A Complete Guide to Asset-Based Line of Credit for Businesses

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Boost Your Business Liquidity with Asset-Based Lines of Credit

INTRODUCTION

Business owners recognize that the right financing contributes to growth and success. Traditional financing comes with challenges and can be complicated and time-consuming. Asset-based financing ' ABL ' continues to grow in popularity as a solution for financing businesses. Leveraging business assets helps a business maximize the potential of the business and any business with sales and assets can benefit from cyclical seasonal cash flow gaps in the company.

WHAT IS AN ASSET BASED LINE OF CREDIT?

The asset-based credit line is a type of financing that allows a company to borrow under a revolving credit facility using the sales and business assets as collateral. While traditional financing institutions such as banks focus on companies with strong credit histories ABL financing uses assets as the collateral value of the funding. Financing limits are determined by the actual value of business assets as determined by the asset-based lender.

WHAT TYPES OF ASSETS ARE USED AS COLLATERAL IN ASSET BASED CREDIT LINES

The types of assets that are the collateral for asset based business credit lines are:

WHAT ARE THE DYNAMICS OF BORROWING LIMITS IN THE REVOLVING ABL FACILITY

Borrowing limits under asset-based financing credit lines are unique in that they align with the level of your sale and asses - As sales and assets increase the credit line increases also. Borrower should recognize downward levels of sales and assets limited the facility values.

WHAT ARE THE BENEFITS OF THE ASSET BASED CREDIT LINE

Flexibility - The business credit lines can be used for day-to-day working capital needs, and purchases of inventory and materials, and come with the ability to take advantage of short-term opportunities that arise

The approval process for the facility is easier than bank-type financing comes with a number of traditional loan requirements and financial covenants that limit financing

Competitive interest rates - Whiles rates are generally ( but not always ) higher than bank rates pricing is still competitive based on overall credit quality and transaction size

ABL funding helps companies who want more predictable cash flow to manage day-to-day and plan for long-term growth

The facility is generally totally focused on what we generally refer to as working capital, or more specifically, short-term working capital. The largest part of the asset-based financing facility tends to be your firm's accounts receivable, but quite frankly in our experience, it can be inventory also, as well as a component of equipment even purchase orders.

Turning Assets into Opportunities: The Role of Asset-Based Lines of Credit in Business Growth

Most business owners are surprised when we tell them they are in a position to quite accurately calculate their own amount of total credit facility. That is because there are some very accepted rules as to how much is advanced and on what.

By now the business owner or financial manager of a Canadian business understands that this type of financing is an alternative to a Chartered bank line of credit. The facility ‘in general' works in the same way, but there are some major differences in setting up the facility and in the effects, or rather lack of effects it has on your business.

Let’s clarify. If your business has a Chartered bank line of credit there are three things that facility has that don’t apply to an asset based lending facility. They are as follows:

Asset-based credit facilities, also called ‘ABLs' are generally able to increase to the same extent that your firm can increase its receivables and inventory. The bottom line is that you are not constrained to grow!

There are little or no covenants or ratio requirements in an asset-based lending facility, it’s totally based on the number of assets you have

One of the few similarities of an asset-based credit agreement is that similar to a bank facility, receivables under 90 days are the only receivables that are financed.

So let’s just focus on the receivables portion of our asset-based line of credit for a moment. A quick example would be:

Your firm has 500,000.00 in accounts receivable - Under your facility, you can borrow up to 80 or 90% of that amount at any given time. Naturally, the line fluctuates daily, (similar to a bank facility) because you are receiving payments every day and you are invoicing every day.

We can say as an across-the-board statement that asset-based lines of credit are less restrictive than bank lines, they also cost more.

Customers we meet with regularly though are in a position where they frankly don’t qualify for traditional bank financing – this could be for a variety of reasons. (A net loss in the current year, a high debt/equity ratio, can’t meet bank interest coverage requirements, etc.)

THE COST OF ASSET BASED FINANCING

So yes, your firm has a higher cost of borrowing – asset-based credit facilities in Canada have a wide spectrum of pricing, from 8-9% per annum, or in some cases 1-1.5% % per month.

