How Does Asset Based Lending Work ?

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Why Use Asset Based Lending ? It Works

The asset based credit line is a key part of alternative financing options available to Canadian businesses. As simple as the solution is ( i.e combining all your business assets into one borrowing facility ) it just might be the perfect solution for businesses that can't access any, or all, of the business credit they need in Canada.

It is interesting to note that this revolving facility is perfect for new, growing, and even large mature corporations , many of whom use the facility now days. When it comes to SME COMMERCIAL FINANCE needs business people would be surprised as to how many firms use this type of business finance.

There's probably no agreement on actually how tight business credit is or isn't in Canada - that debate constantly rages on . We continually read in both the GLOBE & MAIL and FINANCIAL POST that Canada is awash in capital, but here at 7 Park Avenue Financial we encounter clients with borrowing needs everyday, many of them dissatisfied with traditional access to business credit.


Naturally it goes without saying that Canada, despite the complaints of the Canadian business owner and financial manager, is probably in better shape than many other countries.

Asset based financing can be used for a business credit line, as we have noted, or also as a financing vehicle for purchasing a business or competitive business. It used the leverage in your assets to monetize your cash flow needs .

The ability of a business to fund both it's operations as well as growth is key to any level of business success. When it comes to banks and other more ' traditional ' lenders thousands of businesses can't meet the credit quality criteria that is required by these lenders.

So why has asset based lending gained such a dominant foot hold in the Canadian business landscape. While chartered banks have great rates and virtually unlimited amount of capital to lend many companies don't have the balance sheets, profits, and outside collateral often demanded by our banks, who for all the right reasons are more conservative in their lending practices.

So for that reason alone thousands of firms have gravitated to asset based finance solutions that focus on your assets and sales levels. As an interesting aside asset based lenders provide close to half of all of the business credit lines in the U.S. - So it is not hard to see why ' ABL ' facilities are growing in Canada - where relatively speaking it's a newer business finance solution.


So why consider ABL financing ? Simply if your firm can't meet traditional lending criteria and you still have assets and sales it allows you to harness new borrowing power .


Yes of course those same assets are being margined, just as your bank would have, but there are two major differences, we can call them the core of our ' naked truth ‘.



How Does Asset Based Financing Work ?


First of all your borrowing levels are raised significantly because your assets are margined at a higher rate , and the inventory component of margining is very aggressive, where in some case a bank facility might not even address that asset at all, or at lease only nominally .

Asset based credit lines also can include your equipment and real estate, if applicable, as part of your new borrowing power - bottom line : increasing borrowing power of your company .

And what about that 2nd difference or truth? It's a key point, in that the focus on ABL approval is not cash flow coverage and covenants, its just mainly about assets, which has great appeal to Canadian borrowers, especially those that struggle to meet those cash flow covenants imposed by traditional lenders.


Quite often we see tremendous flexibility in the size of such a facility, because in many cases business has peaks and valleys and bulges in financing requirements.

We don't consider it a drawback necessarily, but most asset based business lines of credit have your reporting on your monthly levels of a/r, inventory, sales, etc, allowing the ABL lender to monitor and justify your borrowing needs. In many cases we have seen that it allows companies to understand and run their business more successfully.

That then is some of the naked truth in this asset credit line .It's a part of the new reality of Canadian business financing that you should take a serious look at, especially if things are not working well now .

Speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success - Get the stripped down truth on the Asset Based Lending advantage .