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Financing & Cash flow are the biggest issues facing businesses today
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ASSET BASED LENDING IN CANADA - A BUSINESS GUIDE
Asset based lending. The only business credit tool your firm will ever need?
"The lack of money is the root of all evil." - Mark Twain
At 7 Park Avenue Financial we think Mr. Twain had it right - It's challenging when a business doesn't have the resources it needs!
It's possible, and we've seen it work all the time. How could one type of business financing, i.e. asset-based lending, be the only business credit tool our firm will ever need? Let's dig in.
WHY CANADIAN BUSINESS IS TURNING TO ASSET-BASED LENDING FOR CANADIAN BUSINESS FINANCING SOLUTIONS
Asset based lending solutions, also known as ' ABL ' are a type of financing that secures financing for a business using the ' assets ' of the business as collateral. This method of financing a business is popular with businesses who cannot access all the bank unsecured financing and who have sales and assets to collateralize.
It is an increasingly popular method of accessing needed capital that is ' non-dilutive '; allowing business owners to retain their equity ownership while obtaining needed funding.
FROM INVENTORY FINANCING TO HARD ASSETS AND SALES- WHY ABL IS REVOLUTIONIZING CANADIAN BUSINESS FINANCE
Many of our clients want to discuss non-bank alternatives to cash flow and working capital challenges. In most cases, one type of Canadian business financing is not necessarily going to do the entire job you need - Except..! Except when it’s an Asset-based lending solution for business credit.
BEYOND BANKS - THE RISE OF ALTERNATIVE FINANCING / ASSET BASED FINANCING IN CANADA
The 'ABL' asset based loan is sort of the new kid on the block - it’s vastly popular in the U.S. and rapidly taking off in Canada, some say in fits and starts, which is partially due to the entry and departure of various firms that dominate the market.
ABL, which is our acronym for the solution can be tailored very specifically to be the total one-stop financing solution your firm needs. The two greatest dynamics of ABL are that it offers your business more credit availability (isn’t that what it’s all about) and at the same time can be customized to your industry and specifically, your company!
BRIDGING THE GAP - WHY ASSET BACKED LENDING CLOSES THE CANADIAN FINANCIAL DIVIDE FOR YOUR BUSINESS
In its purest form is simply putting in a customized loan facility to allow you to draw daily against the value of your receivables, inventory, and in many cases fixed assets and real estate. It’s kind of the business version of a home equity line of credit we like to explain to clients!
THE BENEFIT OF ASSET BASED LENDING VERSUS TRADITIONAL LENDING IN CANADA
But wait a minute, clients say, isn’t it exactly what a bank does? Well, yes, and absolutely no! Conceptually it is still the same, but the asset-based lending business credit facility focuses solely on the assets, so you will rarely if ever hear terms such as rations, covenants, outside collateral, personal guarantees, etc in the context of an ABL solution.
IS ABL RIGHT FOR YOUR BUSINESS?
So is it the right financing tool for your firm - we'll let you be the judge of that. But if your firm required working capital and cash flow revolver in excess of 250k and you have some financial challenges you are immediately a candidate. Oh and by the way, you absolutely need to have receivables, inventory and fixed assets to get this type of facility, that’s really the main premise.
Typical candidates we work with all the time have margin pressures, they don’t have the business financing in place to support sales growth and new orders, or they have some real business and balance sheet issues revolving around restructuring, turning around, coming off a bad year, receiving a mega-contract, etc.
If that sounds like you we can assure you that you're a candidate for asset based lending business credit.
WHY ASSET BASED LENDING WORKS - COLLATERAL / CASH FLOW / BUSINESS CREDIT
The majority of businesses in Canada need business credit lines to fund day-to-day operations and meet the cash flow demands around their current liabilities and obligations. Using business assets as collateral to access that needed cash flow is what ABL lines of credit and business loans are all about.
Lenders place specific values on the business collateral, with balance sheet assets such as accounts receivable and inventory receiving a high level of margin financing. Physical assets are sometimes subject to appraisal or valuation but can be a key component of the borrowing facility. Interest rates and borrowing costs are generally higher in ABL lending but provide more access to business capital than unsecured loans.
The benefits? Greater cash flow, no covenants or ratio maintenance, and the ability to take advantage of opportunities otherwise not available. Not having to consider dilutive equity financing allows business owners to retain ownership while accessing cash flows needed in the business based on a higher borrowing for the face value of any asset. In many situations financing needed is ' time sensitive ' and ABL solutions are more readily obtained compared to the timelines of obtaining financing from traditional financial institutions.
KEY TAKEAWAYS -
Asset based lending is the financing of a borrower's assets as collateral for lines of credit/term loans
Each asset category has an assigned amount of borrowing capacity - liquidity
Asset based non-bank credit lines are strong alternatives to bank credit and allow a company to cover short-term cash flow demands with greater credit availability by virtue of higher advance rates, as well as the ability to access growth opportunities
CONCLUSION - UNLOCKING THE POWER OF ASSET BASED LENDING
So is it the be-all and end-all financing solution? Only you as a Canadian business owner and financial manager can decide - Call 7 Park Avenue Financial, a trusted credible and experienced business financing advisor to see if this type of business credit is for your firm and your business needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is asset-based lending? How does it work in Canada?
Asset-based lending is a business credit solution that allows a company to use the assets of the business as the sole collateral for securing financing. Typical assets financed by the ABL lender are working capital assets such as accounts receivable, inventories, and also fixed assets/property plant and equipment. This method of financing focuses on ' assets ' versus traditional banking solutions which place a high emphasis on balance sheet ratios, profitability, and cash flow generation - as well as often requiring personal guarantees and external collateral.
How does asset-based lending differ from traditional lending in Canada?
Traditional lending in Canada focuses on business credit history and financial covenants and ratios in the regulatory environment of Canadian banking, while asset-based lending provides more flexible financing based solely on the sales and the company's assets of the business. ABL business credit solutions can also provide equipment financing and sale-leasebacks, as well as bridge loans on company-owned commercial real estate. This method of alternative financing focuses less on cash flow and traditional measures of creditworthiness and is a newer known form of financing in the Canadian lending market. The regulatory environment of Canadian banks precludes them from lending to many businesses that without ABL solutions would not be able to access credit.
What types of businesses in Canada can benefit from asset-based lending?
Asset-based lending provides more financing because the alternative lending market has created a more competitive landscape for business borrowers to access capital. Almost every industry has uses for asset-based lending institutions - Manufacturers, major retailers, and even some service industries are high users of asset backed lending.
Inventory financing is also best suited to an ABL solution- and any business experiencing seasonality or cyclicality can benefit from asset-backed financing/underwriting revolving around credit or term facilities. Understanding loan covenants is key to the benefits and use of ABL lending as little or no emphasis is placed on loan covenants.
What are the risks associated with asset-based lending in Canada?
Although asset-based lending solutions provide access to business credit and capital this method of financing comes at a higher cost/interest rate versus a bank unsecured loan - And as well borrowers must realize that the business lender can take possession ( if a borrower defaults ) of a pledged asset or assets under a defaulted business loan within an asset based facility.
How can Canadian businesses find a reputable asset-based lender?
In order to find reputable asset-based lending in Canada business borrowers should perform a proper level of due diligence based our the lender's experience in their industry as well as the terms and conditions in lending agreements. The two types of asset based loans offered by ABL asset based lenders include business lines of credit securing a/r, inventories and fixed assets, as well as term loans around specific assets such as commercial real estate owned by the business.
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