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asset based lending and abl lending canada

Asset Financing Solutions in Canada - The New Financing Alternative From Asset Based Lenders


Asset Based Lending in Canada ( ABL Finance ); What’s all the excitement about?

As we are well into our 2022  business year in Canada, the financial markets continue to provide challenges to Canadian firms in the small to medium enterprise sector ( ' SME ' ) for various reasons, one of which is a Pandemic!  Let's examine asset based loans versus unsecured loans in commercial banking in Canada.


At 7 Park Avenue Financial, we define SME as Sales revenues less than 50 Million dollars, but you will find several people with different size definitions. Suffice to say our numbers are smaller than those in the United States,  as usual!




Asset based lending is a type of business financing arrangement and loan security that allows your company to secure cash via a bridge loan or line of credit secured by the collateral of your business. Typical asset categories for loan collateral are inventories, receivables, fixed assets, and other company-owned assets such as real estate.


Real estate can be financed separately via ABL term loans based on an acceptable face value of the property, or inside your overall asset loan arrangement.


Typically a monthly-based borrowing certificate on eligible assets is prepared, allowing the business owner and financial manager to understand the maximum drawdown potential on the facility/loan.


Asset loans are business loans as opposed to other consumer financing solutions. These loans are best suited for highly leveraged firms that can't meet banking covenants that can't access traditional capital as well as firms that are experiencing high growth and who are willing to secure company assets for funding - thereby addressing the ' credit risk ' issue of commercial lenders.


Financing for retailers is available via asset loans tailored to the unique business model of retailers in Canada. Retail financing for small stores is typically addressed through merchant cash advances, aka ' short term working capital loans '.


When contemplating a business purchase ABL is a solid way to buy a business in Canada.


Asset-based lending services are strong additions to working capital needs as operating line of credit facilities grow automatically as the business grows.


ABL financing is collateral-based lending - ABL lenders secure inventories, accounts receivable, equipment, and other property your business owns, such as real estate, for example. Financing equipment that is already owned by the company is an excellent way to build on your business equity for borrowing power. Canadian businesses use asset based lending to cover short-term solvency issues to run their businesses - it is often termed as ' transitional financing ' as asset-based loans provide a road back to traditional Canadian bank financing. Asset-based lenders fill the gap when it comes to a firm's inability to access traditional financing.


Working capital and cash flow financing challenges seem to be a constant challenge for the Canadian business owner and financial manager. When we combine that challenge with the fact that many companies have debt and debt service problems, and in many cases, are coming off a bad year ( the worst year ever? ), you can see how any new financing solution very quickly becomes top of mind. If the Canadian business owner is confident that his liquid and fixed assets as a whole can support the financing need, careful thought should be given to an ABL arrangement.


ABL is the term most people refer to when discussing ABL FINANCE if they have a financial background.





What are those liquid and fixed assets – well, they are, of course, the company’s liquid current assets, receivables and inventory? That is also balanced with the firm's fixed assets, and real estate might be included in that and used as collateral also. That asset-backed security provides significant comfort for ABL lenders in areas such as a receivables loan.

Business loans for startups can always be addressed by full ABL facilities but numerous other Canadian business financing solutions address the needs of a start-up or early-stage business.


Whether on the U.S. or the Canadian side of the border, the asset based lending lines of credit continue to increase – some of the largest corporations in Canada and the U.S. have either completed such financings or are contemplating them. Asset based finance - aka ' ABL ' in Canada grew out of the tremendous growth in the U.S. asset-based lending industry.




As large as the market and market potential are in asset-based financing, it is interesting to note that the actual market participants can really be brought down to a handful or two of key players. Some large tier one type firms are primarily offshoots of major U.S. corporations who dominate the market in asset-based lending. Then there are a tiny handful of Canadian well-heeled players.


That is finally balanced by a similar handful of Canadian tier 2 and tier three players who play in niche markets and geographies. Asset-based lending works only when there are... guess what... ‘Assets ‘! As such, industries that are very capital intensive in nature – think manufacturing, etc... are the  perfect candidates for ABL-type arrangements.




Asset-based financing is essentially an operating loan and credit line that allows Canadian firms to meet everyday cash flow demands as they operate the business. As there is often a significant delay in the final collection of receivables, your business needs cash flow to cover that gap. For companies that can't demonstrate ongoing historical cash flow from operations, the collateral in the business's assets provides business capital to run and grow a business.




Asset based loans and lines of credit are typically tailored to a company's specific needs. There is a hierarchy of priority in assets that ABL lenders prefer. More liquid assets such as your receivables and inventory receive high borrowing margins, but other assets also command good borrowing ability - sometimes dependent on appraisals, etc.


Borrowers familiar with traditional bank covenants and formulas will be happy to know that those restrictive covenants in finance rarely occur in ABL lending.


In the past, there was a major stigma in the asset-based lending marketplace that this type of financing – i.e. leveraging your current and fixed assets to the max, is a form of alternative financing previously embraced by only firms who were in some financial trouble or distress.


