YOUR COMPANY IS LOOKING FOR A LINE OF CREDIT FOR BUSINESS!
ASSET BASED LOANS & LINE OF CREDIT FINANCING - Updated 04/29/25
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Financing & Cash flow are the most significant issues facing businesses today
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South Sheridan Executive Centre
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Oakville, Ontario
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ASSET-BASED LENDING CANADA
Business credit line funding needs can be achieved in more ways than one.
The concept of having your funding needs on a ' remote control ' should be very appealing to most business owners / financial managers.
Asset-based lending via ' ABL ' credit lines is one way to put your company on cash flow autopilot. Here's how asset-based financing companies can help your firm. Let's dig in.
Unlocking Hidden Capital: How Asset-Based Funding Solves Your Business Liquidity Challenges
Is your growing business asset-rich but cash-poor?
Many Canadian entrepreneurs are trapped between increasing orders and insufficient working capital. This frustrating cycle threatens both immediate operations and long-term growth potential.
Let the 7 Park Avenue Financial team show you how Asset-Based Funding breaks this cycle by transforming your existing business assets into immediate working capital. This allows you to seize opportunities while maintaining ownership and control.
3 Uncommon Takes on Asset-Based Funding
- Asset-based funding can serve as a strategic "bridge financing" tool during mergers and acquisitions, providing liquidity for a pledged asset / pledged assets during ownership transitions when traditional lenders typically pull back.
- Unlike commonly held beliefs, Asset-Based Funding isn't merely a last resort—forward-thinking CFOS increasingly use it proactively as part of a capital stack diversification strategy, even when traditional options remain available.
- Asset-based funding can actually improve vendor relationships by enabling faster payment terms, potentially unlocking previously unavailable volume discounts that offset financing costs due in part to the strength of the focus primarily on the borrower's assets
THE CHALLENGE OF SME/SMB SMALL BUSINESS FINANCING / LINE OF CREDIT CANADA
Businesses requiring SME COMMERCIAL FINANCE funding for cash flow are constantly challenged by our somewhat monopolistic banking system requirements in Canada for funding, such as unsecured loans or pure cash flow loans from traditional financial institutions.
The strength, market dominance, and regulated nature of our commercial banking system in Canada often make it difficult for companies that are doing quite well to achieve some or all of the business finance they need.
Simply speaking, they fall ' outside the box ' regarding requirements that include profits, cash flows, clean balance sheets, etc. That is often when an asset-based loan makes the most sense.
BANK REQUIREMENTS FOR LINE OF CREDIT FACILITIES
The bank's requirement of cash flow, debt, profits, and equity covenants can sometimes not always be met, and these are typically a written part of your bank arrangements.
Firms that fall ' out of covenant ' with their bank often feel not so ' special ' when placed in Special Loans Default departments at the bank, where the focus primarily is on rehabilitation. A logical solution via ABL financing is often an asset-based lender with a ' covenant light structure ' because of the loan collateral, and many companies prefer that.
Some Canadian banks offer ABL financing as an exit strategy for troubled businesses.
ABL LENDING PUT YOUR CASH FLOWS ON AUTOPILOT!
Utilizing your firm's current and fixed assets asset-based lines of credit allows you to leave your business on a kind of ' auto-pilot ' for cash flow financing.
That’s because the combination of accounts receivable, inventory and physical assets allows you to monetize those assets into one borrowing base via asset-based lenders that revolve and can be drawn down according to your cash flow needs based on the loan amount.
KEY BENEFITS OF ASSET BASED LINES OF CREDIT
1. When properly managed and utilized (and structured in advance!), this type of cash flow funding from abl lenders allows you to :
2. Finance operations / higher loan to value ratio on current assets and fixed assets for maximum loan accessibility - in unique cases, intellectual property may be financed
3. Engage larger clients/ larger orders/contracts for domestic or global markets for growth opportunities for a broad range of industries
4. Finance inventory, which in many bank circumstances is sometimes not achievable
Typically, you would never use your revolving asset-based credit line to acquire new assets—this is typically done via equipment leases or bridge loans, which are sometimes more applicable when a firm is in a financing transition.
