The Funding Solution You've Been Waiting For: ABL Financing

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You Are Looking for ABL Finance and Asset Backed Lending! 

From Collateral to Cash: How Asset-Based Loans are Revolutionizing Business Financing in Canada

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        Financing & Cash flow are the biggest issues facing business today

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Email - sprokop@7parkavenuefinancial.com

Unlocking Your Business Potential: The Power of  ABL Finance Loans | 7 Park Avenue Financial

 

Beyond Banks: Discover the Flexibility and Power of Asset-Based Lending Canada

 

  

Introduction :  

 

ABL financing is distinct from traditional bank lines of credit and offers unique advantages to businesses, particularly regarding creative financing via  collateral and liquidity 

 

The arrival of asset-based financing is a significant change in Canadian Business financing - with this method of funding a business's working capital needs becoming more popular every day.

 

Conventional business financing relies heavily on a company's cash flow, which suits many firms. However, businesses possessing valuable assets can explore an alternative asset-based lending (ABL) approach for expanded financing opportunities with fewer restrictions for companies unable to meet traditional financing requirements demanded by banks.

 

  

Comparing Cash Flow-Based and Asset-Based Loans:  

 

1. Secured Nature: Both cash flow-based and asset-based loans are secured, offering collateral for lenders. That collateral is documented and secured in a different manner when assessing ABL facility financing versus traditional bank loans.

2. Loan Underwriting Factors:

   • Cash flow-based loans: Banks evaluate a company's cash flows for loan terms.
   • Asset-based loans: The ABL lender considers balance sheet assets for determining loan terms.

3. Suitability of Cash Flow-Based Loans:

   • Ideal for companies lacking significant assets, such as service-based firms.
   • Suitable for entities with higher margins. Canada does not have an ' ABL  bank ' per se- the role is filled by a commercial finance firm - some banks have ABL divisions

4. Advantages of Asset-Based Loans:

   • The asset based loan is beneficial for companies with strong balance sheets but narrower margins and cash flow from operations
   • Suited for businesses with unpredictable cash flow patterns.

5. Credit Management Efficiency:

   • Both loan types are secured and offer competitive  credit terms based on overall credit quality
   • Suitable options for businesses aiming to effectively manage credit costs.

 

ABL allows businesses to leverage various assets, such as accounts receivable, real estate, intellectual property, and even brand names, as collateral. This facilitates access to essential capital. If a business has substantial assets, ABL offers significant financing possibilities with a flexible structure that permits better decision-making than other loan types.

 

Innovative setups like "first in, last out" (FILO) tranches can enhance borrowing potential via asset based lenders and the abl loan agreement

 

Choosing ABL depends on factors like a company's requirements, business nature, current status, and future plans.

 

  

Key Elements of ABL Financing:  

 

ABL financing has two crucial elements: collateral and liquidity. Collateral refers to the assets a business uses to secure the loan, while liquidity refers to the availability of cash or readily convertible assets. These elements make ABL financing stand out from traditional bank credit lines.

 

Asset Base: ABL financing revolves around the value of a business's assets. The quality and quantity of these assets determine the credit facility that can be obtained through asset-backed funding - the assets determine a borrowing base that adjusts with sales and assets as the business grows.

 

The process of obtaining ABL financing is different from the more familiar cash-flow financing.  ABL lenders focus on asset value, which acts as collateral for the loan.

 

Accounts receivable are the first assets considered, typically prioritizing recent ones (within 90 days of invoicing or no more than 90 days overdue). Other assets, including inventory, machinery, real estate, and intellectual property can be bundled into the facility.

 

ABL  borrowers undergo due diligence to assess their assets to determine their quality and quantity. The due diligence and potentially required appraisals establish eligible collateral and the corresponding advance rates.

 

ABL offers an advantage by reducing the constraints typically seen in cash-flow lending, such as mandatory debt service coverage and leverage levels. Unlike cash-flow lending, where a drop in sales could trigger financial covenant breaches, ABL's asset-backed approach minimizes lender concerns about defaults based on the borrowing base of assets.

 

Businesses need only maintain a basic liquidity level to avoid specific financial covenants when they choose asset-based lending.

 

  

Traditional Bank Perspective:  

 

Traditional banks often focus not just on assets but also on a business's financial health, income statement, ratios, and covenants when they fund unsecured loans and bank lines of credit.

On the other hand, secured loans via  ABL financing prioritize the value and liquidation potential of the company's assets.

 

  

Suitability for Different Business Stages Of A Business:   

 

ABL loans via asset-based financing are suitable for various stages of a business, such as startups, periods of hyper-growth, financial recovery in a turnaround, or times of crisis management. This versatility makes ABL financing an appealing alternative for a total working capital solution.

 

Determining  The Credit Facility Size: The amount a business can borrow through ABL financing is based on the true value of its assets. These assets may include more liquid assets such as accounts receivable, inventory (raw materials, work in progress, finished goods), and fixed assets/real estate if applicable.

