Working Capital Financing – Why Asset Based Credit Lines Work

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YOUR COMPANY IS LOOKING FOR CANADIAN WORKING CAPITAL

 FINANCING VIA AN ASSET-BASED LINE OF CREDIT! 

You’ve arrived at the right address! Welcome to 7 Park Avenue Financial 

        Financing & Cash flow are the biggest issues facing business today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW – DIRECT LINE – 416 319 5769 – Let’s talk or arrange a meeting to discuss your needs

  EMAIL – sprokop@7parkavenuefinancial.com

 

LOOKING FOR WORKING CAPITAL FINANCE CREDIT LINES?

 

Does your company have healthy revenue but can't access traditional bank financing due to your company’s performance and industry?

 

7 Park Avenue Financial helps companies through their working capital challenges via asset-based credit lines.

 

INTRODUCTION 

 

In a challenging economic and financial landscape, businesses should always be actively pursuing flexible and dynamic financial options.

 

Asset-Based Lending (ABL), is a viable alternative to conventional business financing,  and it offers a compelling way to access more funds with fewer limitations in areas such as personal guarantees, covenants, outside collateral, etc!  ABL solutions' ' covenant light structure ' is a significant appeal to Canadian business borrowers.

 

For asset-rich companies, ABL presents an opportunity to secure substantial financing while enjoying unparalleled flexibility compared to traditional loans. 

 

 

UNDERSTANDING ASSET-BASED LENDING 

 

Asset-Based Lending (ABL) is a business loan that uses the company's assets as collateral. These assets can vary, including accounts receivable, real estate, intangible assets like brand names and valuable assets such as intellectual property. ABL's core concept is to leverage the inherent value of a company's physical assets / other assets to obtain essential capital. This financing solution proves particularly valuable for asset-rich companies facing inconsistent cash flows, as it offers an alternative to traditional cash-flow loans.

 

Stringent rules, restrictions, and a lengthy approval process mean that traditional financing is not always accessible for Canadian SME/SMB companies. Many small to mid-sized companies have been turned down for business lines of credit because they don’t fit the profile of the average borrower – even when they are financially capable of repaying a loan!

 

Let 7 Park Avenue Financial demonstrate a  banking alternative and business line of credit solution to achieve cash flow AND growth goals via asset-based loans. Do banks and other financial institutions not understand your business, nor care to?

 

How can Canadian business owners and financial managers secure working capital financing and cash flow financing for their businesses when it seems that access to business financing provides significant challenges?

 

  

HOW DO ASSET-BASED CREDIT LINES DIFFER FROM TRADITIONAL BUSINESS LOANS   

 

• Traditional business loans primarily assess overall creditworthiness, relying on factors like credit score, financial history, revenue projections, cash flow, and profits.

 

• This approach can be challenging for businesses with limited credit history or temporary financial difficulties.

 

• Traditional loans often have strict repayment terms and restrictions on the use of funds and credit limits

 

• Asset-based credit lines focus on the value of the assets used as collateral, such as accounts receivable, inventory, or equipment and commercial real estate if applicable.

 

• This allows businesses to secure financing, even with limited credit history or difficulties obtaining traditional loans.

 

• Asset-based credit lines provide a reliable source of working capital, supporting business growth and objectives.

 

• Unlike traditional loans, asset-based credit lines offer flexibility in borrowing against assets as needed.

 

• Businesses can use the funds to expand, manage cash flow fluctuations, or cover unexpected expenses.  In many cases, these facilities can also be a part of an acquisition financing strategy to purchase another business

 

• The flexibility of asset-based credit lines allows tailored borrowing to meet specific business needs and drive sales growth

 

  

 

WORKING CAPITAL FINANCING ASSET-BASED CREDIT LINES   

 

The Process of Asset-Based Lending  

 

When securing an Asset-Based Credit Line, an  "ABL" loan, the focus shifts from traditional cash-flow evaluation to assessing a company's assets.

Lenders prioritize the value of these assets based on market value and liquidity - Business assets will serve as collateral for the loan.

 

Critical assets, including accounts receivable, inventory, machinery, equipment, real estate, and intellectual property, undergo evaluations to determine their quality and worth. The outcome is a comprehensive understanding of eligible collateral and the loan rates that can be offered based on these assets.  

These assets become the ' borrowing base ' for the facility.

 

Asset-based lines of credit are one of the fastest-growing sources of financing for small businesses. ' ABL '  a superior way to keep your business cash flowing. However, this type of financing is also riddled with misconceptions. Let the 7 Park Avenue Financial team show you the many advantages of an asset line of credit and why every company should consider this a financing option.

 

The answer is that a potential solid solution is an ‘asset-based line of credit' or a ‘working capital facility. What is this type of financing? Is it new to Canada, and more importantly – how does it work, and what are the benefits and risks?

 

ASSET-BASED LENDING BANKS IN CANADA?  

 

Although asset-based lenders tend to be specialized independent finance firms, many business people are surprised to find that deep in a few Canadian banks; there exist small,  somewhat boutique divisions that specialize in asset-based lending. Ironically, they often compete with their peers in more traditional commercial, corporate banking.

