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CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email Address = sprokop@7parkavenuefinancial.com
"The greatest danger in times of turbulence is not the turbulence itself, but to act with yesterday's logic." - Peter Drucker
Struggling to secure financing? Discover how Asset Based Finance Business Loans can turn your company's assets into immediate working capital.
Asset Based Business Loans: A Guide to Finance
Introduction
Asset-based lenders can remove many challenges faced by business owners and financial mgrs in Canada.
We’re examining the abl loan as a method to fund operations and growth through asset-based financing. Businesses might choose asset-based lending because it can unlock significant capital for asset-rich companies and provide flexibility in managing loans, especially during cash flow fluctuations.
Most top experts in Canadian business financing consider asset-based lending a different form of funding your company, with traditional chartered bank financing at the other end of the spectrum.
Comparing Traditional Bank Financing and ABL Loans
How is traditional bank financing different from an ABL Loan?
Unlike unsecured loans, which typically allow for lower capital amounts and impose financial constraints based on credit scores, ABL loans focus on specific assets that essentially give more borrowing power against four asset categories, either one of those or in combination.
Traditional financing relies heavily on the stability of a company's cash flow ratios, which can be particularly challenging during economic fluctuations.
Asset Categories: Accounts Receivable
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Accounts Receivable
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Inventory
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Fixed assets/equipment ( Must be assets that your firm owns outright )
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Real estate - if applicable
A company's assets can be used as collateral for securing asset-based loans, allowing businesses to leverage their assets—such as accounts receivable and inventory—to access necessary capital.
Purchase Order financing can also be considered a subset of solutions offered via an ABL lending company in Canada.
Physical assets can be leveraged for asset-based loans, providing flexibility and accessibility for small, mid-sized, and larger corporations.
Depending on your firm's business and industry, you may be top-heavy in one or more asset categories or perhaps not at all. Service-based companies traditionally utilize a/r and contract financing via the asset finance offering.
Key Benefits of Asset-Based Finance
What, then, is the key benefit to asset-based finance business loans and financing solutions?
To put it simply: FASTER ACCESS TO CASH and FLEXIBLE FINANCING!
Traditional financing forces you to address key issues such as what your balance sheet looks like and focus on historical, present, and future cash flow/projections.
Your company may not necessarily have what it takes there, or in some cases, you’re newer in business or even a start-up.
We point out that it always helps to have a business plan and cash flow readily prepared. Asset-based lending can also provide additional working capital for growth initiatives and operational efficiencies amid changing market conditions.
Addressing Seasonality and Cash Flow Needs
Many companies that utilize asset-based ‘ ABL ‘ lending solutions in Canada have seasonality or ‘ bulges’ in their business cash flow needs.
The terms and conditions of an asset-based loan depend on the type and value of the assets used as collateral. Relying on your ongoing asset base really helps smooth out those bulges!
Personal Guarantees and Asset Monetization
While personal guarantees are almost always an issue for the business owner, this type of guarantee, considered ‘ valuable ‘ or a ‘ must ‘ in banking circles, places much smaller or no emphasis on asset-based lending.
A pledged asset is collateral in asset-based lending when a borrower lacks sufficient cash flow or assets. A negative pledge clause is often included to restrict borrowers from using the pledged asset for further loans, highlighting the risk considerations associated with loans based on physical assets compared to more liquid collateral.
Additionally, true asset-based finance deals are pure asset monetization.
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No debt on the balance sheet
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There is no equity sacrifice. Growing companies can maximize shareholder return without giving up equity when it is most valuable.
Considerations for ABL Cash Flow and Working Capital Solutions
We do need to mention, though, that while some consider ABL cash flow solutions their ‘ holy grail ‘ in business cash flow financing, you must be able to properly report on assets or be willing to undergo some form of appraisal process when adding inventories, fixed assets, or real estate.
An asset-based lender acts as a strategic partner for businesses seeking flexible financing. They evaluate purchase orders and conduct inventory assessments to determine clients' creditworthiness and the potential value of collateral in case of default.