 

Asset Valuation and Liquidation Expertise: ABL financing providers are experts in valuing and liquidating assets, distinguishing them from traditional banks. This expertise can significantly increase borrowing capacity.

 

Example of Increased Borrowing Capacity: An example is provided where a wholesale client leveraged a modest bank line of credit into a much larger borrowing facility using the expertise of the ABL lender to assess the actual liquidation value of inventory. Inventory Financing has traditionally been difficult to finance.

 

 

Cost and Long-Term Viability: 

 

ABL loans can vary in cost compared to traditional bank facilities. Long-term viability is a common question. ABL financing is often presented as a bridge solution that could be used for a year or two before transitioning back to a traditional financing structure.

 

  

The Flexibility of ABL Financing:   

 

ABL financing is lauded for its flexibility in handling special situations, seasonality, over-advances on a revolving line, and different credit qualities. It is also used to finance acquisitions. Talk to the 7 Park Avenue Financial team to determine why ABL finance might suit your firm's working capital business needs.

 

 Key Takeaways: 

 

1. Asset-Rich Companies: Businesses with substantial assets, even if experiencing cash flow variations, that require significant capital for growth and operations are solid candidates for asset finance

2. Diverse Range of Businesses: A broad spectrum of companies can benefit from ABL due to their asset-rich nature.

3. Manufacturing Businesses: Companies like commercial truck trailer manufacturers facing economic slowdowns that impact demand. Capital is essential to navigate volume dips and modernize production.

4. Distribution Businesses: Wine and liquor wholesalers experience seasonal sales fluctuations. Having a line of credit helps manage inventory gaps and provides flexibility for stocking up before peak seasons.

5. Retailers with Inventory: Retailers possessing valuable inventory but facing earnings volatility. ABL becomes valuable during unforeseen disruptions, such as the COVID-19 pandemic, offering liquidity beyond standard cash flow financing based on asset values

6. Enhancing Online Presence: ABL assists retailers in funding operations and online improvements during challenging times, bolstering their ability to adapt.

7. Liquidity and Flexibility: ABL provides a welcome bonus by enabling businesses to access their line of credit without prior lender approval. This flexibility proves valuable for strategic moves like acquisitions, joint ventures, and dividends, as long as payment conditions are met.

 

 

CONCLUSION -

 

Asset-based lending offers numerous advantages for businesses, including the flexibility to support various growth initiatives. Whether you're looking to diversify services, launch new products, enter new markets, or maintain your team, this financing method provides quick and adaptable funding based on your company's sales revenues and tangible assets.

 

Unlike traditional bank loans that focus on cash flow stability, asset-based lending allows you to leverage assets like accounts receivable, inventory, and equipment to secure a loan, giving you greater freedom to use your credit for business growth. Talk to the 7 Park Avenue Financial team, a trusted, credible and experienced Canadian business financing advisor who can assist you with your business loan and cash flow needs.

 

  

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION  

 

What is asset-based lending, and how does it differ from traditional bank financing?

 

Asset-based lending (ABL) is a financing option that uses your business's assets as collateral. Unlike traditional banks, which focus on your financial picture, ABL lenders assess the value of your assets and their potential for liquidation, resulting in increased borrowing capacity.

 

1. Stable Small and Mid-Sized Companies: Typically, small and mid-sized companies possessing valuable physical assets are frequent users of asset-based borrowing.

2. Large Corporations as Occasional Borrowers: Even large corporations might turn to asset-based loans for short-term requirements due to specific circumstances and the need to maximize borrowing capacity

Reasons for Large Corporations' Asset-Based Borrowing:

1. Cost and Time Constraints: The expenses and extended duration associated with issuing new shares or bonds in capital markets may deter large corporations from those options.

2. Urgent Cash Needs: Immediate cash demands, like funding significant acquisitions or unexpected equipment purchases, drive large corporations towards asset-based borrowing. Time sensitivity plays a crucial role in these cases.

 

 

Can ABL financing benefit my business during different growth stages?

 

Absolutely! ABL loans cater to diverse business phases, whether you're a startup experiencing rapid growth or dealing with financial challenges. The flexibility of ABL financing ensures it's suited for your unique situation.

 

How is the borrowing amount determined in ABL financing?

 

The borrowing amount in ABL financing is based on the actual value of your assets, including accounts receivables, inventory, and fixed assets. This approach maximizes your borrowing potential and allows you to tap into the true worth of your business assets.

 

 

Is ABL financing a short-term solution, or can it support long-term growth?

 

ABL financing can be both. While it can serve as a bridge solution for a year or two, it's important to note that ABL is increasingly becoming a "new traditional" financing option. Many successful corporations use ABL as a long-term solution to unlock growth potential.

 

How does ABL financing's expertise in asset valuation benefit my business?

 

ABL lenders are experts in valuing and liquidating assets. This expertise enhances your borrowing capacity, as it considers the actual liquidation value of your assets, often resulting in significantly higher credit limits than traditional bank financing.

 

Can my business qualify for asset-based lending if it doesn't have tangible assets like real estate or inventory?

