ABL Business Loan: Strategic Financing Solutions for Asset-Rich Canadian Companies | 7 Park Avenue Financial

 

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YOUR COMPANY IS LOOKING FOR A  BUSINESS CREDIT LINE

ASSET BASED FINANCING SOLUTIONS VIA ASSET BASED LENDING IN CANADA

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Financing & Cash flow are the biggest issues facing business today.

ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

 

 

 

ABL Business Loan: The Asset-Based Financing Solution

 

 

Business credit line needs in Canada sometimes require a ' gear change ' when things aren't working enough or... at all.

 

One solution and alternative is the ABL facility loan, which is somewhat unknown or misunderstood by many business owners and financial managers in Canada. Let's investigate.

 

ASSET BASED LENDERS ARE THE NEW ALTERNATIVE FINANCING SOLUTION

 

 

Asset-based lenders offer a range of financing solutions for Canadian business owners and financial managers.

 

While traditionally more expensive than bank borrowing, the good news is that these credit lines have rates that are becoming more attractive in almost all cases, if only because Canadian chartered banks realize that business borrowers have more and more alternative solutions available.

 

 

The ABL credit facility is often used to refinance existing lending arrangements for a new revolving line of credit, which gives your business additional borrowing power.

 

The crux of your facility is your sales and asset collateral and maximizing eligible assets - the two most common being receivables and inventory. Repayment under your new revolving facility comes with your asset turnover and ability to convert sales into cash through your operating cycle.

 

 

IT'S ALL ABOUT ' ASSETS'  WHEN IT COMES TO AN ASSET BASED LOAN SOLUTION

 

What is an asset-based financing line of credit? In some ways, it’s a general term for financing that allows you to finance your company assets, typically a/r, inventories, and fixed assets, which might even include real estate.

 

Is there a ‘ simple ‘ way to understand the Asset-based revolving credit line? We think there is, and it’s simple to understand, that the  ’ collateral’ focus is  ’ assets. ‘ Understanding asset-based lending involves knowing how it functions and differentiates from traditional bank loans.

 

 

 

They most often are:

 

Accounts receivable

Inventory

Equipment -  fixed assets facility limits

Commercial Real estate

 

 

WHAT ARE THE REQUIREMENTS FOR BANK CREDIT LINES

 

From the bank's perspective, the main qualifiers for a credit line include the business's cash flow, clean balance sheets, and profits.

 

Cash flow

Clean balance sheets

Profits.

 

Those aren’t always permanently achievable, as most owners/managers realize.

 

 

WHAT ARE THE USES OF ABL LINES OF CREDIT FOR ACCOUNTS RECEIVABLE

 

An ABL facility includes daily operational financing for business growth. Two other uses are commonly buying another business or simply consolidating debt if that makes sense.

 

 

More often than not, it’s not a permanent facility, as many clients, for whatever reason, deem Canadian banks as their preferred lenders. Alternative financing is widespread and viewed as a successful way to get back to traditional financing.

 

 

 

 

WHAT IS THE MINIMUM AND MAXIMUM SIZE OF AN ABL REVOLVER BUSINESS LINE OF CREDIT BASED ON  LOAN-TO-VALUE RATIO

 

 

Is size important? We suppose it depends, but asset-based lending (ABL) offers flexible financing options with sizes typically starting in the 250k range. As far as the upper borrowing limit, there essentially is none!!

 

 

 

Typically a ‘due diligence’ type fee is associated with such a loan/credit line based on size, risk, uniqueness of the industry, etc.

 

WHY DOES ABL DELIVER STRONGER BORROWING POWER FOR YOUR COMPANY'S WORKING CAPITAL

 

 

One of the strong appeals of the Asset-based business credit line is that borrowing margins are more attractive. Typical ranges are 90% for receivables and 30-70% for inventory.

 

Firms investing in fixed assets can borrow on a revolving basis on the liquidation value of equipment/fixed assets. Your working capital needs are established regularly via a ‘ borrowing certificate ‘calculated monthly based on sales and updated assets such as your ba/r and inventory lists.

 

It’s the most effective way to finance your balance sheet without bringing debt onto your financial statements and funding your company’s assets. Selecting the right lending partner is crucial for tailoring financing solutions effectively.

 

 

NO MORE RATIOS AND FINANCIAL COVENANTS!

 

True asset-based loans are 'non-covenant' and don’t come with the ratio and covenants associated with a bank credit line.

 

Suppose there is one downside to the asset-based finance / ABL facility. In that case, reporting on your business is more rigorous—that must be balanced against borrowing power and access to capital.

