Your Guide To Asset Based Lending In Canada

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South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

CASH STRAPPED? HOW ASSET-BASED FINANCING  SOLUTIONS CAN HELP YOUR BUSINESS GET BACK TO THRIVING!

 

WHAT IS ASSET BASED LENDING - ' ABL '

 

Asset-based lending in Canada is a Canadian business financing solution that provides Canadian business borrowers with a ' one-stop ' solution for their business credit needs line. 

 

BDC defines ABL very simply - ‘Asset-based lending occurs when a loan is granted primarily on the value of the assets the borrower offers as security “

 

Asset-backed lending, called " ABL' for short, it’s a business bank alternative to traditional unsecured loans from banks via the funding of your company's assets - creating greater borrowing capacity for day-to-day operating needs such as payroll expenses. Traditional operating facility advances offer much less borrowing capability in most cases. Let's dig in.

 

ABL solutions provide the borrower with financing based on the value of the assets of the business. Typically these assets include accounts receivables, inventories, fixed assets and commercial real estate if the latter is applicable.  Appraised values for fixed assets facility limits are the benefit of proper asset valuation for more growth financing funding via that greater credit availability.

 

These assets are pledged to secure financing and funding a business in this manner is a popular finance option for Canadian SME borrowers – as it provides access to capital and improves cash flow.

WHY CHOOSE  ASSET BASED LENDING SOLUTIONS

 
Although business borrowing costs are at all-time lows when it comes to cash flow financing, the main reason business owners/financial managers consider asset based credit lines is simply the flexibility and additional borrowing power they provide for specific assets in your business. The asset lender a welcome relief for firms that can't always access any or enough Canadian chartered bank financing via multiple forms of finance solutions such as term loans or business credit lines.

 
By the way, some of the most recognized and large firms also use ABL credit lines if only for the same flexibility they provide. They have made the choice to replace bank borrowing with commercial finance borrowing even though they categorically qualify for bank credit.

WHAT ARE THE BENEFITS OF ASSET BASED LENDING SOLUTIONS IN CANADA?

Asset based lending solutions provide a company with quicker access to capital compared to bank loan decisions which can be time-consuming – That is because loans are based solely on the value of the assets of the business – with less or no emphasis on business credit history – The vast majority of firms using asset-backed lending solutions utilize ABL based on the challenge of obtaining all the business capital they need to run and grow their business.

Additionally, asset based loan solutions are often tailored to the specific requirements of the company – This improved cash flow solution for the business allows a company to pay suppliers and meet short-term working capital needs.

Borrowers in asset based loans should ensure they understand the typically higher cost and the need to work with asset based lenders who can service their market and industry.

 
Sizes of asset-based credit lines range from 250k on the low end to tens of millions on the high end, with numerous players - both Canadian and U.S.-based providing Canadian borrowers with these facilities.

 
ASSET BASED LENDING RATES

Cost is, of course, always a discussion point when it comes to business borrowing. Although large creditworthy firms can borrow almost at the same or better prices than bank offerings the truth is that the majority of loan rates for Asset Credit facilities will always be more expensive.
 
It's a case of balancing costs against the benefits of all the financing you need for working capital and cash flow based on your revenues and assets.
 
As with any type of business financing, you have to balance costs with access to capital and flexibility and the time it takes to get approved. (ABL financing can happen in a matter of a few weeks if the borrower has all the proper up-to-date financials and asset lists)

Interest rates for asset-based lending solutions in Canada will typically range from 8% per annum to 1.5%  per month, and a number of different factors influence final pricing such as:

Transaction size,

Overall credit quality

Whether the ABL lender is a traditional or an alternative financial institution.

 

BRIDGING THE GAP – HOW ASSET BASED LENDING SERVICES WORK FOR SMALL AND MEDIUM-SIZED BUSINESSES IN CANADA

 

FORMULAS FOR ASSET BASED LOANS  CREATE A BORROWING BASE

 

Asset based lending rates are based on the types of assets that are used as collateral for the loan or line of credit –  More liquid assets on the balance sheet provide a higher loan-to-value ratio. Using accounts receivable as collateral for asset based loans is a key use of ABL -

 

Accounts receivable is often the largest current asset on the balance sheet and receivables typically represent the largest cash flow need.  Receivables are typically financed at 90% loan to value, while inventory financing through asset based lending is also widely used;  inventories are also financed based on the overall marketability of the inventory – Most companies have inventory in different stages, such as raw materials, work in process, or finished goods.

