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ABL ASSET BASED LENDING SOLUTIONS 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
Oakville, Ontario
L6J 7J8
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ABL Credit Facilities 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”
Asset Based Financing in Canada
Asset-based lending (ABL) is a financing method that allows businesses to obtain loans based on the value of their assets, such as inventory, accounts receivable, and equipment.
By using these assets as collateral, businesses can access a flexible source of working capital. The value and quality of the borrowing base assets play a crucial role in determining loan amounts and approvals, rather than relying on the borrower's future cash flow.
This highlights the lenders' focus on the collateral's quality and accessibility over traditional financial metrics.
An asset-based business credit line is one solution to what many business owners / financial managers tell us is their ‘mountain of pain’ regarding revolving credit facilities that make sense for their company.
Cash Flow Problems? Your Business Assets Hold the Solution
Your business always has fluctuating cash flow needs - When traditional banking falls short, the focus now has to be funding day-to-day operations - 'ABL' asset-backed credit lines turn sales and assets into the working capital you need. That's flexible financing based on sales and assets.
THREE UNCOMMON TAKES ON ASSET BACKED FINANCING
- ABL Credit Facilities can improve supplier relationships by enabling faster payments
- These facilities often lead to better inventory management practices
- They can serve as a strategic tool for seasonal business optimization
What is Asset-Based Lending?
Asset-based lending (ABL) is a financing method that allows businesses to leverage their assets to secure capital.
This type of lending is particularly beneficial for companies with substantial assets, such as accounts receivable, inventory, machinery, equipment, real estate, and intellectual property.
By using these assets as collateral, businesses can access a flexible source of working capital. The value of these assets secures ABL facilities, making it easier for companies to obtain the funds they need to support their operations and growth.
WHY CHOOSE ASSET BASED LENDING
‘ABL’, i.e. asset-based lending, is the one alternative to achieving a working capital line that makes sense to maximize your borrowing capacity.
This type of financing will allow a company to access more financing more quickly than with traditional bank loans. Credit availability can fluctuate based on regular appraisals of a borrower's collateral, influencing a lender's decisions regarding risk management. Let’s dig in.
Benefits of Asset-Based Loans
Asset-based loans offer several advantages for businesses looking to enhance their financial flexibility and growth potential:
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Access to Funds: ABL provides businesses access to capital that might not be available through traditional lending channels. This can be crucial for companies that need immediate liquidity.
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Flexibility: ABL facilities can be tailored to meet the specific needs of a business, offering flexibility in terms of repayment schedules and borrowing limits. This adaptability helps businesses manage their cash flow more effectively.
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Growth Opportunities: By leveraging their assets, businesses can overcome financial challenges and pursue growth opportunities that might otherwise be out of reach. This includes expanding operations, investing in new projects, or entering new markets.
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Lower Interest Rates: Since asset-based loans are secured by collateral, they often come with lower interest rates compared to unsecured loans. This can result in significant cost savings for businesses over time.
What is the difference between a cash flow loan and an asset-based loan?
Asset-based credit facilities allow a company to borrow against all the company’s assets/business’s assets on the balance sheet of the company -
Typically, these assets include accounts receivable, inventory, tax credits, and fixed assets and equipment, as well as commercial real estate if the company owns the land and building.
Cash flow lending, on the other hand, assesses a company's financial health predominantly through its cash flow metrics and requires companies to meet specific financial covenants and leverage ratios, which can restrict access to capital during periods of fluctuating sales or income.
THERE ARE NUMEROUS TYPES OF ASSET BASED LOAN AND LENDING SOLUTIONS
Some asset-based credit subsets also work for many businesses in Canada. ABL financing rose in popularity in the United States and gradually became more popular in non-bank Canadian business financing solutions.
The primary one is invoice financing, which focuses specifically on accounts receivable, and unlike ABL, does not take into account borrowing against your inventory, equipment, and other assets.
While invoice factoring works for thousands of firms, it falls when the business owner/manager finds financing the business too inflexible.
Types of Assets Used in ABL
Various types of assets can be used as collateral in an asset-based lending facility, providing businesses with multiple options to secure financing:
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Accounts Receivable: Outstanding invoices can be used as collateral, allowing businesses to convert their receivables into immediate working capital.
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Inventory: Existing inventory can be leveraged to secure financing, helping businesses manage their stock levels and meet customer demand.
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Machinery and Equipment: Companies can use their machinery and equipment as collateral, enabling them to access funds for maintenance, upgrades, or new purchases.
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Real Estate: Commercial properties owned by the business can be used as collateral, providing a substantial source of capital.
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Intellectual Property: Patents, trademarks, and copyrights can also be used as collateral, offering an additional avenue for businesses to secure financing.
ASSET BASED LENDING FOR REAL ESTATE
Even real estate business equity can be included in this funding, and these are typically structured as term loans inside or outside of the facility.
DON'T PICK THE WRONG TYPE OF ALTERNATIVE LENDING
Getting into the wrong facility can become either too expensive or, in some cases, cumbersome. If there is one primary reason businesses shy away from invoice financing, it is that they don't want the financing to involve customers, suppliers, etc.
