Why You Must Consider Asset Based Lending Bank Alternative Financing Solutions

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An asset based lending bank alternative financing solution traditionally has been thought of as a 'non-traditional' form of Canadian business financing. The truth is that these forms of alternative financing (sometimes dubbed ' fintech ‘) are becoming more mainstream every day.

If you're looking for a 'redesign' of your business finance capital solutions, we think we've got some solid solutions around different types of asset-based financing. Let's dig in!

WHAT IS ASSET BASED LENDING?

Asset based lending, also known as ' ABL ' is the financing of the assets of the company as collateral for term loans or lines of credit. This type of financing maximizes liquidity and supports the day-to-day running of a business. Lenders determine the value of assets such as receivables, inventory, equipment and real estate, the ' loan collateral ' to support the financing. In many cases asset based funding can relieve a company that has been placed in 'non performing loans' status by banks in Canada.

THE GOAL OF THE BUSINESS OWNER

Owners and financial managers' goal is always to increase their cash flow and working capital to run and grow their business. There's no bigger fan of Canadian banks than us. Still, there is a general feeling from many businesses looking for SME commercial finance solutions that the bank alternative isn't always available when they need it, while collateral finance is always available for business assets.

Canada's Globe & Mail business newspaper on in a past article highlighted insights from many entrepreneurs, many of who maintained that Canadian bank solutions were either unavailable or irrelevant. Another article on the same day accused the Royal Bank of Scotland of literally forcing small businesses to improve capital ratios for the bank's own purposes!

THE RISE OF ALTERNATIVE FINANCING IN CANADA

Asset based lending in Canada is a previously non-traditional (but becoming more traditional every year!) form of financing that significantly increases cash flow and working capital for Canadian business.

The two main drivers of an asset based loan/line of credit facility in Canada represent the majority of every firm's current assets or working capital assets - they are:

Inventory ( ABL is one of the best ways to resolve the inventory financing challenge, including retail financing )

Financing commercial real estate is also a common use of asset based loans, with a bridge loan being a common structure.

HOW IS ASSET BASED LENDING DIFFERENT FROM BANK FINANCING?

Asset based Lending for Canadian firms differs from traditional chartered bank type financing in that lines of credit are made available against inventory and receivables on their own merit, so to speak. What do we mean by that? Simply that these types of facilities are very non-covenant-based. Unlike bank operating facilities which have a lower cost of financing asset-based lines of credit do not have covenants, rations, and significant external other collateral attached to them. In certain cases, parts or all of the transactions can be structured as term loans versus revolving facilities.

ABL IS FORMULA DRIVEN

This type of business financing is very much formula-driven, to the point where the Canadian business owner or financial manager always knows his or her working capital availability subject to current and projected sales growth.

In the case of the receivables component, 90% of available A/R is financing, and depending on the overall quality and liquidation value of your inventory, margins on the inventory component tend to be anywhere between 40-75% in our experience.

This type of financing works best because asset-based lenders are experts in the quality of receivables and inventory value. In an asset based lending facility, you are not taking on debt. You are simply liquidating receivables and inventory at a fast pace, and as you grow, your working capital and cash grow commensurately with your sales and revenue growth!

Security for the facility is simply a charge on the assets being financing. As we have stated, those assets include A/R and inventory, but equipment and real estate can also be added on in many cases. A general security agreement, commonly known to financiers as a 'GSA, 'is taken as collateral for the facility, in the same manner as a Canadian bank might take. This collateral is, in effect, the 'underpinning' of the facility.

A simple way to understand this new type of financing from asset based lending companies in Canada is to think of the collateral assets, not your overall balance sheet and financial strength and operating metrics.

THE REQUIREMENT FOR REPORTING AND REGULAR UPDATES ON FINANCIAL STATEMENTS AND RECEIVABLE AND PAYABLE AGINGS

There is more reporting required because you receive a higher margining or borrowing base in asset-based lending. As a business owner, you can view that as a bad thing or a good thing - many clients have told us the additional monthly reporting they do for their asset-based lines of credit helps them understand their business better.

Numerous 'subsets' of asset-based finance can deliver on short-term structured credit and intermediate-term finance needs. The owner/mgr should also understand these. They include:

CONCLUSION

Financing a business has never been more of a challenge - If you're focused on growing your business, eliminating finance anxiety, and redesigning how you currently fund your business with a new type of structured finance, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with alternative financial solutions that make sense for your cash flow financing and business needs.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

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