 

Yes, asset-based lending considers various types of assets, including accounts receivable and machinery.  Unlike cash flow loans, If your business has valuable receivables or equipment, inventory and other assets you are eligible for ABL financing.

 

What industries typically benefit the most from asset-based lending?

 

 Asset-based lending can benefit many industries, including manufacturing, distribution, retail, and services. It's not limited to any specific sector and is more about the value of your assets than your industry.

 

 Are there any risks associated with asset-based lending that I should be aware of?

 

Like any financial arrangement, asset-based lending has considerations. One potential risk is maintaining asset value, which directly impacts borrowing capacity. It's essential to work with experienced lenders to ensure proper management. Many challenged and troubled companies utilize ABL as part of their turnaround plans.

 

 

How does the application process for asset-based lending differ from traditional bank loans?

The application process for asset-based lending typically focuses heavily on the value and quality of your assets. Traditional bank loans often place more emphasis on credit history and financial statements. ABL lenders evaluate your asset base to determine creditworthiness.

 

 

Are there specific reporting requirements when using asset-based lending?

 

Asset-based lending often requires more frequent reporting on your assets and financials. Lenders want to monitor the health of the collateral that secures the loan. Clear communication and transparency are crucial to maintaining a successful ABL arrangement.

 

 

 

Click here for the business finance track record of 7 Park Avenue Financial

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Asset Financing Solutions in Canada - The New Financing Alternative

Asset Based Lending in Canada ( ABL ) ; What’s all the excitement about? As we are well into our 2020 business year in Canada the financial markets continue to provide challenges to Canadian firms in the small to medium enterprise sector ( ' SME ' ) for a variety of reasons, one of which is a Pandemic!

At 7 Park Avenue Financial we define SME as Sales revenues less than 50 Million dollars, but you will find a number of people with different size definitions. Suffice to say our numbers are smaller than those in the U.S, as usual!

WHAT IS ASSET BASED LENDING?

ABL financing is simply collateral-based lending - It secured inventories, A/R, equipment, and other property your business owns, such as real estate for example. Canadian businesses use asset based lending to cover short term solvency  issues to run their businesses - it is often termed as ' transitional financing '.

Working capital and cash flow financing challenges seem to be a constant source of challenge for the Canadian business owner and financial manager. When we combine that challenge with the fact that many companies have debt and debt service problems, and in many cases are coming off a bad year ( the worst year ever? ) you can see how any new financing solution very quickly becomes top of mind. If the Canadian business owner is confident that his liquid and fixed assets as a whole can support the financing need careful thought should be given to an ABL arrangement.

ABL is the term most people refer to when discussing ABL FINANCE if they have a financial background.

SPECIAL CONSIDERATIONS  

So what are those liquid and fixed assets – well they are of course the company’s liquid current assets, receivables and inventory? That is also balanced with the firm's fixed assets and real estate might be included in that. Whether on the U.S. or the Canadian side of the border the asset based lending lines of credit continue to increase – some of the largest corporations in Canada and the U.S. have either completed such financings or are contemplating them. ABL in Canada grew out of the tremendous growth in the U.S. asset based lending industry.

HOW CAN YOUR BUSINESS GET AN ASSET BASED LOAN

As large as the market and market potential are in asset based financing it is interesting to note that the actual market participants can really be brought down to a handful or two of key players. There are some large tier one type firms that are primarily offshoots of major U.S. corporations who dominate the market in asset based lending, and then there are a very small handful of Canadian well-heeled players.

That is finally balanced by a similar handful of Canadian tier 2 and tier three players who play in niche markets and geographies. Asset based lending works only when there are... guess what... ‘Assets ‘! As such industries that are very capital intensive in nature – think manufacturing, etc... Are perfect candidates for ABL type arrangements?

HOW ASSET BASED LENDING WORKS

Asset based financing is essentially an operating loan and line of credit that allows Canadian firms to meet everyday cash flow demands as they operate the business. As there is often a significant delay in the final collection of receivables your business needs cash flow to cover that gap. For companies that can't demonstrate ongoing historical cash flow from operations the collateral in the assets of the business provides business capital to run and grow a business.

WHAT ASSETS CAN BE USED TO SECURE A LOAN ?

Asset based loans and lines of credit are typically tailored to a company's specific needs. There is kind of a hierarchy of priority in assets that ABL LENDERS prefer. More liquid assets such as your receivables and inventory receive high borrowing margins, but other assets also command good borrowing ability - sometimes dependent on appraisals, etc. Borrowers familiar with traditional bank covenants and formulas will be happy to know that those restrictive type of covenants in finance rarely occur in ABL lending.

In the past there was a major stigma in the asset based lending marketplace that this type of financing – i.e. leveraging your current and fixed assets to the max, is a form of alternative financing that was previously embraced by only firms who were in some sort of financial trouble or distress.

While a firm can have financial losses, a poor balance sheet capital structure, or cash flows that are very volatile or seasonal and still be a great candidate for an asset based line of credit /loan, it should be pointed out that major successful well-known corporations have added ABL financing to their financing toolkit so to speak.