FINANCING ACQUISITIONS VIA ABL LOANS
In a merger and acquisition scenario, the Asset Based Credit Line is an excellent way to acquire a target company successfully.
HOW DOES THE ASSET-BASED LINE OF CREDIT WORK?
How does the ongoing access to liquidity work in Asset-based lending?
Accounts receivable are often financed at 90%, and inventory borrowing margins, depending on the type of inventory class (raw materials, work in process, finished goods), can range from 25-75% borrowing power.
Typically, a third-party appraisal/valuation is required if a business chooses to monetize fixed assets as part of its revolving credit facility.
ASSET BASED LENDING FOR REAL ESTATE FINANCING NEEDS
Real estate can also be bundled into your facility via asset-based business loans from Canadian asset lenders, again, maximizing more potential business capital.
REQUIREMENTS TO APPLY FOR AN ASSET-BASED LOAN / CREDIT LINE
Up-to-date financial statements and the requirement for you to be able to provide ongoing a/r and inventory ageings are a necessity, as they become the majority of your ' borrowing base ' on an ongoing basis.
Focusing on asset turnover will help improve cash flow and, of course, reduce operating costs as well.
The application process is very straightforward and requires the usual business information about your business. ABL lending covers all industries.
Due diligence is done extensively at 7 Park Avenue Financial to ensure your firm qualifies for the maximum line of credit you require based on assets and sales.
THE COST OF ABL FINANCE
It should be noted that ongoing reporting requirements are typical of an asset-based line of credit - in some cases, owners/managers might find rigorous monthly ( sometimes weekly ) reporting as a ' downside ' of ABL cash flow financing.
While 99% of the time, pricing on revolving line of credit facilities is at a higher interest rate than bank credit, those interest rates often become an alternative to a liquidity crisis for ongoing growth operations. It's a solid method of financing the balance sheet without taking on debt via a term loan solution with a longer amortization.
Case Study on the Benefits of Asset Based Finance Funding
A mid-sized industrial supplies distributor in Ontario faced a critical challenge when their primary banking relationship imposed restrictive covenants following two quarters of losses during pandemic-related disruptions. Despite having $3.8 million in inventory and $2.2 million in receivables, they couldn't access the capital needed to fulfill growing orders as the economy recovered.
By implementing an Asset-Based Funding solution, the company leveraged their existing assets to establish a $4.5 million credit facility, significantly higher than its previous $2 million bank line. This additional liquidity allowed them to:
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Increase inventory by 30% to meet surging demand
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Offer more competitive payment terms to key customers
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Negotiate early payment discounts with suppliers
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Hire additional sales staff to capitalize on market opportunities
CONCLUSION - ASSET BASED LENDING WORKS!
We've shown that not all business credit lines are created equal. Is ABL the bank alternative for your company's cash flow needs?
If you're prepared to investigate asset-based lenders and to investigate asset-based lending's applicability to your business's financial needs,
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who offers working capital funding services and can assist you with your funding needs via asset-based loans that make sense for your business.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is meant by asset-based lending?
Asset-based lending is using business assets as collateral for the loan. Collateral can be anything from inventory, equipment or liquid assets such as accounts receivable financing. Commercial real estate can be financed under a short-term bridge loan structure.
How does an ABL work?
ABL loans are a leveraged type of business financing that can be used to finance a company's assets. The most common way it works is via asset-based revolving lines of credit or, in some cases, a term loan structure. Business credit lines provide ongoing borrowing power commensurate with a company's sales revenues and accounts receivable levels.
What are the types of asset-based loans?
Asset-based lending products/services include asset-based credit lines, accounts receivable financing, inventory finance, and equipment and fixed asset and real estate financing if a company has equity in commercial real estate.
Assets are pledged as collateral for a loan from abl bank or non-bank commercial lenders.
What specific business assets qualify for Asset-Based Funding?