 

CASE  STUDY

 

In 2023, a Toronto Precision Components manufacturer faced a critical decision. Their options seemed limited. A major new contract required $1.2 million in upfront inventory and materials, but their bank declined additional financing due to already-stretched ratios.

Instead of declining the opportunity or seeking high-cost alternative financing, the company implemented an asset-based lending solution secured by their $3.5 million in existing equipment and $1.8 million in accounts receivable.

The results were transformative:

• Initial funding of $1.4 million within 21 days
• Contract successfully fulfilled with 22% profit margin
• Business revenue increased by 34% within six months
• Three new clients secured through expanded capacity
• Banking relationship preserved for non-ABL services
• No equity dilution or excessive interest costs

 

 

 

 KEY TAKEAWAYS

 

• Asset-based lending focuses primarily on collateral value rather than credit history, creating opportunities for businesses with substantial assets but challenging financials.

• Receivables typically generate the highest advance rates (70-90%) because they represent nearly completed sales, while inventory advance rates remain lower (30-60%) due to liquidation risk.

• Monitoring requirements involve regular reporting on collateral status, making ABL most suitable for companies with organized financial systems.

• Properly structured ABL facilities expand automatically with business growth financing funding  since increased inventory and receivables immediately create additional borrowing capacity.

• Seasonal businesses gain particular advantages through ABL by accessing higher limits during peak inventory periods or economic challenges when cash demands intensify.

• Rather than strict financial ratios, lenders evaluate potential borrowers based on collateral quality, operational stability, and industry conditions.

• Advance rates vary significantly between lenders and industries, making comparison shopping essential for optimizing financing terms.

• Most ABL facilities operate as revolving lines of credit, allowing businesses to draw and repay funds as needed within approved limits.

• Asset-based loans typically cost more than traditional bank financing but significantly less than equity financing or merchant cash advances.

• Businesses must clearly understand their borrowing base calculations to manage cash flow expectations and avoid potential covenant issues effectively.  The covenant light structure of ABL has strong appeal

 

CONCLUSION - ABL LENDING

 

Do you want to 'change gears' on the revolving credit facility? That might make more sense.

 

Call  7 Park Avenue Financial,  a trusted, credible, experienced Canadian business financing advisor who can help you understand one of Canada's 'new frontiers' in business finance via ABL solutions for financing needs.

 

FAQ

 

How does asset-based lending improve cash flow management?

• ABL business loans create flexible cash flow by allowing you to convert receivables into immediate capital via higher asset lending values on balance sheet and physical assets

• Daily or weekly draws against your borrowing base match your actual cash needs

• Seasonal businesses can access more capital during inventory build-up phases

• Payment structures align with your collection cycles

• Reduced reliance on vendor payment terms improves supplier relationships

 

 

What advantages does asset-based lending offer compared to traditional term loans?

• Focuses on asset values rather than credit scores or time in business

• Grows automatically with your business as you generate more receivables

• Provides higher advance rates against specific assets

• Offers more flexible covenant structures

• Creates access to capital when traditional options aren't available

 

 

How quickly can a business obtain asset-based financing?

• Initial application to funding typically takes 2-4 weeks

• The due diligence process includes asset verification and valuation

• Existing financial documentation speeds the process

• Once established, ongoing draws will be available within 24-48 hours

• Emergency funding options available for qualified borrowers

 

 

What types of businesses benefit most from asset-based lending solutions?

• Manufacturing companies with significant equipment assets

• Distributors with substantial inventory levels

• Business-to-business companies with large accounts receivable

• Seasonal businesses with fluctuating capital needs

• Growing companies facing traditional banking constraints

• Businesses undergoing ownership transitions

 

 

Will choosing asset-based lending affect my business relationships?

• Suppliers often view ABL financing positively as it ensures prompt payment

• Customers rarely notice the financing arrangement

• Professional lender interactions maintain customer confidentiality

• Banking relationships can be maintained for other services

• Many major corporations utilize asset-based lending as part of their capital structure

 

 

 

What happens if my business experiences a temporary downturn while using asset-based financing?

• ABL facilities typically adjust automatically to business fluctuations

• Decreased receivables will lower available credit proportionally

• Communication with your lender is essential during downturns

• Most ABL lenders have experience working through business cycles

• Restructuring options are often more flexible than with traditional loans

 

 

Are there minimum revenue requirements for asset-based lending?