 WHAT DOES ASSET BASED FINANCING COST VS BANK FINANCE?   PROS AND CONS OF ASSET BASED LENDING

When CFO’s and business owners meet with chartered banks to structure operating and term financings the discussions revolve around balance sheet ratios, debt covenants, cash flow coverage, and personal collateral. When all of those issues are generally positive in nature the Canadian chartered banks are providing lines of credit and term facilities at very low interest rates.

For the ABL lender it is simply a lending decision around the lenders ability to convert collateral to cash under the ABL facility. While asset-based lending interest rates are almost always higher than traditional bank financing rates have come down significantly and the final cost of borrowing will depend on the overall credit profile of your company and industry, as well as its current financial position and years in business.

When there are major challenges in satisfying bank requirements those ratios and loan covenants are not on the discussion table with your asset based lender, only the liquidation value of all your assets is. Receivables and inventory in most firms are of higher quality and can be margined in the 90% range, while appraisals are performed on other fixed type assets. That gets your company maximum asset financing, and that is what ABL is all about.  Real estate owned by the company can also be part of the asset mix.

Is it more expensive than traditional bank financing – we would say 95% of the time it is. But as a business owner do you want no or a small credit facility at a great rate or all the financing you need at a more expensive rate? Asset based lenders have a thorought due diligence process around your financials and the assets that ultimately finalize a term sheet / offer to finance. Canadian companies looking for SME COMMERCIAL FINANCE solutions and who have business assets are eligible for asset based financing loans.

Whether your business is a major corporation of an up and coming startup it's cash flow that is like ' gasoline to a car '. Operations must be funded and working capital financing must be conserved and maximized. Thousands of companies cannot satisfy ' cash flow based loans ' and are unable to demonstrate past and future cash flow generation. That is one of the main reasons why asset based financing works.

 CASH FLOW VS ASSET BASED LENDING - WHATS THE DIFFERENCE ?   

Companies that have bank financing in place for cash flow based borrowing are subject to potential reductions in their business lines of credit when their profits drop due to company-specific of general economic issues. On the other hand firms that borrow using ABL finance have the assets on their balance sheet backing up collateral for loans and lines of credit - cash flow is really a secondary consideration for the ABL lender.

ABL credit lines are formed by a percent of the value of your total assets, and facilities typically grow automatically as sales and assets grow !
ABL allows you to leverage assets and is often an intermediate step back to traditional bank financing for many companies; it's flexible and is often used in conjunction with buying a business or is part of a TURNAROUND FINANCING and a restructuring or refinancing strategy.

Various types of asset based financing such as inventory loans, purchase order financing and factoring ( pledging accounts receivable) form part of the ABL solution .For information on PO FINANCING click here , and for an understanding of how factoring works click here.
  
CONCLUSION  

Asset based lenders allow companies to borrow money based on the liquidation value of assets on its balance sheet. A recipient receives this form of financing by offering inventory, accounts receivable, and/or other balance sheet assets as collateral. While cash flows (particularly those tied to any physical assets) are considered when providing this loan, they are secondary as a determining factor.

They are fast flexible solutions outside of traditional financing and banking covenants. Ensure you are aware of this newer financing alternative – now it's your turn to decide, so talk to a trusted, credible and experienced Candian business financing advisor to see if asset based financing will work for your firm.





7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.


Click here for the business finance track record of 7 Park Avenue Financial







Stan Prokop
7 Park Avenue Financial/Copyright/2020

Business As Unusual - Asset Based Lending Works Because Its Business As Unusual !

Asset Based Lending In Canada

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Asset based Lending - Canada is catching on quite quickly to a new breed of financing facility that has been in existence in the U.S. for a number of years. Whether your firm is relatively new, large or small, you have the option of looking at an asset based loan as an alternative financing facility in Canada, unlocking your assets for capital! Let's dig in.

The acronym for Asset Based Lending is ' ABL ' - ABL has grown popular for some very simple reasons :

1. ABL facilities will often resemble a bank credit line, providing the client with full-service banking needs

2. ABL lenders have a solid understanding of specialized asset values

3. Transactions are often very much ' customized ' to a particular firm or industry

4. There are limited or no ' financial covenants in asset-based lending; As an example banks are focused on ' leverage covenants ', thereby forcing firms to meet debt to equity ratios as an example that may be unachievable for many firms. Covenants in finance in banking scenarios become a real challenge as a firm tries to balance ratios versus growth opportunities.

5. There are no real ' upper limits' on the amount a firm can borrow in ABL, while the smaller transactions commence in the 250k range, which is considered a very small facility

6. An ABL loan line of revolving credit facility will almost always deliver more liquidity to a business because loan margins are much more generous; typical advance rates for a/r and inventory are significantly higher than bank credit lines. Stand-alone inventory loans can also be accessed as an inventory loan is a subset of asset based lending.

7. Many company's and certain industries, in general, are very ' seasonal ' when it comes to revenue recognition, need to build up inventory, etc. Asset-based credit address this issue head on. Additionally, certain industries become ' out of favour' in traditional financing circles, and ABL can often easily finance cyclical or industry specific challenges

8. Outside of general borrowing needs asset finance loans are very appropriate for acquisitions and or management buyouts.