DO YOU UNDERSTAND INVOICE FINANCING / FACTORING
We can commiserate with these clients because the ability to keep how you finance your company private is probably how you want to run your business.
If there is one other perception of invoice financing, many firms don't understand what it does, how it works, and, as importantly, how it is priced.
CONFIDENTIAL RECEIVABLE FINANCING
And paramount to all of this is the fact that the facility is ' CONFIDENTIAL ' regarding your business running independently, billing, and collecting your own receivables to enhance cash flow.
For more information on financing accounts receivables in this manner and on confidential a/r financing, click here.
ASSET BASED LENDING VERSUS COMMERCIAL BANKING & FINANCING
How are commercial finance firms offering ABL creditable to compete with unsecured loans provided by banks offering lower interest rates?
Top experts tell us that the ‘ risk spread ‘ on banks lending to smaller firms is less attractive than lending to large commercial borrowers when cash flow financing is required.
Banks also place heavy emphasis on satisfactory ratios and the need for the company to agree to covenants at certain levels, which might be considered restrictive to a business that has substantial assets but is unable to borrow what it needs.
Credit and term loans are often suitable financing solutions for companies with strong asset bases, especially those new to such financing or facing fluctuating cash flow and working capital needs. That ‘ covenant light structure ‘ has significant appeal to borrowers.
To qualify for unsecured business lines of credit from Canadian banks, borrowers will have to satisfy numerous bank lending criteria that include:
1. Years in Business
2. Annual revenue sizes
3. Business credit score /personal credit score
4. Ability of owners to pledge personal guarantees and potentially outside collateral
While no collateral is put up in unsecured lines of credit the assets of the business are still pledged and secured, typically via a general security agreement -
Credit limits are usually significantly lower than secured lines of credit, but interest rates and fees are attractive. Personal guarantees are usually always required for bank unsecured facilities.
ASSET BASED LENDING BANKS IN CANADA
Some Candian banks offer asset based lending solutions - these facilities typically require a 5-10 Million dollar minimum borrowing and come with extensive monitoring and higher setup costs via audits, appraisals, etc
ASSET BASED LENDERS FILLING THE VOID IN BUSINESS FUNDING
Asset-based lenders fill the void when small to medium-sized businesses cannot secure ' traditional' loans.
WHAT IS AN ASSET BASED LINE OF CREDIT
So that brings us around to the ASSET BASED BUSINESS LINE OF CREDIT, which finances your a/r, inventory, and equipment under one revolving credit facility. In many ways, it is the perfect alternative to ‘credit-hungry ‘ Canadian business.
A ‘ borrowing base ‘ is established, typically monthly, based on your sales and assets - your firm draws down on those assets. The loan-to-value ratio is used to evaluate the risk of asset-based loans and determine lending limitations. It’s a perfect way to finance the balance sheet and capitalize on a combination of your sales and assets.
WHO USES ABL FINANCING
Top experts tell us that thousands of firms are now fully utilizing asset-based lending facilities, primarily in the start-up and SME Commercial marketplaces.
At the same time, many would also be surprised to learn that major corporations utilize this type of business borrowing.
THE RISING POPULARITY OF ABL FINANCE
This ' bundling ' of your assets into one borrowing facility provides liquidity and borrowing power that is more often than not 100-200% more than you could achieve at a bank facility.
It is also well suited to Canadian businesses that sell into the U.S. as no real distinction is made between U.S. and Canadian receivables if you're working with the right partner. Solutions via asset-based lenders typically come with a higher interest rate - for the business owner, it becomes a question of access to capital versus the cost of capital.
What is the interest rate on an asset loan? Asset based lending rates in Canada
Asset-based lending rates in Canada differ based on the type of lender providing the solution and general business qualification requirements. Rates typically range from 7% per annum to 1.25% per month based on overall asset quality, deal size, etc.
DID YOU KNOW?
STATISTICS:
- The asset-based lending market grew by 10.8% in 2023
- Average advance rates: 85% on receivables, 65% on inventory
- 73% of businesses report improved cash flow with ABL
- Typical facility sizes range from $1M to $100M+
- 92% renewal rate among established ABL borrowers
KEY TAKEAWAYS
- Borrowing Base Calculation forms the foundation of facility size
- Advance Rates determine available funding against each asset class
- Collateral Monitoring ensures facility stability
- Asset Valuation drives lending decisions
- Regular Reporting maintains facility compliance
CONCLUSION - THE ABL BUSINESS LOAN SOLUTION - FLEXIBLE FINANCING THAT GROWS WITH YOU
Ensuring your business can access credit is a positive step for the future. The value of your business's ability to access credit is critical even if you don't need any money right now. It's smart for entrepreneurs and owners alike to plan financing needs.
Are you looking to understand the key advantages of asset-based financing and the ABL business lines of credit compared to your ability to access bank finance from traditional Canadian banking?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you in removing the ' mountain of pain ' surrounding your working capital needs in Canada.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does an asset-based line of credit work?