 

The uniqueness of an asset-based credit facility is that it can include the unencumbered value of equipment and vehicles owned by the company  - Also,  when it comes to asset based lending for real estate that is company property owned , commercial real estate, if owned by the business, can also be a component of the credit lien facility – or financed separately as a short term bridge loan.

DIFFERENT USES OF ASSET BASED FINANCE

 
In some cases, firms also used asset-based credit to acquire a competitor or re-arrange existing debt.  In other cases, ABL is simply a temporary bridge loan to get your company to where it needs to be without taking on more debt. Business owners/managers quickly pick up that if sales are growing and there are receivables and other assets to back them up, they have just discovered they now have all the financing they need.

 

Many companies find themselves in a cyclical or seasonal industry, placing even more pressure on predictable cash flow.

 
Canadians are always recognized as being conservative - if only for that reason some firms never check out asset-based lending as a good choice for their business - for whatever reason they associate not having bank financing in place with a stigma.

 

Not the case these days as many forms of alternative finance via asset based lenders are in fact the new ' mainstream, including the ability to refinance existing debt around asset lending values based on the true value of business assets.

 

Even some traditional financial institutions have become asset  based lending banks – although ABL bank lenders have a higher credit bar and a much higher minimum borrowing requirement – often starting at 5-10 Million dollars.

 
Let us not forget ratios and covenants. ABL lending is either covenant or ratio light or non-existent. It's your assets that back up the facility - not ratios. Banks love ratios in case you haven’t noticed!

 
In fairness, reporting requirements are often more stringent when it comes to ABL borrowing for asset-based loans. So be prepared to provide updated A/R, inventory and payable agings on an ongoing basis. Monthly is an absolute minimum but weekly reporting might also be required. It's the trade-off you make for the non-bank alternative via asset-based financing and getting a ' covenant light structure ' that appeals to many business owners.

 
CONCLUSION - ASSET BASED LENDING CANADA

"Finance is not the only thing that matters in business, but it is by far the most important." - Peter Drucker

Consider asset-based lending for more business credit availability via a flexible financing solution customized to your business and industry – Reap the benefit of no restrictive financial covenants and access to more capital when executing abl transactions.

If your business is a Canadian SME and you need to finance sales growth or focus on a financial turnaround let asset-based lending solutions help you avoid raising additional equity and avoiding equity dilution in your ownership of your business.

If you're looking for someone who understands cash flow lending and asset-based lenders and your business borrowing needs and you finally want to choose a non-business bank alternative to speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your borrowing needs and help to structure flexible financial solutions.

 

When comparing asset based lending to traditional bank financing businesses can properly assess their capital needs for credit and loan terms that make sense for their business.

 
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK/MORE INFORMATION

 

   
How do asset based loans work?  

 

 In ABL financing lenders consider the value of your business assets and your sales growth which generates accounts receivable. Business assets typically financed by ABL lenders and asset lenders include a/r, inventory, fixed assets and real estate - in some cases intellectual property can be considered in the borrowing facility.  Asset based revolving credit and term loans can fund all types of business assets, not just physical assets.

Those assets collateralize the loan and the emphasis on borrowing power is based on the more liquid an asset is. Asset-based lending examples include margining of receivables in the 90% range, which is higher than unsecured bank financing for accounts receivables via traditional commercial banking. Banks place a large focus on cash assets on hand and operating cash flows.

 
What are examples of asset-based lending? 

Asset-based lending examples include the financing of accounts receivable, inventory, and fixed assets /property and equipment and rolling stock – Real estate can also be financed under asset-based guidelines. Equipment financing is often a substitute for some forms of asset based loans.

 

 What is the Process To Obtain An Asset-based line of credit?

The process to determine the eligibility in obtaining asset-based financing will involve the appropriate due diligence around asset values, financial statement review, and any other issues that are of interest to the asset-based lender around your company or your industry.  Businesses should be prepared to provide year-end and interim financial statements, as well as up-to-date agings on accounts receivable and inventory –

 

A review of that information will allow the ABL lender loaning money  to provide a term sheet/finance offer that includes advance rates, interest rates, and repayment terms and any required minimal financial covenants typical in an asset backed loan which greatly differ from conventional lending criteria to access working capital.

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