9. Certain banks also offer ABL loans and pricing is extremely competitive KEY POINT: It should be noted that in general non-bank commercial asset based lenders have higher rates than Canadian chartered banks

10. Asset based non-bank revolving credit facilities are not really 'capped' with an upper credit limit - they can easily grow as your sales and asset base grows. This is a key differentiator vs a bank line of credit.

Asset Based Lending Versus Cash Flow Lenders

Part of the reason that asset-based lending - ' ABL ' has caught on in Canada is the current state of commercial business banking and in Canada and the access to liquidity challenges that many firms face in the post-2010 business environment. Suffice to say the 2020 pandemic has brought those same liquidity challenges to Canadian businesses

A BUSINESS LOAN WITH COLLATERAL

When your company has significant assets tied up in accounts receivable, inventory equipment, and sometimes real estate you want to ensure you are financing them at optimal levels for both survival and growth. Asset financing is the ultimate working capital finance option, as it comes with flexibility and can deliver urgent timely cash flow needs that many companies require when they are in a process of transition, or, alternatively, exploring significant growth options.

HISTORY OF ABL FINANCING IN CANADA

Although the basic financing concept is new ABL has been prospering in the U.S. for a number of years - Canadian firms compete with U.S. ABL lenders in our own business financing marketplace. Every industry in Canada has potential access to asset financing lending solutions - we note though that many industries are the perfect ' poster child' for ABl. Manufacturers, distributors, retailers are very typical users of the ABL solution.


As we noted some of the largest corporations in Canada utilize this type of financing, but the demand for ABL probably grew more out of the need for smaller and medium-sized firms in Canada - let’s say with revenues under 20 Million dollars - to get the operating financing they need.

BENEFITS OF ASSET BASED LENDING

The benefits of ABL financing seem very obvious to Canadian business owners and financial managers. The financing revolves totally around assets, and places only a very small reliance on debt to equity ratios, operating ratios, cash flow coverage, etc.



When Canadian businesses cannot satisfy their bankers on the above ratios and loan cash flow coverage they view ABL as an alternative financing solution. We would point out that ABL financing, similar to any other commercial financing, is not a solution to a firm who is in a death spiral - years ago ABL had the taint of a 'lender of last resort' - that is categorically not the case now and is utilized by firms who want to maximize operating and working capital financing but cant in many cases satisfy all Canadian chartered bank requirements.

WHEN YOU SHOULD CONSIDER AN ASSET BASED LENDING SOLUTION

ABL finance is a business loan that relies exclusively on the value of assets that become the collateral for a loan or revolving credit facility. Banks as an example place a huge emphasis on a firm's ability to generate positive cash flow from operations. Firms that are unable to demonstrate cash flow but still require financing utilize asset based lending arrangements to generate cash. There may be a number of reasons why a firm cannot temporarily satisfy banking covenants - the firms' financials may not be ready or updated as an example.


The typical scenarios under which a firm considers an asset-based lending arrangement are:



Growing very quickly - in high growth mode



Expanding into new markets



Merging with another firm



In 'Special Loans 'now and wishes alternate financing



We can't over emphasis the before mentioned point about financial statement characteristics - Asset based lines of credit focus solely on assets, that is where the liquidity and the operating facility works at its best. In many cases firms that have previous financing arrangements can significantly increase their credit availability by switching to an ABL line of credit.

EXAMPLE OF AN ASSET BASED WIN!

Our firm, 7 Park Avenue Financial, worked with a firm that was in Special loans with a chartered bank. They had an original line of credit of 750,000.00 - the bank cut it down to 500,000.00 and also put the customer into a Special loans category. We originated an asset based line of credit for 1,000,000.00 based on the firm's receivables, inventory, equipment and real estate. The customer utilized the ABL for about 18 months and then migrated back to commercial chartered banking arrangements with another bank. That story plays out over and over again in Canada.


We can say that the amount of funding a company can receive in an ABL arrangement is really based on a hierarchy of value of any given asset category. So as assets become more liquid on your balance sheet and work up to 'cash on hand; they have higher loan to value ratios. So while it is improbably and very unlikely your firm would receive 100% financing receivables as an example typically qualify for 85-90% funding. Many firms owner their own premises and there is significant equity in real estate, so that category also would receive a higher 'ltv' ( loan to value) possible in the 75% range as is common. Standalone inventory loans are also a subset of ABL financing.



CONCLUSION

Asset Based Lending In Canada can be one of the most effective business credit facilities for customers unable to achieve full traditional bank financing. Securing liquidity through company assets allows your borrowing to expand and contract when you need cash flow. Companies of any size or transitional stage can take advantage of working capital provided by asset based lenders.


