Straight Talk On Why Asset Based Lines Of Credit Are Alternatives To Debt Financing

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Asset Based Lines of Credit: A Smarter Business Financing Option | 7 Park Avenue Financial

 

Asset Based Lines of Credit as a Business Financing Solution and Bank Alternative

 

Canadian business owners and financial managers continue to hear about newer forms of business financing in Canada, mainly asset based finance / asset based lending, and, even more remarkably, an asset based line of credit facility.

 

 

Understanding Asset Based Finance 

 

Clients always ask us the same thing - Is this a form of debt financing, and exactly what is the difference between this and a Canadian chartered bank facility? Let’s examine those questions more closely.

 

In general asset based finance is a broad term which, could refer to several things. We have the same problem with other terms such as working capital and cash flow; they seem to be 'catch-all' phrases for several types of business financing and to make things more complicated they infer different things to different people.

 

Understanding the Terminology

 

 

So let’s be clear, using asset-based lines of credit jargon we are talking about a business line of credit that a Canadian chartered bank offers, and comparing it to the new kid in town, as asset-based line of credit via an independent commercial finance company.

 

 

Utilizing Asset-Based Credit Facilities 

 

When your firm originates an asset-based credit facility, you are in effect, using the liquidity in your current assets (typically those are receivables and inventory) and in some cases, pulling some liquidity out of fixed assets such as equipment and real estate. Yes, you can access cash flow on a revolving basis out of your equipment and land if they are unencumbered.

 

We still probably have most business owners confused because they are asking themselves right now that this seems exactly what my bank does (or what you would like them to do).

 

 The Specialization of Asset Based Lenders 

 

So here’s the difference - asset-based lenders are highly specialized. Unlike many bankers who are generalists, they are highly focused on the actual true underlying value of your assets on an ongoing basis.

 

By ongoing we mean daily, weekly, monthly, not long-term. In the old days (and boy, do we wish the old days were here in business financing), you met with your banker quarterly or yearly, reviewed your financials, reset the credit line, and went on to grow, prosper and succeed.

 

However, business banking has changed in Canada, and accessing the cash flow and working capital you need daily has become more challenging. Banks are regulated by provincial and federal governments around their capital bases and what they can lend on and are subject to concentration issues. By that, we mean that a bank could not choose to lend all its capital to one industry, such as autos, etc.

 

 ABL is The Key Differentiator 

 

So the key differentiator in asset based lines of credit is simply that you are working with a company that is often not regulated and is staffed by a specialist with a firm handle on your asset base.

 

That's where the good news kicks in because you can sometimes access up to 50 -100% more in revolving credit facilities. After all, the advances against receivables, inventory (yes inventory!) and other assets are maximized to the hilt.

 

In essence, you are working with an asset-based finance lender that can provide you with maximum cash flow and work with you to give you vital insights into asset turnover and help you through special situations. Remember, this is not debt financing via term loans or additional debt on your balance sheet; you are monetizing your liquid assets to the maximum.

 

Key Takeaways

Asset-Based Financing Basics: Understanding the fundamental concept that asset-based financing leverages your company's assets, such as receivables and inventory, to secure a line of credit is crucial. This concept is the cornerstone of asset-based lines of credit.

Differences from Traditional Banking: Recognizing that asset-based lines of credit differ from traditional bank financing is essential. Highlight the key distinctions, including the specialization of asset-based lenders, their focus on asset values, and the flexibility they offer.

Asset Monetization: The concept of monetizing your liquid assets, like equipment and land, without adding long-term debt to your balance sheet is critical. This illustrates how asset-based financing provides cash flow without traditional loans.

Benefits of Asset-Based Financing: Understand the advantages, such as higher credit limits via a higher loan to value ratio on the borrowing certificate, more significant cash flow potential, and tailored financing solutions. These benefits make asset-based financing an attractive alternative to conventional banking.

 

Conclusion

 

So there’s the main difference, and if this type of financing for your business seems to make sense for your company's cash flow needs, Call 7 Park Avenue Financial to a trusted, credible and experienced business financing advisor to guide you through the next evolution in Canadian business financing when you choose asset based lending and when you need to secure funding.

 

FAQ

 

What exactly is an asset based line of credit, and how does it differ from traditional bank financing?

An asset based line of credit is a type of business financing that leverages your company's  valuable assets, such as receivables, inventory, and even fixed assets, to provide a revolving line of credit. Unlike traditional bank financing, asset based lenders are highly specialized and focus on the actual value of your assets on a daily, weekly, and monthly basis, allowing for more flexibility and potentially higher credit limits.



How can I access cash flow from assets like equipment and land using asset based lines of credit?

Asset based lines of credit enable you to access cash flow from assets like equipment and land if they are unencumbered. This means you can monetize these assets to their maximum potential without adding additional debt to your balance sheet.


Why should I consider asset based financing over traditional bank loans?

Asset based financing offers several advantages, including the ability to access more substantial credit facilities, increased flexibility, and a focus on maximizing your asset's value. Unlike traditional banks, asset based lenders are not as heavily regulated, allowing for more tailored financing solutions.

Are asset based lines of credit suitable for businesses of all sizes?

Asset based lines of credit can benefit businesses of various sizes, but they are particularly advantageous for businesses with significant assets, such as receivables and inventory. Small, medium, and large businesses can leverage these credit facilities to optimize their cash flow.

How can I get started with asset based financing, and whom should I consult for guidance?

To explore asset-based financing for your business, it's advisable to consult with a trusted and experienced business financing advisor such as 7 Park Avenue Financial. They can help you navigate the nuances of these credit facilities and guide you through the process of securing asset based lines of credit tailored to your specific needs and goals.

 

What are the typical eligibility criteria for businesses seeking asset-based lines of credit?

Eligibility criteria often include having a solid asset base, sales revenues, and a history of general creditworthiness, and the ability to demonstrate consistent asset turnover. The specific requirements may vary among lenders.

Are startups eligible for asset-based lines of credit, or is this financing option primarily for established businesses?

Asset-based lines of credit are typically more accessible to established businesses with a track record of assets and operations. Due to their limited asset base, startups may find it more challenging to qualify.

What potential risks are associated with using asset-based lines of credit for business financing?

Risks can include the potential for higher interest rates compared to traditional loans, the risk of asset devaluation affecting credit limits, and the need to regularly monitor and report asset values.

How can businesses mitigate asset-based financing risks to ensure financial stability?

Mitigation strategies include prudent management of  balance sheet and physical assets, careful selection of asset-based lenders, and maintaining strong financial discipline to prevent over-leveraging for this type of cash flow financing.


What does the application process for asset-based lines of credit typically involve, and how long does it take?

The application process may include a detailed review of your assets, financial statements, and credit history. The timeline can vary but may take several weeks to complete, depending on the complexity of your financial situation. Some companies may simply choose accounts receivable financing facilities.


Are there any specific documents or information businesses should prepare when applying for asset-based lines of credit?

Businesses should be ready to provide documents for asset based loans, such as financial statements, accounts receivable and inventory reports, and details about their assets. Being well-prepared can expedite the application process.




 

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