YOUR COMPANY IS LOOKING FOR CANADIAN ASSET-BASED LENDING SOLUTIONS!
Revolutionize Your Business Growth: Financing a Business with Asset-Based Lending
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Elevate Your Business Strategy: Unleash the Potential of Asset-Based Lending for Financing
Business finance solutions in Canada are regularly delivered via asset-based lending and financing.
The small business owner and financial manager who hasn't heard of (or checked into) this type of funding solution/business loan solution, might mistake this for a new 'secret' financing strategy, and it is not equity financing. Frankly, though, the secret is out! These days small businesses are relying on everything, including credit cards! So let's dig in.
Asset based lending, aka ' ABL ' is an increasingly popular business financing solution that allows a business to capitalize on the assets and sales of the business - In that way companies can fund expenses and ongoing operations, fulfilling client orders, and purchase inventory and other investments the business must make.
Companies looking for flexible financing to meet their business planning needs used asset-based finance, versus traditional loans, for lines of revolving credit, term loans, or in many cases a combination of both.
ALTERNATIVE LENDING VIA ASSET BASED LOANS
Asset-based loans (‘ABL') are often considered an 'alternative' strategy in the brave new world of nontraditional and 'fintech' business solutions. But guess what? Main Street uses this form of financing everywhere in Canada, in all industries, and all sizes of companies. Bank loans come at a great interest rate but are difficult to access for thousands of companies for the funding and growth potential solutions they need.
WHAT ARE THE DIFFERENT TYPES OF ASSET BASED LENDING?
Asset-based lending offers asset loan arrangements secured by accounts receivable, inventory and fixed assets. Business financing via Asset-based lending in Canada differs based on the financial transaction size and the methodology around which day-to-day transactions are handled and which assets are being financed by the lender.
We can broadly put ‘ABL' solutions into several key categories.
CATEGORIES AND TYPES OF OF ASSET BASED FINANCING
Non-bank business lines of credit
A/R Financing
Inventory Financing
Tax credit financing
Sale Leasebacks
Working capital term loans/merchant loans
Commercial real estate loans
There are different levels of due diligence in setting up any of these facilities - most asset-based loans are dependent on facility size, the industry your firm is in, and the quality of your assets being financed.
WHAT ARE SOME USES OF ASSET BASED LOANS?
At 7 Park Avenue Financial, we demonstrate the flexibility of the asset-based loan solution by explaining the multitude of uses of this method of business financing
Improve access to working capital and the company's cash flow for the funding day-to-day business needs
They allow companies to satisfy large contracts and orders from clients which require the purchasing of inventories and materials to fulfill those orders
Asset-based financing allows businesses to fund growth and increase capacity for products and services
Asset-based term loans allow a business to acquire assets and technology
Many companies use the ABL solution to fund a turnaround or restructuring for firms that might have some level of financial distress
Acquisition financing needs to acquire a competitor or another business is often fulfilled via an ABL solution when strategic acquisitions are contemplated - including leveraged buyouts relying on asset values of the target acquisition
ASSET BASED LENDING VERSUS BANK FINANCING
When Canadian business owners and financial managers sit down with us and ask us to explain 'asset-based lending' as a new type of financing, we cover a fair amount of ground, as there are various types of 'ABL' facilities compared to bank loans which are typically term loan in nature or unsecured lines of credit.
WHAT ARE THE BENEFITS OF ASSET-BASED LENDING?
Improved liquidity &Increased Flexibility
The benefits of asset-based financing? They are pretty basic - you will often differentiate yourself from your competitors given you have increased amounts of capital and cash flow - allowing you to secure more sales/contracts, as well as enhancing relationships with suppliers and other lenders you might have in place. In many cases, ABL finance addresses the seasonality challenge you might have in your company/industry.
SUMMARY OF KEY BENEFITS OF ASSET BASED FINANCE
Improved cash flow and additional working capital liquidity
Flexible/versatile financing custom-tailored to a company's business model and asset base
Ease of credit facility management - no focus on covenants, outside collateral or personal credit history/credit ratings of owners
Faster access to financing compared to traditional bank loans and other traditional financial institutions
In certain circumstances, a lower financing cost/interest rate can be achieved for higher quality or large transactions
WHAT BUSINESS ASSETS DOES ABL FINANCING FUND?