But if your firm needs financing for growth or even survival, and you have no access to traditional bank or term credit, asset-based financing via asset based lendiers in many cases will save your company, give you almost unlimited access to working capital based on your sales, and at the same time position you for the next level of growth or a return to traditional financing.

Many customers we have dealt with actually decide not to return to traditional bank financing once they realize and calculate the benefits of an asset-based line of credit.

ALTERNATIVES TO ASSET-BASED LENDING

While asset-based lending can be a great financing option for businesses, there are also alternatives to consider. These include:

Traditional loans for companies that qualify for traditional bank and commercial financing

When contrasted with other types of business financing like bank loans or accounts receivable financing, the asset based credit facility and ABL lending solutions stand out for their flexibility. While traditional loans rely heavily on credit history, and demonstrable cash flow, profit, balance sheet ratios, etc, asset-based lending emphasizes the value of a company's assets. However, a careful analysis of business needs, market conditions, and asset value is essential to decide on the best financing option.

CONCLUSION

Asset-based lending provides flexible financing to maximize the potential of the business - the ability to leverage a borrowing base on sales and assets allows a company to obtain working capital for a variety of purposes and business needs, The combination of meeting operational demands and avoiding financial turbulence while securing needed capital is a cornerstone of ABL,

In summary, investigate asset-based lines of credit - Call 7 Park Avenue Financial, a trusted, credible and experienced advisor in this area of Canadian financing. Weigh the benefits and advantages and you may find this is the business financing solution for credit availability you have never heard of but works for you!

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

How does asset based lending work?

Asset-based lending works by using your company's assets as collateral for a revolving line of credit. The lender evaluates the assets to determine their value and extends a credit line based on that value. The credit line can be used for working capital, inventory purchases, or other business needs.

The lender will monitor the value of the assets used as collateral and adjust the credit line accordingly. For example, if the value of your inventory decreases, the lender may decrease your credit line to reflect the lower value of the collateral.

The interest rate on an asset-based line of credit is typically lower than other types of financing such as credit cards or merchant cash advances. However, the interest rate will vary depending on the lender and the value of the assets used as collateral and traditional bank loans will usually offer lower interest rates for companies that qualify.

How Do Businesses Qualify for an asset based line of credit

To qualify for an asset-based line of credit, your company must have physical assets & financial assets that can be used as collateral. The assets can include inventory, accounts receivable, equipment, and real estate.

The lender will evaluate the assets to determine their value and the credit line that can be extended. Business lenders will also consider your company's financial history and creditworthiness before extending a line of credit.

What are common mistakes to avoid with asset-based lending

While asset-based lending can provide many benefits for businesses, there are also some common mistakes to avoid. These include:

Overreliance on ABL: Businesses should not rely solely on ABL for financing. It is important to have a diversified financing portfolio that includes other types of financing, such as equity financing and traditional loans.

Inaccurate asset valuation: It is important to accurately value your assets before using them as collateral for ABL. Inaccurate valuations can lead to lower credit lines and higher interest rates. In some cases an inventory appraisal or other asset appraisal may be required

Poor cash flow management: ABL provides businesses with a predictable cash flow, but it is still important to manage cash flow effectively. Businesses should have a plan in place to manage their finances and ensure they have enough cash on hand to cover expenses.

The potential drawbacks may include rigorous monitoring by lenders, possible limitations on the use of funds, and the risk of losing assets if the business is unable to repay the loan

Businesses with significant financial and physical assets, such as manufacturers, wholesalers, or retail companies, are ideal candidates for an asset-based line of credit. These businesses often have substantial inventory, accounts receivable, or machinery, and often need an immediate cash influx to meet operational needs or seasonal demands of the company's cash flow and borrowing capacity. Companies that cannot meet the financial covenant/covenants required by banks are ideal for ABL lending.

How does an asset-based line of credit compare with other financing options?

While traditional loans rely heavily on credit history, asset-based loans emphasize the value of a company's assets in asset rich businesses. However, a careful analysis of business needs, market conditions, and asset value is essential to decide on the best financing option when understanding if asset based lending will work for a business.

' 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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