Asset based lending will work for your business credit needs if your cash flow requirements are seasonal and revenues fluctuate. If your business plan includes acquisition financing, a turnaround or restructuring, or even a need for capital outside of equity considerations ABL will work for your company. ABL allows you to leverage company assets and is often a bridge back to traditional financing for many companies in Canada. The ability to finance a firm when it is in transition is a key part of ABL's success in Canada.



Asset based lines of credit? Your mission, should you choose to accept it? Investigate this unique financing option and work with a trusted, credible and experienced Canadian business financing advisor if the solutions meet your working capital needs.






7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.


Click here for the business finance track record of 7 Park Avenue Financial







Stan Prokop
7 Park Avenue Financial/Copyright/2020

Asset based lending canada

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Eliminating The Tough Road In Accessing Business Credit Lines

Business line of credit needs may often require the business owner/financial mgr look beyond the ' norm' associated with revolving credit lines. That's where ABL asset based lending and revolving loans come in - they're the viable bank alternative. Let's not forget though that bank facilities of this type offer low cost and flexibility if they can be accessed. Let's dig in.

An ' ABL ' is the acronym for the non-bank business credit line via the asset based lending solution. With the focus on using your assets as collateral the true ' borrowing power' of the facility provides your firm with a flexible cash flow solution based solely on the balance sheet assets. The facility actually suits every type of company but is often most successful for firms that have uneven financial statement ratios, fluctuating profits, and cash flows that might not resemble true operating cash flow performance.

Many companies, but not all as we've mentioned, used the facility to facilitate a turnaround or restructuring around their overall capital structure when that is mandated by owners or lenders! Many firms that are financed by Canadian banks might find themselves on the wrong side of covenants and ratios that often can only be solved by a new third party solution.

Solutions around asset based revolving lines demand that your firm has a good handle on your overall cash conversion/business cycle. That knowledge, combined with the ability to borrow a higher amount on your overall collateral will deliver the proper turnaround in your business finances. In some cases true asset based lenders will also consider term debt if it is appropriate and feasible.

WHY CONSIDER AN ABL BUSINESS CREDIT LINE / REVOLVING CREDIT FACILITY?

Many new clients at 7 PARK AVENUE FINANCIAL aren't fully aware of the differences in ABL loans as compared to bank credit or other facilities. They have found via experience that bank credit is difficult to get given the personal guarantees, covenants, and other obligations Canadian chartered banks might impose. Accessing all the bank credit you require can easily become a full-time job! As one of our mentors used to say ' tuition is very expensive in the school of experience '!


There are a number of reasons why your firm might consider an ABL revolving line. Some of these reasons might include:

ABL Finance will provide significantly more, and immediate liquidity to the business

Firms that might be under a cash flow crunch or constantly facing bulge financing needs due to issues around seasonality, etc will find themselves fully financed

Asset based credit lines tend to almost automatically grow as your revenues rise Growing sales requires constant replenishment of working capital due to the build-up your investments in receivables and inventory consistent with any company with growing sales.

ABL financing is 'covenant friendly', with asset based lending companies place much less, or even no focus on debt to equity ratios, financial leverage, outside collateral, etc ( ABL Lenders can do this as they constantly update your overall all asset coverage around aged payables, receivables, fixed asset lists, etc - The software and reporting mechanisms ABL lenders use provides them with a total update on how your firm is doing


In summary, asset based lenders who feel comfortable with their asset security, as well as your firm's ability to provide regular updates on performance, provide a significant amount of liquidity into the Canadian business financing landscape.

Are There Disadvantages To The ABL Facility And A ABL Revolving Line Of Credit?

99% Of the time asset based lending will always cost more than traditional bank financing. The bottom line interest rate and the focus on continual reporting is the tradeoff your firm gets from it's access to maximum liquidity. However, similar to bank financing the ABL environment allows you to pay for only the credit you utilize. ABL lenders have a higher cost of financing as they are typically financed privately and have higher costs around the monitoring of collateral and reporting.


Fundamentally it's all about the cost of financing benchmarked against the ' risk ' associated with your firm or its industry. It's at these times that looking at alternatives make sense.


Revolving credit facilities are primarily used for growth; and in some cases they are a solid re-financing alternative.

HOW DOES THE ABL BUSINESS LINE OF CREDIT WORK? THE REVOLVING CREDIT AGREEMENT

The ability to constantly access and drawdown working capital/cash flow needs is the key attraction of securing the proper line of credit facility. The assets that make up and drive this type of business credit are:


Receivables

Inventory

Equipment / Real Estate (if applicable)


As these two ' current asset' levels rise and fall so does the line of credit accessibility. Technically speaking the bank, or the asset based line of credit provider determine your firms access by establishing what they call a ' borrowing base' - typically on a monthly basis


In the case of a bank facility, typical margins against these two assets are as follows -


A/R = 75%

Inventory - 50% (varies)


The asset based lenders who provide lines of credit typically offer higher margin borrowing:


A/R - 90%

Inventory - 50-75% - (varies)


We can with confidence and experience say that asset based non-bank credit lines, while more costly, almost 99% of the time offer more borrowing power.

