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The Challenges of Traditional Bank Financing in the Modern Canadian Landscape
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Unlocking the Power of ABL Financing Loan Revolver in Canada
Exploring Asset Based Lending in Canada
Introduction
A recent article by Michael A Cappabianca / Aird & Berlis was an excellent summary of Asset-based lending post-Covid -
In the article, the author maintains that the COVID-19 pandemic deeply affected the global economy, with Canada's asset-based lending (ABL) market experiencing significant changes in demand, credit availability, and overall dynamics.
The pandemic led to a notable shift in ABL demand as companies across sectors like manufacturing, retail, and hospitality utilized it to manage liquidity, fund operations, and harness growth opportunities. Pandemic-induced disruptions saw many businesses unable to fulfill financial obligations, leading them to turn to ABL, especially with the lure of record-low interest rates.
Cappabianca further maintains the future of the ABL market in Canada holds several considerations. Interest rates play a crucial role, with ABL loans typically having higher rates than traditional cash flow loans; a rise in rates could make ABL less appealing to borrowers.
The market is also influenced by volatile asset values due to changes in demand, interest rates, pandemic-related supply chain challenges, and global unrest. Lenders for an asset based loan must assess risks in sectors like travel while identifying growth in health care and e-commerce areas. Other factors include rethinking supply chain management, adhering to a potentially changing regulatory landscape, and the vital role of ABL in post-pandemic business recovery.
As summary, the author maintains that despite the challenges brought about by the pandemic, ABL's versatility has proven to be a critical tool for businesses in Canada. Its adaptability has been essential in helping companies navigate the tumultuous economic environment. As the nation's economy begins its recovery phase, ABL will be pivotal in fostering growth and supporting enterprises in their rebound efforts.
Understanding ABL Versus The Challenges of Traditional Bank Financing
Are you totally on top of the newest trend in Canadian business financing? Then, of course, you're fully aware and knowledgeable on ABL asset based loans for a business credit revolver loan versus the alternative... a bank line of operating credit.
What's that? You're not? No problem... read on!
Nowadays, no Canadian business owner or financial manager disputes with us the challenges of obtaining what everyone seems to call 'traditional' bank financing. For all the right reasons (probably... hopefully?!) Canadian banks hunkered down and tightened the lending strings after the 2008-2009 financial debacle. Current higher rates in 2023 and generally poor economic and market conditions inhibit bank financing for many firms.
The Rise of ABL Financing
Therefore, it’s not hard to determine how various specialized funds and independent finance firms became prominent by offering ABL funding . A = Asset B = Based L = Loan... It’s as simple as that.
Finding a Solution to Business Financing Challenges
Do you recognize any parts of the following story... we think you will. You feel as if you have hit an impasse in expanding your firm. Personal funds have been depleted, and your efforts to find that elusive 'traditional' financing have failed. Additionally, your firm might have some real challenges in returning to profit after your industry has been out of favour with those in the glass towers who seem to know everything...
Asset Based Financing: An Alternative to Bank Lines
Is there really a viable solution to that business financing challenge, i.e. a real-world alternative to a bank line/cash flow financing and credit revolver loan? Enter asset based financing and asset-based lines of credit!
Assessing the Cost of Asset Based Loans
Interest rates for ABL Funding can vary depending on factors like the borrower's creditworthiness and the assessed risk of the collateral. In some cases, ABL Financing rates may be higher than traditional bank loans, but they offer unique benefits, such as greater flexibility and access to liquidity based on assets.
Depending on the size of your facility and the overall financial condition of your firm, the cost of ABL financing will either be lower, competitive, or higher than your current finance arrangements. ‘Thanks a lot' we can hear you say, as that sure wasn’t very informative!
But we stand by that comment because of the complexity involved in assessing the size of your financing requirements, the overall creditworthiness of your company, and the mix of financing you need when it comes to ABL . The bottom line is simply that every situation is unique and needs to be addressed in that manner.
Unlocking High Liquidity Ratios
The essence of our message is hopefully clear - you do have a Canadian business financing alternative. It's a non-bank revolving credit revolver via an independent firm that provides very high liquidity ratios on a loan to value ratio on key balance sheet assets such as credit and loan terms on receivables, inventory, and in many cases, fixed assets and commercial real estate.
