Asset Based Lending Canada | 7 Park Avenue Financial

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YOUR COMPANY IS LOOKING FOR CANADIAN ASSET BASED LENDING!

 LET ASSET BASED FINANCING SOLVE YOUR CASH FLOW PROBLEMS

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        Financing & Cash flow are the biggest issues facing businesses today

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ASSET BASED LOANS IN CANADA 

Asset based Lending - Canada is catching on quite quickly in the financial services area of Canadian Business Financing to a new breed of financing facility that has been in existence in the U.S. for several years.

WHY ALTERNATIVE FINANCING?  WHAT IS IT?

No secret that business is moving faster than ever these days - with most businesses focusing on acceleration in technology adoption as an example. Canadian businesses need the financial capital to run day-to-day operations and grow business- Independent private financing is a newer and solid source of business capital.

Alternative finance solutions are the business financing solutions that do not come from traditional financial institutions such as banks, providing new levels of flexibility - it is access to new financing products that meet business needs - including those unable to borrow all they need from traditional banks.

Many non-bank lenders now offer Canadian business financing solutions to firms ineligible for bank financing-  providing new levers of choice in funding.

Whether your firm is relatively new, large or small, you have the option of looking at an asset based loan as an alternative financing facility in Canada, unlocking your assets for capital!  ' ABL, 'our acronym for this type of financing, started in the U.S. but grew in popularity every day in Canada. Let's dig in.

"ABL"   ASSET BASED LENDING 

 The acronym for Asset Based Lending is ' ABL ' - ABL has grown popular for some straightforward reasons :

1. ABL facilities will often resemble a bank credit line, providing the client with full-service banking needs

2. ABL lenders have a solid understanding of specialized asset values -Companies can now access up to 90% of the value stored in their accounts receivable and inventory, with fixed assets facility limits providing even more financing -  Asset based revolving lines offer more financing versus traditional operating facility advances, enabling businesses to capitalize on more capital than ever before.

3. Transactions are often very much ' customized ' to a particular firm or industry

4. There are limited or no ' financial covenants in asset-based lending; For example, banks are focused on ' leverage covenants, 'thereby forcing firms to meet debt to equity ratios as an example that may be unachievable for many firms. Covenants in finance in banking scenarios become a real challenge as they try to balance ratios versus growth opportunities.

5. There are no real ' upper limits' on the amount a firm can borrow in ABL, while the smaller transactions commence in the 250k range, which is considered a tiny facility

6. An ABL loan line of revolving credit facility will almost always deliver more liquidity to a business because loan margins are much more generous; typical advance rates for a/r and inventory are significantly higher than bank credit lines. Stand-alone inventory loans can also be accessed as an inventory loan is a subset of asset-based lending. Real estate can also be included in a full ABL lending facility

7. Many company's and certain industries, in general, are very ' seasonal ' when it comes to revenue recognition, need to build up inventory, etc. Asset-based credit addresses this issue head-on. Additionally, certain industries become ' out of favour' in traditional financing circles, and ABL can often easily finance cyclical or industry-specific challenges

8. Outside of general borrowing needs, asset finance loans are very appropriate for acquisitions and or management buyouts.

9. Certain banks also offer ABL financing loans, and pricing is extremely competitive- asset based lending banks typically focus on large transactions with minimum deal size in the  5-10 Million $ range

KEY POINT: It should be noted that in general non-bank commercial asset based lenders have higher rates than Canadian chartered banks who offer unsecured loan solutions under conventional lending criteria.

10. Asset-based non-bank revolving credit facilities are not really 'capped' with an upper credit limit - they can easily grow as your sales and asset base grows. This is a key differentiator vs a bank line of credit.

Note that asset based lending for commercial  real estate is also available and solutions are tailored to your needs/cash outflows

IS IT DIFFICULT TO OBTAIN FINANCING WITH ASSET BASED LENDING  

Asset based lending is less demanding than many other forms of business credit for companies trying to obtain loans. The business owner should understand the focus is on the assets of the company as collateral and the ability to provide proper and updated information on those assets

ASSET BASED LENDING VERSUS CASH FLOW LENDERS - WHAT IS THE DIFFERENCE?

Part of the reason that asset-based lending - ' ABL ' has caught on in Canada is the current state of commercial business banking and Canada and the access to liquidity challenges that many firms face in the post-2010 business environment. Suffice to say the 2020 pandemic has brought those same liquidity challenges to Canadian businesses

ABL IS A VIABLE ALTERNATIVE TO EQUITY FINANCING

Using alternative financing solutions will often allow business owners to avoid issuing equity / raising equity and avoiding dilution in their ownership of the business - Common alternative financing solutions such as ABL business lines of credit and other types of debt and cash flow financing do not dilute equity!

Providing working capital without reliance on outside investment provides predictable financing to manage and raise cash flow - ensuring business stability and offering business finance options. 

A BUSINESS LOAN WITH COLLATERAL

When your company has significant assets tied up in accounts receivable, inventory equipment, and sometimes real estate, you want to ensure you are financing them at optimal survival and growth levels. Asset financing is the ultimate working capital finance option. It comes with flexibility and can deliver urgent, timely cash flow needs that many companies require when transitioning or exploring significant growth options.

HISTORY OF ABL FINANCING IN CANADA

Although the basic financing concept is new, ABL finance has been prospering in the U.S. For many years, Canadian firms compete with U.S. ABL lenders in our own business financing marketplace. Every industry in Canada has potential access to asset financing lending solutions - we note that many industries are the perfect ' poster child' for ABl. Manufacturers, distributors, retailers are very typical users of the ABL solution.

As we noted, some of the largest corporations in Canada utilize this type of financing. Still, the demand for ABL probably grew more out of the need for smaller and medium-sized firms in Canada - let’s say with revenues under 20 Million dollars - to get the operating financing they need.