While a firm can have financial losses, a poor balance sheet capital structure, or cash flows that are very volatile or seasonal and still be a great candidate for an asset based line of credit /loan, it should be pointed out that major successful, well-known corporations have added ABL financing to their financing toolkit so to speak.





When CFO's and business owners meet with chartered banks to structure operating and term financings, the discussions revolve around balance sheet ratios, debt covenants, cash flow coverage, and personal collateral. When all of those issues are generally positive in nature, the Canadian chartered banks provide lines of credit and term facilities at very low-interest rates.


The ABL lender is simply a lending decision around the lender's ability to convert collateral to cash under the ABL facility. While asset-based lending interest rates are almost always higher than traditional banks, financing rates have come down significantly, and the final cost of borrowing will depend on the overall credit profile of your company and industry, as well as its current financial position and years in business.


When there are major challenges in satisfying bank requirements, those ratios and loan covenants are not on the discussion table with your asset-based lender; only the liquidation value of all your assets is. Receivables and inventory in most firms are of higher quality and can be margined in the 90% range, while appraisals are performed on other fixed-type assets. Those asset based lending finance rates, therefore, provide maximum borrowing power around your asset financing, and that is what the ABL  loan agreement is all about.  Real estate owned by the company can also be part of the asset mix.


Is it more expensive than traditional bank financing – we would say 95% of the time it is? But as a business owner, do you want no or a small credit facility at a great rate or all the financing you need at a more expensive rate? Asset-based lenders have a thorough due diligence process around your financials and the assets that ultimately finalize a term sheet/offer to finance. Canadian companies looking for SME Commercial Finance solutions and who have business assets are eligible for asset based financing loans.


Whether your business is a major corporation or an up-and-coming startup, its cash flow like gasoline to a car. ' Operations must be funded, and working capital financing must be conserved and maximized. Thousands of companies cannot satisfy ' cash flow-based loans ' and cannot demonstrate past and future cash flow generation. That is one of the main reasons why asset-based financing works.




Companies that have bank financing in place for cash flow-based borrowing are subject to potential reductions in their business lines of credit when their profits drop due to company-specific of general economic issues. On the other hand, firms that borrow using asset based finance lending companies and considering  ABL finance have the assets on their balance sheet backing up collateral for loans and credit lines - cash flow is really a secondary consideration for the ABL lender.


ABL credit lines are formed by a percent of the value of your total assets, and facilities typically grow automatically as sales and assets grow!


ABL allows you to leverage assets and is often an intermediate step back to traditional bank financing for many companies; it's flexible and is often used in conjunction with buying a business or is part of a turnaround financing and a restructuring or refinancing strategy.


If a bank has placed a  loan in its ' NPA ' (non-performing asset) special loans category asset-based loans can be effectively used to pay out the bank with new senior lending in place. A special loan classification of loans and advances in banks is very stressful for business owners - ABL can fix that.


Various other business financing options and types of asset-based financing such as inventory loans, purchase order financing and factoring ( pledging receivables/invoice factoring ) form part of the ABL solution. For information on PO Financing, click here, and for an understanding of how factoring works, click here.


Acquisition financing and financing a takeover are also a common use of asset-based financing when raising funds.





Asset-based lenders allow companies to borrow money based on the liquidation value of assets on their balance sheet. A recipient receives this form of financing by offering inventory, accounts receivable, and/or other balance sheet assets as collateral. While cash flows (particularly those tied to any physical assets) are considered when providing this loan, they are secondary as a determining factor.


Can asset loans help your business? They are fast, flexible solutions outside of traditional financing and banking covenants. Ensure you are aware of this newer financing alternative – now it's your turn to decide, so talk to 7 Park Avenue Financial, a trusted, credible and experienced Candian business financing advisor to see if asset-based financing via an abl facility will work for your firm, allowing to you explore growth opportunities for your business





What is Asset  Based Lending?

Asset-based lending can be called the business of loaning money secured by collateral, unlike unsecured loans by banks.  The industry serves businesses, not consumers; it's also known as asset based financing, aka  ' ABL'  Collateral often includes inventory, accounts receivable or equipment, and commercial real estate owned by a borrower who wants to take out a line credit on these assets for working capital purposes - The high loan to value ratio provides more  business capital to borrowers via the maximum loan amount in the ABL  formula.

The asset based  loan is a popular choice for small to mid-sized businesses that need quick funding in order to cover the short-term demands.


Is it difficult to obtain financing with asset based lending?

The process of asset-based lending ( ABL ) is less demanding than other methods a company can use to access loans. However, it is not all seamless and easy when it comes to asset-based lending! There are pros and cons which every entrepreneur/ business owner should know before using their business assets as collateral for a loan. Lenders prefer liquid collateral such as a/r versus other assets  such as they can be readily converted to cash if the borrower defaults.


How do asset based loans work?


Asset-based lending involves loaning money using the company's assets as business collateral. Liquid collateral is preferred as opposed to illiquid or physical assets such as equipment. Asset-based lending is often used by small to mid-sized businesses in order to cover short-term cash flow needs.



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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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