Asset Financing Solutions in Canada - The New Financing Alternative
Asset Based Lending in Canada ( ABL ) ; What’s all the excitement about? As we are well into our 2020 business year in Canada the financial markets continue to provide challenges to Canadian firms in the small to medium enterprise sector ( ' SME ' ) for a variety of reasons, one of which is a Pandemic!
At 7 Park Avenue Financial we define SME as Sales revenues less than 50 Million dollars, but you will find a number of people with different size definitions. Suffice to say our numbers are smaller than those in the U.S, as usual!
WHAT IS ASSET BASED LENDING?
ABL financing is simply collateral-based lending - It secured inventories, A/R, equipment, and other property your business owns, such as real estate for example. Canadian businesses use asset based lending to cover short term solvency issues to run their businesses - it is often termed as ' transitional financing '.
Working capital and cash flow financing challenges seem to be a constant source of 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.
So 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. 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. ABL in Canada grew out of the tremendous growth in the U.S. asset based lending industry.
HOW CAN YOUR BUSINESS GET AN ASSET BASED LOAN
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. There are some large tier one type firms that are primarily offshoots of major U.S. corporations who dominate the market in asset based lending, and then there are a very small 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 perfect candidates for ABL type arrangements?
HOW ASSET BASED LENDING WORKS
Asset based financing is essentially an operating loan and line of credit 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 assets of the business provides business capital to run and grow a business.
WHAT ASSETS CAN BE USED TO SECURE A LOAN ?
Asset based loans and lines of credit are typically tailored to a company's specific needs. There is kind of 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 type of 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 that was previously embraced by only firms who were in some sort of 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.
WHAT DOES ASSET BASED FINANCING COST VS BANK FINANCE? PROS AND CONS OF ASSET BASED LENDING
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 are providing lines of credit and term facilities at very low interest rates.
For the ABL lender it is simply a lending decision around the lenders ability to convert collateral to cash under the ABL facility. While asset-based lending interest rates are almost always higher than traditional bank 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. That gets your company maximum asset financing, and that is what ABL 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 thorought 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 of an up and coming startup it's cash flow that is 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 are unable to demonstrate past and future cash flow generation. That is one of the main reasons why asset based financing works.
CASH FLOW VS ASSET BASED LENDING - WHATS THE DIFFERENCE ?
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 ABL finance have the assets on their balance sheet backing up collateral for loans and lines of credit - 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.
Various types of asset based financing such as inventory loans, purchase order financing and factoring ( pledging accounts receivable) form part of the ABL solution .For information on PO FINANCING click here , and for an understanding of how factoring works click here.
Asset based lenders allow companies to borrow money based on the liquidation value of assets on its 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.
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 a trusted, credible and experienced Candian business financing advisor to see if asset based financing will work for your firm.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Click here for the business finance track record of 7 Park Avenue Financial
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