing, not historical cash flow finance based on bank covenants, ratios, personal guarantee focus, etc. ABL loans become self-liquidating as you repay drawdowns via cash inflows from sales.
That ability (flexibility) to include your fixed assets into your borrowing base, of course, removes the need to consider term loans and additional long-term debt that most business owners/financial mgrs would prefer to avoid. That is the appeal of asset-based lending.
Canadian business owners and their financial managers quickly find that asset-based lending might be the workable financing they have been looking for.
The ability to have the true value of the balance sheet assets collateralized into one business line of credit facility with traditional bank requirements being imposed is key to funding day-to-day operations and allowing your firm to look at growth-type opportunities.
CUSTOMIZED FINANCING SOLUTIONS - VERSATILE OPTIONS
'ABL ' is all about ' speed' in approval of your facility, as well the added impetus of knowing your loan/asset monetization facility is custom-tailored to the needs of your firm - No secret that many firms and industries are not ' cookie-cutter' in their financing needs and the expertise of an asset-based lender is worth the time invested in the process.
Small, medium-sized and large corporations can take advantage of asset finance, and of course, many do. Very few types of corporate financing can say the same thing, as typically, finance solutions are tailored to firms in particular credit profiles.
Whether your firm is a financial services firm looking for Lender finance solutions or a company that is experienced financial challenges, ABL works in both cases. Financing a business becomes less of a challenge!
OTHER USES OF ASSET BASED LOANS
Asset financing can also be a key part of financing a management buyout or a loan to purchase a business in Canada.
Some subsets of asset finance can still get the job done on their own - that might be a purchase order financing facility that is stand-alone or part of a true asset-based credit program, or it might be ABL at its most basic, financing receivables solely on the strength and value of the a/r base.
Borrowers will be pleased to know that A/R advances in receivable financing from lending companies such as an ABL financing firm are typically in the 90% range.
P O FInancing is specifically appealing to thousands of smaller firms in Canada trying to establish larger sales and contracts with clients or entering into U.S. or overseas markets. Taking on larger orders and contracts knowing your suppliers will be paid directly by the PO financier allows firms to consider unlimited growth opportunities, even in Pandemic times!
Interest rates and overall cost of financing are always higher in ABL lending, but in most cases, the decision revolves around access to available capital, not just the cost of capital when it comes to financial needs for liquidity.
KEY TAKEAWAYS
- Entrepreneurs often have a fear of obtaining financing, especially a business line of credit, which is crucial for B2B transactions
- Many Canadian business owners may not realize their firms are viable for financing due to not knowing where to look or which lending options suit them best.
- Asset-Based Lending (ABL) is presented as an accessible solution, mirroring commercial bank lines of credit but easier to achieve and often more flexible.
- ABL focuses on the value of a company's balance sheet and physical assets for approval, including accounts receivables, inventory, fixed assets, and even commercial real estate.
- In contrast, bank lines of credit require sound financials and are tied to a company's balance sheet and cash flow, with a rigorous approval process.
- Traditional bank financing criteria include the 5 C's: character and finances, cash flow capacity, collateral, capital/equity, and the bank's comfort and confidence in the business.
- If a business can't meet these bank criteria of if the bank borrower defaults or is in breach of covenants, an asset based line of credit is an alternative, focusing solely on asset value for approval.
- ABL is suitable for companies with significant assets but who can't get Canadian bank financing for the maximum loan amount they require, facing situations like high growth, turnarounds, or temporary undercapitalization.
- Cost-wise, ABL lines of credit can be comparable to bank rates for large facilities but are generally higher for smaller amounts.
- The article aims to demystify the process of obtaining a business line of credit and encourages seeking advice from experienced Canadian business financing advisors for exploring ABL solutions.
CONCLUSION - ASSET-BASED LOANS CANADA
Is asset based finance right for your company and industry? Your firm’s ability to leverage your assets into an asset-based business credit line will make sense to any commercial borrower who sees bank financing as a challenge.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a proven track record, who can assist you with your firm’s business loan and financing needs from asset-based lenders and their solutions.
FAQ: ( FREQUENTLY ASKED QUESTIONS )
WHAT IS ASSET-BASED LENDING?
Asset based lending is a commercial financing facility that collateralizes assets of the company, thereby providing a term loan or revolving line of credit for the business. Key assets secured are inventory, receivables and fixed assets as well as real estate if applicable. This type of asset-based financing is for commercial businesses in all aspects of the Canadian economy. Asset-based finance provides day-to-day short-term cash flow needs on an ongoing basis based on sales and assets.
How does asset based lending work?
Asset-based lending involves obtaining a loan secured by the assets of a business, such as inventory, accounts receivable, and equipment, providing a flexible financing solution. In some cases intellectual property can also be included in the facility.
What are the main benefits of asset based lending?
An asset based loan offers increased liquidity, flexibility in terms of credit requirements, and the ability to leverage existing assets via a higher loan to value ratio on sales and assets to support growth or operational needs.
Who can qualify for asset based lending?
Typically, businesses with tangible assets like inventory or receivables can qualify, especially those looking for alternative financing options due to stringent bank loan requirements - Banks don't offer loan to value ratios on receivables and inventory that are as generous as ABL.
How does asset based lending differ from traditional loans?
Understanding asset-based lending , unlike traditional bank unsecured loans, which focus on creditworthiness and cash flow, asset-based loans are secured against company assets, offering a more accessible route for some businesses.ABL is easier to obtain than traditional bank financing because the focus is on the assets and sales revenues of the company versus more traditional financing which requires proper combinations of profit, cash flow, and solid balance sheet ratios around debt to equity, etc.
What types of assets can be used for asset based lending?
Common assets include accounts receivable, inventory, machinery, equipment, and sometimes real estate, depending on the lender's policies around the pledged asset category.
What is the typical interest rate for asset based loans?
Interest rates can vary widely based on the lender, the borrower's risk profile, and the type of assets used as collateral but generally are higher than traditional bank loans due to perceived higher risks.
How quickly can a business access funds through asset based lending?
The timeline can vary, but businesses can often access funds quicker than traditional bank loans, sometimes within a few weeks of the application.
What happens if the value of the secured assets decreases?
If the value of the secured assets decreases significantly, the lender may require additional collateral or adjust the loan terms.
Are there any industries that particularly benefit from asset based lending?
Industries with high levels of inventory or receivables, such as manufacturing, wholesale, and retail, often benefit most from asset based lending.
How is the loan amount determined in asset based lending?
The loan amount is typically determined by a percentage of the value of the secured assets, with different asset types having different advance rates.
Can asset based lending improve a company's cash flow?
Yes, by providing immediate access to capital based on existing assets, companies can improve their cash flow to fund operations or growth initiatives.
What is the difference between asset based lending and factoring?
Asset based lending involves loans secured by various assets, while factoring specifically involves selling accounts receivable to a third party at a discount for immediate cash. A/R represents liquid one of the most liquid assets on the balance sheet.