When you choose asset based lending Asset Based Funding typically leverages accounts receivable (typically 70-90% advance rates), inventory (up to 60% depending on type), equipment (up to 70% of appraised value), and commercial real estate (up to 75% LTV). Businesses with significant tangible assets on their balance sheet—even with challenging credit profiles or recent losses—can typically qualify.
- Accounts receivable from creditworthy customers receive the highest advance rates for a company seeking a/r finance
- Inventory value depends on liquidity and turnover rates
- Equipment valuation considers age, condition and market demand
- Real estate collateral offers the highest dollar amounts but requires a clean title
Why might Asset-Based Funding cost more than traditional bank financing?
Asset-based funding carries higher interest rates and fees than traditional bank financing because lenders take on higher risk profiles and provide greater flexibility. The cost differential reflects the value of accessibility, speed, and minimal covenant restrictions rather than just the cost of capital.
- Rates typically range from prime+2% to prime+5% depending on asset quality
- Monthly monitoring and audit fees usually apply
- Higher administrative overhead for lenders increases costs
- Benefits often outweigh costs during growth phases or recovery periods
How does Asset-Based Funding differ from traditional bank financing for seasonal businesses?
Asset-based funding provides seasonal businesses with flexibility that traditional banking cannot match by automatically increasing availability during inventory build-up periods and naturally contracting during slower periods. This alignment with business cycles eliminates the cash flow crunch that fixed payment structures create.
- Borrowing capacity expands automatically with inventory increases
- No fixed monthly principal repayment requirements
- Availability grows as receivables increase during peak season for issues such as payroll expenses, day to day operations
- Naturally self-liquidating as any significant inventory converts to receivables and then to cash
What documentation is required to apply for Asset-Based Funding?
Asset-based Funding applications require detailed asset documentation, including current receivables aging reports, inventory listings, equipment appraisals, and real estate valuations. Lenders also need financial statements, tax returns, and corporate structure information to complete their due diligence.
- Complete accounts receivable aging with customer concentration analysis
- Inventory listings categorized by type and age
- Equipment lists with purchase dates and estimated values
- Recent financial statements (preferably reviewed or audited)
- Corporate tax returns for the past 2-3 years
How can Asset Based Funding help during business turnaround situations?
Asset-based funding provides crucial liquidity during business turnarounds by focusing on asset value rather than recent financial performance. This approach delivers working capital when traditional lenders typically withdraw, allowing management to implement operational improvements without immediate cash flow pressure.
- Provides liquidity despite recent losses or challenges
- Creates a runway for implementing turnaround strategies
- Doesn't require immediate profitability
- Often replaces bank financing that's being withdrawn
- Can be structured to include restructuring costs
What industries typically benefit most from Asset-Based Funding solutions?
Asset-based Funding benefits asset-intensive industries, including manufacturing, distribution, transportation, staffing, and wholesale businesses. These sectors typically maintain significant receivables, inventory, or equipment that can be leveraged for working capital while supporting ongoing operations.
- Manufacturing companies with significant equipment and inventory
- Distributors with substantial inventory and receivables
- Transportation companies with valuable rolling stock
- Staffing companies with large receivables from creditworthy clients
- Wholesalers managing seasonal inventory fluctuations
- Construction companies with specialized equipment
What advantages does Asset-Based Funding offer over traditional term loans?
Asset-based Funding offers advantages over traditional term loans, including greater flexibility, fewer financial covenants, availability based on asset growth rather than historical performance, and the ability to access higher advance rates than conventional banking relationships typically allow.
- Funding grows automatically with business expansion.
- Minimal or no financial covenants
- Focus on asset quality rather than historical performance
- Higher advance rates on eligible assets
- No fixed repayment schedules constrain cash flow
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How can Asset-Based Funding support business acquisition strategies?
Asset-based funding supports acquisition strategies by unlocking capital trapped in the target company's assets, potentially financing a portion of the purchase price, providing post-acquisition working capital, and creating immediate liquidity for integration expenses or operational improvements.