BENEFITS OF ASSET BASED LENDING

The benefits of ABL financing seem very obvious to Canadian business owners and financial managers. The financing revolves totally around assets and places only a minimal reliance on debt to equity ratios, operating ratios, cash flow coverage, etc. When Canadian businesses cannot satisfy their bankers on the above ratios and loan cash flow coverage, they view ABL as an alternative financing solution.

We would point out that ABL financing, similar to any other commercial financing, is not a solution to a firm who is in a death spiral - years ago, ABL had the taint of a 'lender of last resort - that is categorically not the case now and is utilized by firms who want to maximize operating and working capital financing, but cant in many cases satisfy all Canadian chartered bank requirements.

WHEN YOU SHOULD CONSIDER AN ASSET BASED LENDING SOLUTION

ABL finance is a business loan that relies exclusively on the value of assets that become the collateral for a loan or revolving credit facility. Banks, as an example, place a huge emphasis on a firm's ability to generate positive cash flow from operations. Firms that cannot demonstrate cash flow but still require financing utilize asset based lending arrangements to generate cash. There may be several reasons why a firm cannot temporarily satisfy banking covenants - the firms' financials may not be ready or updated as an example.

The typical scenarios under which a firm considers an asset-based lending arrangement are:

Growing very quickly - in high growth mode

Expanding into new markets

Merging with another firm

In 'Special Loans 'now and wishes alternate financing

We can't overemphasize the before mentioned point about financial statement characteristics - Asset-based lines of credit focus solely on assets; that is where the liquidity and the operating facility works at their best. In any case, firms with previous financing arrangements can significantly increase their credit availability by switching to an ABL line of credit.

EXAMPLE OF AN ASSET BASED WIN!

Our firm, 7 Park Avenue Financial, worked with a firm in Special loans with a chartered bank. They had an original line of credit of 750,000.00 - the bank cut it down to 500,000.00 and put the customer into a Special loans category. We originated an asset-based line of credit for 1,000,000.00 based on the firm's receivables, inventory, equipment and real estate. The customer utilized the ABL for about 18 months and then migrated back to commercial chartered banking arrangements with another bank. That story plays out over and over again in Canada.

We can say that the amount of funding a company can receive in an ABL arrangement is really based on a hierarchy of value of any given asset category. As assets become more liquid on your balance sheet and work up to 'cash on hand, they have higher loan to value ratios. So while it is improbably and very unlikely, your firm would receive 100% financing receivables; as an example, it typically qualifies for 85-90% funding.

Many firms owner their own premises, and there is significant equity in real estate, so that category also would receive a higher 'ltv' ( loan to value) possible in the 75% range as is common. Standalone inventory loans are also a subset of ABL financing.

KEY TAKEAWAYS - ASSET BASED LENDING CANADA

Perform your due diligence on the types of alternative financing that are available

Focus on key issues such as underwriting and application requirements/repayment terms

Be able to clearly demonstrate your business model

CONCLUSION  - ASSET BASED FINANCING SOLUTIONS

Asset Based Lending In Canada can be one of the most effective business credit facilities for customers unable to achieve full traditional bank financing. The ability to refinance existing debt is also a widely used function of asset-backed lending.

Securing liquidity through company assets allows your borrowing to expand and contract when you need cash flow. Companies of any size or transitional stage can take advantage of working capital provided by asset-based lenders.

Asset-based lending will work for your business credit needs if your cash flow requirements are seasonal and revenues fluctuate. If your business plan includes acquisition financing, a turnaround or restructuring, or even a need for capital outside of equity considerations ABL will work for your company.

ABL allows you to leverage company assets and is often a bridge back to traditional financing for many companies in Canada. The ability to finance a firm when it is in transition is a key part of ABL's success in Canada.

Asset based lending business solutions ( Canada )? It's flexible financing if you need it. Your mission, should you choose to accept it? Investigate this unique financing option and work with 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor, if the solutions meet your working capital needs.

FAQ:FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION 

 What Are Examples Of Alternative Financing 

Accounts receivable financing/factoring is a common often used financing solution used by thousands of businesses in Canada.  That method of financing from asset-based lenders allows businesses to smooth cash flow and receive funding immediately as the business generates invoices for products and services

Committed revolving lines of credit and term loans are a key part of most companies' finance structure. Asset lending values will almost always deliver more financing capability than bank finance solutions based on larger advance rates and loan-to-value formulas.

Non-bank business lines of credit are revolving credit facilities similar to unsecured bank lines of credit - These facilities are collateral based and do not have the stringent financial requirements and covenants that financial institutions such as banks demand.  Assets financing under asset-based non-bank credit lines includes accounts receivable, inventory, and fixed assets.

Asset-based lending for real estate is also available.

Shortt term bridge loans are similar to bank term loans but with higher interest rates and shorter payback periods - they are often a ' bridge ' back to traditional financing for many businesses for firms that are in a cyclical or seasonal industry , or experiencing other challenges.

SR&ED tax credit financing for refundable tax credits and revenue-based financing for recurring revenues are popular in the technology area of Canadian business, providing growth financing funding - they are often utilized by software companies and technology firms.  

 What is Asset Based Lending 

Asset-based lending is a type of loan in which the amount granted is determined primarily by the collateral provided. Business lenders providing ABL solutions rely on tangible assets from borrowers to determine how much money can be borrowed and under what terms.

 How does a company qualify for bank financing in Canada 

In order to qualify for bank financing companies should have strong revenues and profits and a diverse client base - Solid balance sheets that demonstrate reasonable debt to equity and good asset turnover of receivables and inventory is desired - Good management teams must be in place with relevant business experience.