Asset Based Financing in Canada – 3 Things You Must Know

More and more Canadian business owners continue to hear about and in some cases start to investigate asset based lending as an alternative method to generation additional working capital and cash flow. This type of financing is predominantly used in the U.S. and is become much more available and popular in Canada.

When we meet with clients to discuss the benefits of asset based lending and asset based lines of credit we highlight three things they need to know. Those 3 things are as follows :

1. You need to know what an asset based line of credit is and what it is not

2. Understanding the qualifications and daily mechanics of the facility is important

3. Asset based financing pricing differs - here’s why

Let’s examine some of the key data you need to know to determine if this type of financing is form your firm, and that you can benefit from the facility. First of all in terms of what we are discussing an asset based line of credit is not an asset loan per se - There is no additional debt that appears on your balance sheet, if, for example, you were thinking this asset loan is in fact term debt. It is not. It is simply what we can call cash lending, or cash flow monetization - your firm is utilizing asset based financing as an alternative method to generate business financing. Due to tight credit conditions and the generally improving prospects of Canadian firms it is becoming an increasing attractive method of financing your firm.

An even better way to thing of it is to view it as a direct competitor to chartered bank lending in Canada, on an ’ operating ’ or revolver basis. Your firm would consider this type of financing in one of two circumstances - you don’t qualify for bank financing, or, as in many cases, you have financing in place but it simply does not supply with the amount of cash flow and working capital you need.

Let’s move on to # 2 - qualifications and methodology. In general asset based financing in the form of a revolving facility is available to any firm. We tell clients that a solid entry point with respect to financing needs is in the area of 250k and above. If you didn’t know it some of Canada’s largest corporations utilize this type of financing - if they do why shouldn’t your firm consider this alternative. On an ongoing basis you simply supply, usually monthly, reports on your receivable and inventory levels. You are then advanced funds against these two asset based balance sheet accounts.

The only difference is that in general, 99% of the time you receive higher advances on your receivables and inventory than you would from a bank. The reason is that the banks focus on traditional balance sheet, income statement and operating metrics - while an asset based line of credit focuses predominantly on one thing, the asset!

Pricing in Canada is all over the place with respect to these types of facilities. We tell clients this is for a number of reasons , one of which is simply that the Canadian market is under developed in this area and consists of some large U.S. firms, and a number of smaller Canadian firms, privately owned, who are in some cases geographically constrained or have certain limits themselves with respect to their own capital based .Pricing in Canada varies form 9% per annum, and can in fact go up to 2% per month if in fact your firm has significant challenges but could benefit from the financing . Your ability to turn assets quicker and generate more cash and profits can significantly offset any cost. For this reason we recommend to clients that you deal with a trusted, credible, and experience advisor in this area who can confidently walk you through the ’ ABL ’ (ASSET BASED LOAN) maze.

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