- Leverages the combined asset base of both companies
- Can finance the portion of the acquisition purchase price
- Provides immediate post-acquisition working capital
- Fund integration expenses and operational improvements
- Creates liquidity without additional equity requirements
Is my business too small to qualify for Asset-Based Funding?
Asset-based funding works for businesses of various sizes, with facilities ranging from $250,000 to many millions. The determining factor isn't company size but rather the quality and value of available collateral assets. Even smaller businesses with strong tangible assets can qualify.
- Facilities start as low as $250,000 for smaller businesses
- Asset quality matters more than company size
- Specialized lenders focus on specific business size segments
- Combined asset classes can create viable facilities for smaller firms
- Some providers specialize in smaller business funding solutions
Will using Asset-Based Funding damage my banking relationships?
Asset-based Funding typically strengthens rather than damages banking relationships by demonstrating financial sophistication and proactive management. Many traditional banks now offer Asset-Based Funding products themselves or maintain relationships with asset-based lenders for clients whose needs exceed conventional lending parameters.
- Many banks refer clients to Asset-Based Funding partners
- Demonstrates financial sophistication to banking partners
- Creates pathway back to traditional banking after growth phase
- Can complement existing banking relationships for specific needs
- Often viewed as positive transition toward bankability
Does using Asset-Based Financing signal financial distress to suppliers or customers?
Asset-based Funding no longer signals financial distress. It has become a mainstream financing tool used by stable and growing companies. The stigma once associated with asset-based lending has largely disappeared as sophisticated businesses proactively use this funding strategy to support growth initiatives.
- Now recognized as strategic rather than distressed financing
- Used by financially stable companies for growth capital
- Increasingly common in many industries as standard practice
- Suppliers often prefer customers with secure working capital
- Can be positioned as "corporate financing" without specific details
How does the application process for Asset-Based Funding work?
The Asset-Based Funding application process begins with a preliminary assessment of eligible assets, followed by term sheet issuance, due diligence, including asset verification and appraisals, documentation preparation, and finally, closing and funding. The entire process typically takes 3-4 weeks from initial consultation to first funding.
- Initial consultation and assessment of eligible assets
- Preliminary term sheet outlining structure and pricing
- Due diligence including asset verification and appraisals
- Legal documentation preparation
- Closing and initial funding
- Ongoing collateral monitoring and reporting
How does the borrowing base calculation work in asset-based funding arrangements?
Borrowing base calculations in Asset-Based Funding determine your available credit by applying specific advance rates to each eligible asset category, then subtracting ineligible assets and any reserves. This formula creates a dynamic credit facility that automatically adjusts as your asset composition changes.
- Different advance rates apply to each asset class (70-90% for A/R, 50-60% for inventory)
- Ineligible assets are excluded (aged receivables, obsolete inventory)
- Reserves may be established for specific risks
- Calculations typically updated weekly or monthly
- Available credit fluctuates based on current asset levels
CITATIONS / MORE INFORMATION
- Canadian Finance & Leasing Association. (2023). "Asset-Based Lending in Canada: Market Analysis and Growth Trends." Annual Industry Report, 14-22. https://www.cfla-acfl.ca/
- Thompson, R. & Williams, S. (2022). "Alternative Financing Strategies for Mid-Market Companies." Journal of Corporate Finance, 36(2), 128-145. https://www.journals.elsevier.com/journal-of-corporate-finance
- Bank of Canada. (2023). "Commercial Lending Trends and Business Access to Capital." Quarterly Economic Review, Summer Edition, 76-84. https://www.bankofcanada.ca/
- Deloitte Canada. (2023). "The Evolution of Asset-Based Lending in Canadian Markets." Financial Services Industry Outlook, 42-58. https://www2.deloitte.com/ca/en.html
- McKinsey & Company. (2022). "Working Capital Optimization Through Asset-Based Solutions." Global Banking Practice Report, 103-117. https://www.mckinsey.com/
