YOUR COMPANY IS LOOKING FOR ABL FINANCE!
ASSET BASED LENDING CANADA
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ABL Financing in Canada. How do you know when it just might be time to both discover and utilize one of Canada's best financing mechanisms for a business? There are in fact some strong signals and warning signs when it comes to switching to an asset-based finance business credit line. Let's examine asset based lending in Canada.
WHAT IS ABL FINANCING?
ABL financing seems to go by a lot of names these days, so clients at 7 PARK AVENUE FINANCIAL can be forgiven for occasionally getting confused on what this method of finance is - Simply speaking its a corporate business loan, or alternatively a business line of credit secured by the assets and sales of your business. Those ' sales ' generate receivables, which is one of the key assets in any business line of credit.
Although even some of the largest and well-known corporations in the world utilize ABL financing or an asset based loan the true value of this method of funding a business is probably in the SME COMMERCIAL FINANCE sector of Canadian business. It's these thousands of firms that have investments in accounts receivable, inventory, and equipment and are unable on occasion to access proper traditional bank credit.
Given the need to fund daily operations as well as exploit growth opportunities ABL finance allows a company to ' leverage ' assets and meet the working capital demands of running/growing a business. When taking on new debt, or raising equity is not an option ASSET BASED FINANCE lending is the solution!
The key assets of a business - a/r, inventories, land, equipment make up the total asset mix that is financeable. Using the current and real values of these assets allows a firm to borrow against them and maximize financing potential.
While traditional Canadian bank financing has a total focus on clean balance sheets, profit, and predictable and demonstrable cash flow Asset based finance solutions look toward sales and assets - that's the ABL difference!
Various subsets of asset-based lending & asset loans can get the job done for many firms - that includes:
OTHER EXAMPLES OR SUBSETS OF ABL FINANCING VIA ASSET BASED LENDERS
Inventory Financing Loans
Non bank asset based lines of credit - a true abl facility
SR&ED Tax credit financing
Equipment / fixed asset financing
WHY HAS ASSET BASED FINANCE BECOME SO POPULAR AS A BUSINESS FINANCING SOLUTION
It kind of sneaked upon us, but asset-based finance is growing and becoming more popular every day in Canada as a business finance mechanism. While banks and other lending institutions focus on cash flow and ratios and covenants the asset-based line of credit lender sits quietly in the corner and focuses just on one thing- ' Assets '!
WHEN SHOULD YOU CONSIDER ABL FINANCING?
We're going to discuss how you can recognize some key early warning mechanisms around when to consider this method of finance, but the simple rule of thumb is that you have to have assets such as accounts receivables, inventories, lien-free fixed asses, and even real estate... well let's just stay... you qualify! That’s why wholesalers, retail organizations, and manufacturers and service companies of all types are gravitating to ABL finance.
ASSET BASED LENDING IS THE NON BANK COMMERCIAL CREDIT FINANCING SOLUTION
We're always surprised when we hear clients say they haven’t even heard of ABL. More so when you consider some of the largest companies in Canada have abandoned bank facilities and moved to ABL. While for the larger company asset based finance business credit lines can, in fact, cost less and be more flexible, the reality is that for the small to mid-size sector the cost of such a facility will in fact be more than bank credit.
But, consider this, if you don’t qualify for the amount of bank financing you need that lower interest rate doesn't mean much when you're forced to restrict growth and focus almost all day on managing cash flow in an often crisis type mode. That's when reasonable financing costs should be the least of your problems. Business owners will be pleased to know that ABL does not use the banking covenants and balance sheet ratios which come with access to traditional Chartered bank financing.
WATCH OUT FOR THE WARNING SIGNS!
Let's get back to some of those early warning signs that just might signify your need to check out a new paradigm in business lines of credit. Sales revenue has a direct relationship to working capital needs. Because those higher sales and growth opportunities bring higher levels of receivables and inventory and of course higher levels of payables.
ASSET TURNOVER IS KEY
Velocity, aka ' speed'. It now becomes a greater challenge to turn over assets to generate that working capital. It's up to the Canadian business owner and financial manager to, as you're growing establish what is acceptable in inventory levels, A/R collection days, as well as, oh yes, paying those suppliers.
TWO METHODS OF MONITORING YOUR CASH FLOW
Two ways for you to monitor your financial cash flow and working capital needs over time are to keep a simple track of working capital to sales and working capital turnover itself. The former is calculated simply by taking your current assets and dividing them by sales for, say, an annual period. Working capital turnover is measured by taking your sales and dividing them by your working capital for any period. You then track those! Understanding your firms financials will also make you more successful in asset finance and more comfortable with lending companies.
Let's say you kept track of your working capital turnover and notice the ratio is trending lower. That means poor working capital performance, and you probably are feeling this via cash flow pressures. When you utilize an ABL Financing facility you will find those assets can be monetized faster, with more liquidity in margining, resulting in higher borrowing power for working capital needs.
Speak to a trusted, credible and experienced Canadian business financing advisor when you feel your firm just might be exhibiting signs of a need for a better way in a Canadian business credit line via asset based finance.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020