ABL lenders, mostly commercial non-bank lenders, rely heavily on the true marketability and value of your company's asset base in the asset categories we have mentioned.
ABL Asset Finance for Business Acquisitions
ABL Asset finance can also be used as an integral part of financing a purchase of a business when you or your company has targeted an acquisition that requires specific financing outside traditional norms.
Commercial real estate can significantly enhance liquidity for asset-based facilities, serving as a supplementary asset to improve financial transactions.
KEY TAKEAWAYS
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Borrowing Base: Understanding how lenders calculate the maximum loan amount based on eligible assets is crucial.
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Asset Eligibility: Knowing which assets qualify and how they’re valued forms the foundation of asset-based lending.
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Loan Structure: Grasping the revolving nature of most asset-based loans helps businesses manage their credit line effectively.
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Monitoring Requirements: Recognizing the importance of regular reporting and asset tracking is essential for maintaining the loan.
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Risk Mitigation: Comprehending how asset-based lenders assess and manage risk influences loan terms and availability.
THREE UNCOMMON TAKES ON ASSET-BASED FINANCING
- Asset Based Finance Business Loans can serve as a strategic tool for rapid expansion, allowing companies to capitalize on market opportunities faster than competitors relying on traditional financing.
- These loans can act as a buffer against economic downturns, providing businesses with a stable funding source when conventional lenders may tighten their lending criteria.
- Asset Based Finance Business Loans can effectively improve a company's financial ratios by converting illiquid assets into working capital without incurring additional long-term debt.
CONCLUSION
Asset Based Finance Business Loans offer a powerful solution for Canadian companies seeking to unlock the value of their existing assets and fuel business growth.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor.
FAQ
How do Asset-Based Finance Business Loans differ from traditional bank loans?
They focus on the value of a company's assets rather than credit history or cash flow, often providing more flexibility and higher borrowing limits.
What types of assets can be used to secure an Asset Based Finance Business Loan?
Commonly used assets include accounts receivable, inventory, equipment, machinery, and sometimes real estate.
How can Asset Based Finance Business Loans help companies with seasonal cash flow needs?
These loans provide flexibility to draw funds as needed, allowing businesses to manage seasonal fluctuations in revenue and expenses more effectively.
Are Asset-Based Finance Business Loans suitable for startups or companies with less established credit?
As assets primarily secure these loans, they can be an excellent option for newer businesses or those with limited credit history.
How quickly can a business access funds through an Asset-Based Finance Business Loan?
Once established, these loans often provide faster access to capital than traditional loans, sometimes within 24-48 hours of submitting a draw request.
What are the typical interest rates for Asset Based Finance Business Loans?
Interest rates vary depending on asset quality, loan size, and perceived risk, but are often competitive with traditional business loans.
Is there a minimum loan amount for Asset Based Finance Business Loans?
Minimum loan amounts can vary by lender but typically start around $250,000 to $500,000 for smaller businesses.
How does the application process for an Asset Based Finance Business Loan work?
The process usually involves asset valuation, due diligence, and establishing monitoring systems, which can take several weeks to complete.
Can a business use multiple types of assets to secure a single Asset Based Finance Business Loan?
Many lenders offer combination loans that consider multiple asset classes to determine the overall borrowing base.
Are there any industries that typically don't qualify for Asset Based Finance Business Loans?
While most industries can qualify, lenders may hesitate with businesses with highly specialized or difficult-to-liquidate assets.
What is a borrowing base in Asset Based Finance Business Loans?
A borrowing base is the maximum amount a lender will allow a business to borrow, calculated as a percentage of the value of eligible assets.
How often are assets evaluated in an Asset-Based Finance Business Loan arrangement?
Asset evaluations typically occur monthly, but some lenders require more frequent reporting for certain asset classes or higher-risk loans.
Can a business outgrow its need for an Asset-Based Finance Business Loan?
Yes, as businesses stabilize their cash flow and improve their credit profile, they may transition to traditional financing via a bank unsecured loan,or use financing for specific asset values for specific growth initiatives.