Qualifying for Asset Based Lending ABL Financing
Do we qualify? is question number 1 or 2 more often and not from clients. The answer in the ABL world is that everyone qualifies with only one required criterion - you have sufficient assets and sales and a need for working capital via that borrowing base of sales and assets.
Because that’s what an asset based line of credit revolver is all about. And, as we said, it might be more expensive, and due diligence on your operations and assets might be a bit more rigorous (in fact, it will be for sure - ABL lending focuses on assets, not ratios!).
The Canadian ABL Loan Marketplace
What's happening in the Canadian ABL loan marketplace? Lots. Billions of dollars of financing are being accessed every day by your competitors who are knowledgeable about this new type of Canadian business financing. And it’s sure cheaper than bringing in additional equity if in fact, that could be arranged.
Key Takeaways
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Definition of ABL - Understand that ABL stands for Asset-Based Lending, a financing method where a business uses its tangible assets, such as accounts receivable, inventory, and equipment, as collateral to secure a line of credit or loan.
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Benefits of ABL Financing: Recognize that ABL loans offer advantages like increased liquidity, flexibility in funding use, and access to capital even when traditional bank financing is challenging to obtain.
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Differences from Traditional Bank Loans: Differentiate asset-based loans from traditional bank loans, noting that it relies on assets rather than creditworthiness, making it accessible to businesses with valuable collateral but potentially weaker credit profiles.
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Qualification Criteria: Understand that the primary qualification for ABL Financing is the presence of business assets, making it more inclusive compared to traditional loans.
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Cost and Risk Considerations: Acknowledge that the cost of ABL can vary, and due diligence on assets and operations is more rigorous. Balancing the benefits against potential higher costs and risks is essential.
Conclusion
Interested? Intrigued? Want to know more? Call 7 Park Avenue Financial, an experienced, trusted, and credible Canadian business financing advisor, for the scoop on an ABL loan versus bank line. We guarantee you will be glad you did.
FAQ / FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is ABL Finance, and how does it differ from traditional bank financing?
ABL Financing, short for Asset Based Lending, is an alternative to traditional bank financing in Canada. It revolves around using your business assets, such as receivables, inventory, and fixed assets, as collateral for a line of credit.
Why have asset based business credit lines gained prominence in Canada?
Canadian banks became more cautious with lending after the 2008-2009 financial crisis, leading to challenges in obtaining traditional bank financing. ABL Financing became prominent as an alternative solution for businesses.
How does ABL Financing address the challenges faced by businesses needing funding?
ABL Financing offers a real-world alternative for businesses that have struggled to secure traditional financing. It provides liquidity based on tangible assets rather than solely on financial ratios.
Who qualifies for ABL Financing, and what are the criteria?
The primary qualification for ABL Financing is the presence of business assets. As long as your company has assets, you can potentially qualify. However, the due diligence process on your operations and assets may be more rigorous than traditional financing.
What types of businesses in Canada are best suited for ABL Financing?
ABL Financing is suitable for a wide range of businesses, including manufacturing, distribution, retail, and services. It is especially beneficial for companies with substantial tangible assets, such as inventory and accounts receivable, that can be used as collateral.
Are there any limitations on how businesses can use funds obtained through ABL Financing?
Generally, businesses have flexibility in using funds obtained through ABL Financing. They can use the capital for various purposes, such as expanding operations, managing cash flow, purchasing inventory, or financing acquisitions. The borrower and the lender often negotiate the specific use of funds.
What are the key differences between ABL Financing and equity financing in Canada?
ABL Financing involves securing a line of credit using a company's assets as collateral, while equity financing typically involves selling ownership shares of the company to investors. ABL Financing allows businesses to maintain ownership and control while leveraging their assets for funding, whereas equity financing dilutes ownership.
Are there any risks associated with ABL Financing that businesses should be aware of?
While ABL Financing offers valuable benefits, it also carries risks. Businesses need to be cautious about overleveraging their physical assets, as failure to meet repayment obligations could lead to the loss of valuable collateral. Additionally, the due diligence process for ABL Financing can be rigorous, and lenders may closely monitor a company's financial health throughout the financing term. Businesses must understand these risks and manage them effectively.