Asset-based lending is simply the monetizing of your assets to their maximum cash availability. The most common assets financed include:
A/R ( Accounts receivables )
Inventory
Fixed assets
Real estate
Technology
PURCHASE ORDER FINANCING IS A PART OF THE ASSET-BASED LOAN SOLUTION
While 'purchase orders' of new 'contracts aren’t technically an asset on your balance sheet, asset-based lending includes PO / CONTRACT financing solutions! The emphasis is clearly on your 'assets‘!
WHEN DOES ASSET BASED LENDING REPLACE BANK FINANCING
ABL business finance frequently replaces traditional bank financing, or in many situations, provides more cash flow and working capital that banks can't deliver on due to their lending constraints. This is no more evident than in the SME COMMERCIAL FINANCE sector. Flexibility is often the differentiator given that ABL solutions don’t rely as heavily on ratios, covenants, outside collateral, personal guarantees, etc. Note though that costs of this type of financing are almost always higher - so the decision becomes access to capital versus the cost of capital!
Asset-based lenders do not place the same emphasis on credit scores as unsecured loans from traditional banks.
WHAT DOES ASSET BASED LENDING COST
We spend a lot of time with customers showing us how some of the 'perceived' higher costs are, in fact, not really that due to the ability of the company to convert assets into cash and repeat their business cycle over and over, generating additional profits based on faster inventory turns and receivable collections.
One of the tools we use is the 'DUPONT MODEL,' which will clearly demonstrate to our customers how asset turnover affects profits. It's a great financial tool!
HOW DOES ASSET BASED LENDING WORK?
ABL financing focuses on the valuations of business assets as collateral for loans - Asset based lenders establish what is known as borrowing based on which defined advance rate margins are put in place as a lending percentage of the asset based credit facility - Borrowing capacity is almost always greater with asset finance solutions using the company's assets for future growth potential
Receivables typically are financed in the 80-90% range and advance rates are then established on inventories and fixed assets, as well as real estate if that is applicable.
Companies draw down funds based on that established borrowing base certificate other types of collateral, transactions are settled by making predetermined term payments.
EXPLORING OTHER OPTIONS THAT ARE EQUITY-FOCUSED?
Naturally, you have the ability to explore options such as angel investors, and venture capitalists when considering the debt and equity financing question. That angel investor brings no debt to the balance sheet, but he or she wants to be paid back in owner equity on their investment! So while you pay no interest on that type of investment, ownership is diluted in your business.
CONCLUSION
Business owners can benefit from understanding the benefits of flexible and cost-effective asset-based ABL financing solutions.
If your firm has been affected by liquidity concerns and you're one of many business owners searching for business loans, and you need additional funding to survive and grow, check out asset-based lending as a way to unlock cash flow and capital. Small businesses and small business owners in the SME/SMB market are always feeling underserved.
Speak to 7 Park Avenue Financial - A trusted, credible and experienced Canadian business financing advisor/partner who can assist you with your financing needs.
Whether you have good credit, less than good credit, or even require a business plan, talk to the 7 Park Avenue Financial team today. Making the right financial decisions with solid business funding makes long-term investments easier.
FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What are the qualifications criteria for asset-based financing?
Companies should be able t meet minimum financing usage requirements by asset-based lenders which vary by type of lender
Accounts receivable should be business to business based receivables from a generally creditworthy client based
Companies should be able to prepare proper financial statements and aged listings of accounts receivable, inventory and other assets of the business that demonstrate proper financial controls
The business must not have government arrears in taxes
What are some types of asset based loans
Types of asset loans include:
Accounts receivable financing / factoring companies / confidential receivable financing
Inventory loans
Equipment loans/ lease financing/sale-leasebacks for physical assets
Commercial real estate financing/bridge loans for asset-based real estate financing /pledged asset finance
What are asset-based lending disadvantages?
Asset-based loan financing will often, but not always have higher interest rates versus conventional traditional loans and unsecured loan bank financing and the business assets are pledged as collateral for loans in the event of default via a security interest agreement - Asset-based lending rates will vary via the type of asset-based lender and size of the facility - Most asset based loans can be funded by fixed or variable rates
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