 

WHY YOUR BUSINESS NEEDS BUSINESS CREDIT

 

The most active assets these firms finance tend to be ongoing receivables and inventory, but in many cases, by utilizing an expert advisor or partner, you can structure a facility that also includes a component of equipment and real estate.

 

 

QUALIFYING FOR A BUSINESS CREDIT LINE 

 

Generally speaking, a good way to think of an asset-based line of credit is one that, for a temporary period, typically a year or so in our experience, allows you to margin up and get higher advances on receivables and inventory. That translates into more cash flow and working capital.

 

One of the main attractions of an asset-based lending facility (insiders call it an ABL facility) is that your firm's overall credit quality doesn’t play the largest role in determining if you can get approved for this type of financing.

 

As its name suggests, financing is on your ‘assets‘ and doesn’t focus on debt-to-equity ratios, cash flow coverage, loan covenants, and outside collateral.  Business owners who borrow from Canadian chartered banks on an operating or term loan basis are, of course, very familiar with those terms - in some ways, we could call them ‘restrictions.'

 

Most lawyers and accountants will tell you that any business borrowing should be entertained only with a trusted, credible business financing advisor who can guide you through the roadblocks and pitfalls of any commercial financing arrangement.

 

YOUR PROBLEM?   OUR PROMISE!

 

Your business is growing, and you need a commercial loan or credit line, but your bank isn’t willing to lend it.

You need working capital to survive, but getting traditional financing is impossible.

Finding funds for machinery or equipment to help grow your business can be difficult, even if your cash flow is strong.

You want to grow your business, but getting a loan from traditional banks is hard because banks want to see a proven track record and collateral.

 

The 7 Park Avenue Financial promise? Business Lines of Credit and Working Capital for companies that can’t achieve traditional financing.

 

BENEFITS OF THE ASSET-BASED CREDIT LINE

 

A business line of credit for companies that can't achieve traditional financing options.
 

Businesses will have greater access to funds and therefore be able to focus on their core business activities.

Able to use existing assets as collateral, reducing the chance of running out of cash

Get your business the working capital or line of credit you need for rapid and profitable growth.

Commercial Lines of Credit can assist you with working capital needs and seasonal fluctuations in sales and operational expenses, allow you to acquire property and facilities, expand and grow your business, and improve technology and equipment.

Missteps in business financing can lead to long-term adverse effects around such issues as being locked into a facility, giving up too much collateral, or being locked into pricing that isn’t commensurate with your overall asset and credit quality.

 

KEY ISSUES TO CONSIDER WHEN ASSESSING BUSINESS CREDIT LINES

 

What are the key issues you should consider when considering different types of asset-based financing? Primarily they are:

 

- Advances rates on each asset category (Accounts receivable and inventory/equipment) - An ongoing borrowing base is established monthly as your sales grow, providing short-term cash needs

 

- How is pricing defined (asset-based lines of credit and ABL lending, in general, is more generous in overall facility size, but you should ensure you are only paying for what you use

 

- Contractual obligation - in a perfect world (we know it's not!), you should be focusing on the ability to payout at any time, or a minimum with some form of nominal breakage fee

 

- Ensure that the asset-based lending facility, which generally costs more, will allow you to remain or focus on profitability; we spend a significant amount of time with clients on how that can defer the additional costs of ABL facilities by several different strategies

 

   

 KEY TAKEAWAYS    

 

 

1. Asset-based lending is less restrictive: ABL offers borrowers more freedom than cash-flow lending, as it does not come with burdensome covenants related to debt service coverage and leverage levels on the balance sheet.

2. Asset Safety Net: ABL uses your business's assets as collateral, reducing the lender's concerns about defaults and minimizing the need for rigid financial covenants imposed by traditional financial institutions such as Canadian banks

3. Ideal for Asset-Rich Companies: Companies with substantial assets but varying cash flow can benefit from ABL to access significant capital for their operations and growth.

4. Dealing with Cyclical Demands: Businesses experiencing cyclical demands, such as manufacturing or distribution companies, can utilize ABL to ensure operational continuity despite cash flow fluctuations in times of seasonality in their business or industry.

5. Resilience for Retailers: Retailers with sizeable inventory and potential earnings volatility can use ABL to navigate unforeseen disruptions, such as economic downturns or pandemics like COVID-19.

6. Flexibility in Credit Line Access: A key advantage of ABL is the freedom to access your credit line without seeking lender permission, allowing for rapid responses to dynamic business needs. Asset-based lending solutions in areas such as a line of credit will enable a business to increase financing when sales and assets grow automatically.

   

 

CONCLUSION - COMMERCIAL FINANCE FINANCING SOLUTIONS   

 

Asset-Based Lending (ABL) emerges as a practical financing option for businesses in diverse sectors of Canadian industry.

With the ability to offer significant funding based on a company's assets and the added advantage of being less restricted than traditional loans, ABL becomes an appealing choice for businesses looking to utilize their assets for growth financing. To fully grasp the potential of ABL, businesses should engage with financial advisors such as 7 Park Avenue Financial to determine how they can fulfill their capital requirements effectively.