True revolving facilities are the most typical credit line - your firm draws down on the facility and then pays the facility down as you collect receivables and generate cash. The facility ' revolves ' - hence the name 'revolver'. The key drives of that ' revolving ' tend to be the turnover over inventories and collection of receivables as the company completes its sales cycle.

Many industries find themselves perfectly suited to asset based credit; examples might be distribution companies, manufacturers, distributors, etc.

In current times many firm are service or software-based , and these firms focus on the collection of a/r or their ability to contract clients via recurring revenue streams. When you set up your facility with the asset based finance company you will mutually agree on a ' borrowing base ' which will identify the maximum you can draw down at any time. Revolving credit facilities make the most sense economically when they ' revolve ' allowing you to minimize borrowing costs which at the same time being able to access capital when you need it.

This is why good attention to your inventory turns and DSO ( the key measurement of receivable turnover ) are so critical for the ownership/management team.

Asset based lenders use bank lockbox agreements to allow them to control the overall facility and ensuring the funds you receive are used to constantly pay down the facility. Over time your ability to have the facility ' revolve ' properly will have a key place in determining facility size, rates, collateral monitoring, etc.

If your firm has a good relationship with your lender you can often negotiate an ' over adance ', allowing you to temporarily ' over-borrow ' above the approved facility size. In these cases we always recommend clients be prepared to put together a realistic cash flow projection based on the current situation and needs of the business. Those situations might arise out of the ' seasonality ' in your industry, or your ability to take advantage of special vendor pricing, etc.

One other possibility surrounding this type of facility is the potential for the asset based lender to include a ' term loan component ' in the overall structure of the facilities. Payments can be adjusted to be made separately on the loan or also utilizing the ' balloon repayment ' scenario, allowing for the loan to be collapsed when the facility is paid out by another lender.

 Suffice to say good asset coverage is required in these latter two scenarios. Although almost all Canadian banks have an ' ABL ' division Canadian borrowers will always struggle with the concept of trying to understand the difference between bank ABL and non bank ABL.

In the U.S. ' second liens' are popular, allowing lenders to be 2nd on charges of equipment already secured by another lender; this practice is very uncommon in Canada. When banks do provide ABL loans in Canada their rates are often considerably better than their non-bank counterparts - however minimum loan sizes are often in the 5-10 Million range and upward. Banks will take a more extensive look at a multitude of factors in these larger ABL loans such as overall credit quality, pricing, and the company's ability to comply with the operational aspects of loans.

It is safe to say though that on balance there is more lender risk in asset based loans given constantly changing assets of the borrowing firm, along with major fluctuations in cash flow and often struggling working capital ratios, which is why various conditions will be imposed by a Canadian bank or non-bank LOC provider. We can (again) say with confidence (and, again experience!) that conditions imposed by asset based lenders are less onerous and more flexible. To some extent the actual limit on the line of credit can almost automatically increase without further applications, etc


What then is the bottom line of your firm's search for revolving lines of credit? The key points include:


Consider the entire funding landscape currently available in Canada


Be open to looking at both bank and non-bank solutions - aka ' traditional' versus ' alternative’


Have a strong sense of your working capital and cash flow needs


Ensure you have the data to allow a bank or non-bank lender to consider the credit facility - typically that's financials, aged receivables, inventory, payables, etc

ALWAYS BE OPEN TO A PLAN B!

In certain cases your company either may not be eligible for an asset-based credit line. There are numerous other solutions that can provide a similar type of liquidity including accounts receivable credit lines, purchase order financing and inventory loans, sale-leaseback scenarios, factoring loans, etc. Each of these types of facilities has different pricing and benefits attached to them.

Certainly a sole accounts receivable line of credit is always more achievable and can meet the needs of many firms, particularly those with smaller facility size requirements. Although there is no hard and fast rule our experience at 7 Park Avenue Financial is that for firms requiring facilities less than 500k these secondary solutions we have highlighted will often do the job, particularly if your firm doesn't qualify for a true ABL through a commercial lender or the bank.

Solutions such as the factoring line of credit are easily put in place, so business owners and their financial mgr's should always investigate types of asset-based financing.

These secondary types of offerings, versus the operating line of credit, are generally easily accessed, and certainly, approvals are more quickly put in place.

In summary, if you’re focused on shortening the journey on the tough road to business cash flow and working capital financing consider all options, including speaking to a trusted, credible and experienced Canadian business financing advisor who can assist you with funding needs... that deliver.





7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.


Click here for the business finance track record of 7 Park Avenue Financial





Stan Prokop


7 Park Avenue Financial/Copyright/2020

A Business Line Of Credit In Canada : It’s True That ABL Revolving Lines Deliver !

Asset Based Credit Line : A Working Capital Alternative

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Time For Some Fancy Footwork Around Your Business Financing  & Line Of Credit Needs?


An asset based line of credit is an emerging financial alternative in Canada for companies of all sizes that wish to maximize working capital in terms of their growth needs. This type of lending revolves around loans to your business where the collateral of your assets and your ability to generate sales provides all the liquidity you need to operate and grow.

