Asset Based Lending Line of Credit: Transforming Business Assets into Growth Capital | 7 Park Avenue Financial

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ASSET BASED LENDING COMMERCIAL LENDING

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        Financing & Cash flow are the biggest issues facing businesses today 

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UNDERSTANDING ASSET BASED LENDING  CREDIT LINES  

Asset-based lending in Canada is a solid financing alternative for firms that require financing for the traditional build-up of accounts receivable and inventory associated with sales and revenue growth. 

Of course, more and more Canadian firms that purchase products overseas or in the United States marketplace are finding that to achieve economies of scale in pricing and shipping; they must purchase in significantly larger quantities and allow for shipping time.

Even more critical is addressing the supplier’s payment request, which often includes hefty deposits or full payment in advance.

AN  UNCOMMON TAKE ON  ASSET BASED LENDING  

Balance Sheet Restructuring Tool: Beyond immediate funding, asset-based lending lines of credit can strategically reshape your capital structure, reducing reliance on equity financing and potentially improving overall return on investment for business owners.

ASSET-BASED FINANCING - THE COMMERCIAL BANKING ALTERNATIVE?    

Although established firms have access to unsecured loans and operating lines of credit with Canadian chartered banks, these facilities often cannot provide the full financing resources that come with strong, explosive, or seasonal revenue growth. That's why they choose asset based lending!

ASSET BASED LENDING - HOW IT WORKS 

Enter asset-based lending, or the actual facility, which is called an asset-based line of credit. 

The simple definition and explanation are as follows: it is an operating or revolving line of credit facility that focuses on your firm's assets, primarily inventory / finished goods, accounts receivables, and physical assets such as equipment. Fixed assets facility limits are sometimes backed up with appraisals.

A' borrowing base certificate' is established for your business's ongoing drawdowns as sales and accounts receivable grow and revolve around your company's cash flow.

TYPES OF ASSET-BASED FINANCING     

A sole receivable financing facility can be established if a facility needs to be secured solely through accounts receivable. In other situations, a purchase order financing facility can be implemented.

When your Canadian firm applies for a chartered bank line of credit, there is an extreme focus on your operational metrics, overall balance sheet, and income statement ratios.

Your bank sets up a line of credit that is very much related to your firm's tangible equity, debt load, historical cash flow, etc. (Yes, we said historical cash flow!)

This means that the banks focus on how you have generated cash and profits in the past! That is little solace to Canada's manufacturer, wholesaler or distributor that needs cash flow to fulfill orders, contracts, etc.

WHAT IS AN ASSET-BASED LINE OF CREDIT? 

The asset-based line of credit relies only slightly on those issues. Instead, it focuses on your inventory's true, current value, receivables, and unencumbered equipment assets.

Asset-based lending specialists have strong experience in the true liquidation values of your inventory, receivables, and fair market values of your equipment.

Therefore the final amount of the asset based line of credit you are approved for is often, almost 99% of the time, larger than a bank facility.

That allows you to draw down immediately on the values of those assets, generating more cash flow. Many companies that have bank lines in Canada do not even have an inventory component in those facilities. So, just the fact that you can now generate cash flow today out of inventory values is a huge cash flow benefit.

ASSET BASED LENDING RATES    

While asset-based lending in the U.S. and, more recently, in Canada, was considered a non-traditional form of business financing, it has now entered the mainstream.

You would be shocked at the medium and large corporations in Canada that utilize this type of financing via asset based lenders.

 BENEFITS OF ASSET BASED FINANCING    

Different financing strategies achieve different benefits for each company.

The main advantages of this type of financing facility are:

• Easier to set up, get approved, and administer

• Although facilities are set up with an initial cap, the reality is that as your assets grow via increased sales, the facility also grows – Why? Because, as we said, it's asset-based, not covenant or ratio-based

• Higher advance margins, usually 90%, are placed on receivables, and inventory, which in many cases hasn’t been or couldn’t be financed before, is now immediately financeable.

• The facility usually always includes A/R and inventory, but more often than not, has fixed asset equipment or real estate components also.

Case Study: Benefits of Asset Based Lending Lines of Credit   

Client Profile: A Toronto-based industrial parts distributor with $8.5 million in annual revenue faced significant growth opportunities but was limited by traditional bank financing that couldn't keep pace with their expansion.

Challenge: The company had secured several new large contracts requiring $1.2 million in additional inventory purchases, but based on historical cash flow metrics, its bank would only increase its line of credit by $250,000.

Solution: The business secured a $2.3 million asset-based lending line of credit, leveraging its $1.8 million accounts receivable (85% advance rate) and $2.1 million inventory (60% advance rate).

Results:

• Immediate access to over $1 million in additional working capital

• Ability to purchase inventory in volume, securing 18% better pricing

• Successful fulfillment of all new contracts, increasing annual revenue by 37%

• Improved customer satisfaction through faster delivery times

• Reduced dependence on vendor financing, improving supplier relationships

• Line of credit automatically scaled with business growth without requiring renegotiation

KEY  TAKEAWAYS  

• Collateral Valuation forms the foundation of asset based lending, with lenders conducting thorough assessments to determine borrowing capacity based on your business assets' liquidation value.
• Revolving Credit Structure allows businesses to draw funds as needed up to the approved limit, offering flexibility, unlike term loans with fixed payment schedules.
• Borrowing Base calculations determine available credit by applying specific advance rates to each asset category, creating a dynamic funding formula that adjusts with your business.
• Weekly or Monthly Reporting enables lenders to monitor collateral performance, often requiring businesses to submit regular accounts receivable aging reports and inventory status updates.
• Higher Advance Rates represent a key advantage compared to traditional financing, with qualified businesses accessing up to 90% of accounts receivable value and 70% of inventory value.
• Scalable Funding grows naturally with your business as you generate more receivables or acquire additional inventory, eliminating the need for continual refinancing.
• Asset Quality Assessment influences both approval and advance rates, with factors like customer concentration, inventory turnover, and equipment condition playing critical roles.

CONCLUSION - ASSET BASED LENDING - DO YOU QUALIFY

ABL facilities, the acronym for these financings, are specialized financings.

They are an alternative to banks or traditional financing.

They are becoming more popular every day. Call  7 Park Avenue Financial, a trusted, credible, and experienced financing specialist in this exciting new area of Canadian business financing, to assist your working capital needs via financing products and solutions that work!

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

 How does an asset-based line of credit work?