 

ABL is more than just a financial product; it is a strategic financial approach. For asset-rich businesses, ABL has the potential to unlock growth opportunities and enhance financial flexibility significantly.

 

 

Business credit lines exist to help a business with its day-to-day cash flow. These are often more flexible than term loans that bring debt to the balance sheet.

 

So what's the bottom line? Let the 7 Park Avenue Financial team help your business grow faster by providing asset-based, short-term financing backed by accounts receivable, inventory, equipment, and real estate at advance rates and loan-to-value borrowing that maximizes capital.

 

7 Park Avenue Financial specializes in asset-based loan solutions,  solving the problems faced by companies that can’t get financing from traditional sources such as banks or business credit unions. Our business lines of credit and working capital loans are customized to meet your unique needs. Our goal?   Letting you get on with running your company!

 

As always, it’s simple – consider asset-based financing and an ABL facility as a solid alternative for financing your business. Work with a trusted advisor as this financing type is generally understood or not well known in Canada. Be selective in structuring your facility around issues that work best for your firm re benefits derived. That’s solid business financing sense.

 

FAQ: FREQUENTLY ASKED QUESTIONS

What is asset-based finance?

Asset-based finance is a specialized method of providing companies with working capital and term loans that use accounts receivable, inventories, fixed assets /equipment or real estate as collateral. It is essentially any loan to a company that is secured by one of those assets.

 

 What types of assets can be used for an asset-based credit line?

 In an asset-based credit line, various types of assets can be utilized as collateral. These typically include accounts receivable, inventory, machinery, equipment, and real estate. Even intangible assets such as brand names and intellectual property can be used. It's the inherent value in these business assets that makes them suitable for securing necessary capital.

 

How does an asset-based credit line differ from traditional business financing?

 

Traditional business financing via unsecured loans, etc. primarily focuses on a company's cash flow for existing line approval and renewal, while an asset-based credit line leverages the value of the company's assets to determine the maximum credit limit. This type of credit facility provides financial flexibility, especially to asset-rich companies, allowing them to access significant financing without the strict covenants and financial ratios associated with cash-flow lending from a traditional lender for a revolving line of credit.

 

How is the value of assets determined for an asset-based credit line?

 

Asset value for an asset-based credit line is determined through a detailed process that includes field examinations and, in some cases, third-party appraisals to substantiate secured loans. This rigorous process assesses the quality and financial value of assets, thereby determining the eligible collateral and the rates that can be advanced against them.

 

What type of business could benefit from an asset-based credit line? Who should consider an asset based line of credit?

 

Companies that have significant assets and face variations in cash flow can significantly benefit from an asset-based credit line. Manufacturing companies, distribution businesses, and retailers, especially those with significant inventory but earnings volatility, often find ABL a useful tool to maintain operational continuity and navigate through market fluctuations when they need additional working capital

Is your company in turnaround? Taking out unsecured credit can be an unsatisfactory solution in a turnaround situation. Companies risk to reverting to covenants unless they are fully prepared to deal with them. Financing sales via a/r financing and abl lending generally have more ease of qualification and lighter covenant requirements.

 

What are the potential risks associated with asset-based credit lines?

 

Like any financial instrument, asset-based credit lines come with a set of risks. These include the potential for over-leveraging, reliance on asset valuations which may fluctuate, and the possibility of restrictive covenants imposed by lenders. It's crucial for businesses to consider these factors and consult with financial advisors to ensure that an asset-based credit line aligns with their financial strategy and risk profile. Interest rates are generally, but not always, higher in asset-based financing.

Note also that an unused loan/credit line facility is not a cash equivalent, as the facility is a liability on the balance sheet when drawn down.

 

 

What are Some Types Of Types of Assets Used in A Broad Range Of  Asset-Based Credit Loans:

 

1. Accounts Receivable:

   • Businesses with outstanding invoices leverage highly liquid assets such as accounts receivable to access working capital.
   • Lenders evaluate the quality and collectability of the accounts receivable to determine financing.

2. Inventory:

   • Businesses with substantial inventory value use it as collateral to secure financing.
   • Lenders assess the marketability and market value of inventory to determine financing.

3. Equipment:

   • Valuable equipment, such as machinery or vehicles, can be used as collateral for financing.
   • Lenders evaluate equipment condition and market value to determine financing.

4. Real Estate:

   • Some asset-based credit lines use real estate as collateral for businesses that own property.
   • Lenders assess the value and marketability of the real estate to determine financing.

5. Intellectual Property:

   • Businesses with valuable intellectual property can leverage it to secure financing.
   • Lenders evaluate the worth and market potential of the intellectual property.

6. Contracts:

   • Some ABL financing  asset-based credit lines consider contractual agreements as collateral for the company's ability to pay future drawdowns
   • Most Lenders assess the contractual terms and value for determining financing.
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Note: The types of assets that can be used in asset-based credit lines may vary depending on the lender and the specific industry of the business. It is crucial for businesses to work with a firm such as 7 Park Avenue Financial which understands their industry and is capable of providing financing based on their unique assets and the ability to choose asset-based lending in multiple forms of financing as the right working capital solution for their business.

 

 

 

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