Asset based lending facilities via an asset-based lender consist of business lines of credit secured by the collateral on the company's balance sheet - Various types of collateral can be used in asset-based finance that includes such business assets as accounts receivables and physical assets such as equipment and other balance sheet assets such as company-owned real estate and refundable tax credits. In some cases, intellectual property can be pledged. If the borrower defaults, the assets are the collateral to the loan. A broad range of businesses in Canada utilize ABL loans.
Is an ABL a line of credit?
There are multiple forms of ABL facilities & Asset-based lines, and they can be structured as a term loan but more typically are structured to gain access to a revolving line of credit secured by the company's assets. This allows the business to borrow on an ongoing basis against the pledged asset / assets and the sales to fund day-to-day operations around the company's working capital and cash flow requirements. ABL credit lines are commonly used for:
Commercial rent
Utilities
Equipment repair
Payrolls/staffing
Leasehold Improvements
Inventory Purchases
Sales and marketing initiatives
What is an ABL Credit facility?
ABL loans are a form of business financing that provides revolving credit facilities secured by company assets. Although some facilities can be structured as term loans, as in real estate, the typical ABL facility is structured as a business line of credit that revolves around cash flows. This allows a business to borrow on growing assets and sales revenues to fund day-to-day operations.
Eligibility Criteria for Businesses
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Sufficient Assets: The terms and conditions of an asset-based loan depend on the type and value of the assets offered as security. Lenders evaluate the liquidity and risk associated with the collateral, preferring highly liquid assets. The nature of the collateral influences loan terms, interest rates, and overall risk for both the borrower and the lender.
Eligibility Criteria for Businesses
To qualify for an asset-based loan, businesses must meet specific eligibility criteria, ensuring they have the necessary assets and financial stability:
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Sufficient Assets: Businesses must have enough assets to be used as collateral, such as accounts receivable, inventory, appraised value of real estate, or intellectual property. These assets form the basis of the loan and determine the borrowing capacity.
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Creditworthiness: Demonstrating creditworthiness is essential. Lenders will look for positive financial performance and high-quality collateral to ensure the business can meet its repayment obligations.
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Financial Performance: Lenders will analyze a company’s financial statements, focusing on stable cash flow and a healthy debt service coverage ratio. This assessment helps determine the business’s ability to manage the loan and maintain financial health.
How do you Apply for an Asset-Based Loan?
Applying for an asset-based loan involves several steps to ensure the lender can accurately assess the business’s financial situation and collateral value:
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Preliminary Evaluation: Share preliminary information with your banker to evaluate your business’s financials and determine if an ABL facility suits your needs.
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Documentation: Provide essential documentation, such as financial statements, tax returns, and collateral valuations. Keeping this information accurate and up-to-date is crucial for a smooth application process.
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Lender Assessment: The lender will assess your application based on the provided documentation, evaluating the quality of your assets and overall financial health.
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Customized Solution: Work with a dedicated banker who can guide you through the application process and provide a customized solution tailored to your business’s needs.
By following these steps, businesses can effectively navigate the application process and secure the asset-based loan that best supports their financial goals.
Asset-based loans vary in structure. In some cases, they may include just financing accounts receivable, but typically, they will consist of a bundled facility that aggregates a/r, inventories, fixed assets and equipment, and, in some cases, company-commercial real estate—these assets are pledged to the lender.
How does an ABL Credit Facility improve my business cash flow?
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Converts accounts receivable into immediate working capital
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Provides same-day access to funds based on new invoices
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Enables faster supplier payments for better terms
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Supports seasonal fluctuations without strain
What makes an ABL Credit Facility more flexible than traditional loans?
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Grows automatically with your business revenue
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No fixed monthly payments - pay only on what you use
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Adjusts to seasonal business cycles
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Focuses on asset quality rather than credit history
What types of assets can I leverage with an ABL Credit Facility?
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Accounts receivable from creditworthy customers
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Inventory in various stages of completion
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Equipment and machinery
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Real estate in some cases
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Purchase orders from reliable customers
How quickly can I access funding through an ABL Credit Facility?
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Initial facility setup typically takes 3-4 weeks
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Once established, same-day funding is available
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Regular borrowing base updates enable quick access
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Online portals provide real-time availability tracking
What reporting requirements should I expect?
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Monthly borrowing base certificates
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Regular inventory reports
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Accounts receivable aging reports
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Annual asset appraisals
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Basic financial statements
What exactly is an ABL Credit Facility?
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Revolving line of credit based on asset values
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Focuses on collateral rather than credit scores
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Provides ongoing access to working capital
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Typically larger facilities than traditional loans
How does the application process work?
What are the typical costs involved?
Are there minimum requirements for qualification?
What impact does an ABL Credit Facility have on business growth?
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Enables rapid scaling without equity dilution
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Supports larger customer contracts
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Allows for inventory optimization
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Provides competitive advantage through better supplier terms
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Facilitates strategic acquisitions
How do lenders determine advance rates?
What are common challenges in managing the facility?
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Regular reporting requirements
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Understanding borrowing base calculations
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Managing seasonal fluctuations
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Maintaining proper documentation
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Monitoring covenant compliance
