The Upside & Truth About Asset Based Lending In Canada

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THE ASSET BASED LOANS SOLUTION TO YOUR BUSINESS FUNDING NEEDS

It's true - there are other ways that are reliable to finance your business regarding cash flow and growth needs around a line of credit model - Traditional financing and alternative financing solutions are available to business buyers - While entrepreneurs might be familiar with some traditional ways to finance a business via a bank, we'll show you another way that provides faster access to financing, and it works! That solution is asset-based financing, namely Asset Based Lending - aka ' ABL' !

WHY ABL?

Asset-based lending is a useful financing strategy and solution in a period of either market restructuring and a business reset when traditional bank financing can solve your ongoing funding needs. Certain or all of your sales and business assets are the collateral for the loan, even if your company is challenged in some manner.

Many companies look to Asset-based lending for help during difficult times because it provides breathing room for companies to restructure while still having access to the capital they need to run and grow their businesses when cash flow is a challenge.

An asset-based lending structure is beneficial as it allows businesses to access liquidity more easily based on financing multiple forms of your sales and asset base.

An asset-based lending structure can offer a number of benefits to businesses in recovery or growth mode and is a solid viable option to maximize access to liquidity.

WHAT IS ASSET-BASED LENDING - IT'S SIMPLE!

Asset-based lending is a specialized form of secured lending that is tied to your assets, rather than with a typical unsecured loan offered by financial institutions such as banks. Funds are advanced
based on an agreed percentage of the value of certain types of assets. These assets typically include accounts receivable, inventory, fixed assets/equipment, and commercial real estate the ocmpany owns if the latter is applicable.

THE BOTTOM LINE?

Asset-based lending facilities may provide greater headroom and debt capacity for certain corporate borrowers. ABL lenders focus on collateral and liquidity rather than cash flows.

This may be beneficial to companies with strong assets but weaker cash flow metrics, and, as we have noted, Asset-based lenders are willing to look at a wider range of assets as security, which can provide companies with more options when it comes to generating funding they need.

HOW DOES ASSET-BASED LENDING WORK? WHY CHOOSE ASSET BASED LENDING

The arrangements around asset-based lending facilities can be complex and mechanical, but will be well understood by borrowers as soon as borrowers understand the real simplicity of this business model - It's all about the creation of security over assets and sales so you can maximize borrowing and ensuring the ABL lender has proper rights against third parties who may have an interest in or claim over certain assets.

UNDERSTANDING YOUR BORROWING BASE!

The borrowing base is the maximum amount of funding your firm can borrow at any point in time, based on the value of the agreed asset pool based on the assets that we outlined above - a/r, inventory, equipment, etc. Depending on the size and structure of your transaction it may involve extensive negotiation between parties as this borrowing base defines how much money a company can access and when it must repay its lender's loan agreement and can involve extensive negotiation between parties.

KEY POINT!

There are standard reserves against facility availability - as an example receivables, one of your most liquid assets, are typically financed at 90% - which by the way in fact provides more liquidity than a bank facility. The loan to value ratio is always higher in asset-based finance as will therefore be the maximum loan amount achievable - Borrowers should understand that government arrears should not exist

UNDERSTANDING COLLATERAL AND THE BORROWING BASE AGAINST YOUR ASSETS AND SALES

In asset-based lending, the borrowing base which supports the loans is not the same as the collateral that secures them - It's simply a formula used to determine how much money your firm can draw from the business loan agreement at any given time. In some cases, the collateral securing an asset-based loan will extend beyond just what's in the borrowing base.

FINANCING THE BALANCE SHEET AND YOUR SALES - THAT'S WHAT ABL IS ABOUT

In asset-based lending, the lender generally exercises more control over the borrowing base assets than lenders typically exercise over collateral on other secured loans - that's critical in understanding the bank loan vs abl loan difference.

This leads to negotiations regarding the frequency of borrowing base reporting to lenders, which is typically on a monthly basis, as well as the extent of other financial information which the lender might ask for.

ARE APPRAISALS AND DUE DILIGENCE REQUIRED?

There can be an operational impact for borrowers in having to monitor the fluctuations in the asset pool and in larger transactions in the millions there might be a cost associated with the lender carrying out the required diligence or appraisal if required. in respect of the assets, but this may be an acceptable price to pay. It should not be an inconvenience for those already operating good business practices for monitoring inventory.

IS ASSET BASED LENDING A USEFUL TOOL FOR YOUR COMPANY?

An asset-based lending structure may work well for borrowers with greater financial leverage and marginal cash flows. That is typically the most common candidate for this type of financing
•Businesses that are recovering will often face a sudden spike in business sales and activity and will need access to funding that is flexible around solely their company's assets and allows them to scale quickly

While companies that have strong balance sheets and predictable cash flows can borrow money and access traditional financing at a good interest rate via unsecured loans/term loans from a broad range of commercial banking solutions based on their credit history - ABL solutions provide alternative sources of business capital with flexible financing on sales and physical assets.

CONCLUSION

An asset-based lending model may help unlock additional finance for those with more substantial assets and inventory and growing sales - Availability of funding can increase almost automatically as business growth accelerates as long as there are no borrower defaults.

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

What are the types of asset based loans ?

Asset-based lending is a type of lending that is based on the value of certain assets. The different types of asset-based loans include accounts receivable financing, inventory financing, equipment financing, or real estate financing. Asset-based lending has become more popular in recent years as investors have looked for new opportunities outside of the traditional banking system.

' 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

What Is Asset Based Lending How Does It Work | 7 Park Avenue Financial