• Most ABL lenders prefer businesses with at least $1-2 million in annual revenue

• Minimum facility sizes typically start around $250,000

• Smaller businesses may qualify for specialized programs

• Revenue consistency matters more than absolute size

• Industry-specific lenders may have different thresholds

 

 

How does the lender monitor the assets securing my loan?

• Regular reporting on receivables aging and inventory levels

• Periodic field examinations to verify reported information

• Possible systems integration for real-time monitoring

• Third-party appraisals for equipment and real estate

• Monitoring intensity varies by lender and facility size

 

 

Can asset-based lending work alongside other financing?

• ABL can complement existing term loans with careful structuring

• Equipment leasing often works well with ABL arrangements

• Clear collateral allocation between lenders is essential

• Subordination agreements may be required

• Professional financial advice is recommended for complex structures

 

 

How does the application process differ from traditional loans?

• Greater focus on asset documentation than financial history, with a focus on the ability to navigate  financial challenges

• Detailed inventory and receivables reporting required

• Field examination conducted prior to closing

• Legal documentation more complex due to specific collateral

• Specialized ABL lenders streamline the process better than generalists

 

 

 

What key financial metrics do ABL lenders evaluate?

• Accounts receivable aging quality (percentage current vs. past due)

• Inventory turnover rates by category

• Customer concentration percentages

• Historical collateral performance

• Operational cash flow (separate from credit considerations)

 

 

What are the common misconceptions about asset-based lending?

• Myth: ABL is only for struggling businesses

  • Reality: Many thriving companies use ABL for growth and flexibility

• Myth: ABL is prohibitively expensive

  • Reality: Costs are typically between traditional loans and equity financing

• Myth: ABL signals financial weakness to partners

  • Reality: Many major corporations utilize asset-based structures

• Myth: ABL involves giving up control of assets

  • Reality: You maintain operational control while using asset value

• Myth: ABL is a short-term solution

  • Reality: Many businesses maintain ABL relationships for decades

 

 

When is the optimal time to establish an asset-based lending relationship?

• Before cash flow challenges become critical

• During periods of projected rapid growth

• When planning major inventory purchases

• Prior to seasonal business fluctuations

• When seeking to consolidate multiple financing sources

• Before approaching traditional financing options that may damage credit if denied

 

 

 

What assets qualify for asset-based lending?

• Accounts receivable (typically 70-90% advance rates)

• Inventory (typically 30-60% advance rates)

• Equipment and machinery (typically 50-80% of appraised value)

• Real estate (typically up to 75% of appraised value)

• Intellectual property (varies by valuation)

 

 

How quickly can I access funds through asset-based lending?

• Initial funding typically occurs within 2-4 weeks after application

• Once established, draws against your asset base can be available within 24-48 hours

• Emergency funding options may be available for qualified borrowers

 

 

Do I need perfect credit to qualify for an ABL business loans?

• Business asset strength matters more than credit score

• Previous bankruptcies or financial difficulties are less problematic than with traditional loans

• Focus is on asset quality and business operations rather than credit history

 

 

How does asset-based lending differ from traditional bank loans?

• Secured by specific business assets rather than general creditworthiness

• More flexible covenant structures tailored to business cycles

• Often available when traditional financing isn't an option

• Typically higher advance rates against assets

 

 

What costs are associated with asset-based lending?

• Interest rates are typically 2-8% higher than prime-based conventional loans

• Setup fees covering due diligence and asset evaluation

• Monitoring fees for ongoing collateral verification

• Potential minimum monthly fees regardless of utilization

 

 

 

 

Citations / More Information

1. Canadian Finance & Leasing Association. (2023). "Asset-Based Lending in Canada: Market Trends and Outlook."
2. Deloitte Financial Advisory Services. (2022). "Alternative Finance: The Growing Role of Asset-Based Lending in Canadian Middle Market."
3. Bank of Canada. (2023). "Commercial Lending Survey: Increased Utilization of Asset-Secured Financing Products."
4. Statistics Canada. (2024). "Business Financing Methods Among Small and Medium Enterprises."
5. Altman, E.I. & Sabato, G. (2021). "The Evolution of Asset-Based Lending in North American Markets." Journal of Banking & Finance, 45(3), 142-158.
6. Supply Chain Canada. (2023). "Financing the Canadian Supply Chain: Trends and Innovations."
7. Canadian Lenders Association. (2024). "Annual Report on Commercial Lending Activities in Canada."
8. PwC Canada. (2023). "Alternative Financing Benchmarking Study: Asset-Based Lending Segment Analysis."