More often than not asset based lending is associated with companies who are unable to arrange or qualify for what most business owner’s term as a bank operating line of credit.



Asset based lending is known as ' ABL financing ' and has risen to great popularity, first in the U.S. where it originated, and now to the Canadian marketplace. Although occasionally Canadian banks choose to participate in Asset Based Lending through separate units within the banks the vast majority of providers of asset finance are commercial finance companies that are independent of the banks.

Why Do Companies Consider ABL Finance And The Asset Based Loan

Asset based credit lines and loans are used for a variety of purposes - we can make the case they are an ' all-season ' Canadian business financing solution. They are used for:

Non-bank asset based revolving credit facilities

Companies that are growing quickly and can't access all the capital they need

Structuring a merger or acquisition or a management buyout

Seasonality in business financing needs - example - Xmas retailer, etc

Companies that have high debt/equity ratios who are ineligible for traditional finance solutions

Turnaround and restructuring facilities/refinancing of existing debt

Financing The Purchase Of A Business

How Is Asset Based Lending Different From Bank Borrowing?

New clients of 7 Park Avenue Financial want to know the difference in bank borrowing versus alternative lending solutions such as ABL. In banking it's all about traditional corporate credit quality and that boils down to profits and capital structure design around a solid balance sheet with solid owner equity. Those elements historically define a great company poised for continued success. Asset based lending on the other hand revolves around shorter-term focus around converting current assets in cash flow and an understanding around the true value of the collateral of the company.

That latter ABL focus doesn't require that a company be doing as well as a bank financed company. So sales turnover and the liquidation value of assets are essentially what the ABL loan is about when it comes to corporate finance.

In accessing asset financing via an asset based credit line for working capital and cash flow your focus should be on the short term liquid assets of receivables and inventory. That will allow your borrowing facility to fluctuate and lower overall financing costs. That constant turnover of sales into cash will make the ABL solution even more beneficial, and, important to know, these facilities can very easily be increased as you generate higher revenues.




Credit types vary, and traditional bank financing places a heavy emphasis on the overall financial position of your income statement and balance sheet. Therefore, if that is the focus then firms such as yours with either balance sheet issues, or experiencing temporary financial losses or other negative circumstances do not quality for margined lines of credit with institutions such as Canadian chartered banks.

HOW IS THE ASSET BASED CREDIT LINE LIMIT CALCULATED?

The calculation of your borrowing limits under your credit facility has some basic formulas attached to it . Accounts receivable and inventory are the two key drives, but fixed assets and any real estate can play a key role also.

The formula and final limits of your facility are called a ' borrowing base ' and this number is reviewed, typically every month to determine what your new limits are based on the value of your a/r and inventories. This is the revolving part of the facility, and often the fixed assets and real estate part of the facility are under a separate term type of loan. Usually the advance rate on your sales/receivables is higher than the inventory part of the facility, but it should be recognized that asset based lenders are experts in understanding the true value of inventory and are in a position to generate higher advance rates than chartered banks.



Typically A/R under 90 days is an essential part of the borrowing formuls. Typically funds are advanced a 85-90% of the a/r portfolio under 90 days. As you collect receivables your reduce the advances that have been made under the facility, not dissimilar to a bank LOC. The ABL underwriter will look at your overall DSO/COLLECTION period and also look at individual issues such as any one client being a large percentage of yoru sales ( 'concentration' ) or any set-offs you might have in place with suppliers or customers .

KEY POINT - It is essential that your firm is up to date on provincial and federal taxes, as CRA arrears can destory your lenders security on the facility. If you do have CRA arrears they can be paid out at the start of the facility, or you can ensure you have a documented payment plan in place on those arrears.

Inventory advances are where Asset Based Lenders shine. They understand the different components of inventory such as raw materials, work already in process, and finished goods. Their ability to underwrite and advance against inventories is a key differentiator in asset based lending. To you the borrower it's simply more borrowing power!



Asset based lines of credit take the reverse position from banks, simply that you have the assets, let's finance your firm on the strength of your assets, with minimal, if any, in fact, focus on ratios, covenants, outside collateral, operating metrics, personal guarantees, etc.



An asset based line of credit partner will tend to work through with your unique challenges in your industry or your business model. Some of those challenges might be the seasonality of your business or the special ‘one-of' situations we referred to. Some of those circumstances might be making an acquisition, restructuring your firm, or being in the receipt of large new contracts or purchase orders that are out of line with your traditional financing arrangements.



Operating capital financing, or rather the lack thereof(!) can often be the reason your firm is unable to take advantage of strong market opportunities to maintain your competitiveness.



One of the largest parts of an asset based lending facility is receivables financing. In small firms this is often taken care of by a factoring facility – your invoices are sold to the lender, you receive immediate cash, and you can structure facilities around such issues as credit insurance, non-recourse to your firm, etc.



The asset based line of credit, in a true sense, offers all of the advantages of factoring but operates instead like a true bank facility – your receivables, and inventory, are highly margined to the maximum value, and your access to cash availability is directly commensurate to your sales growth – in other words, you have no real cap on your operating facility – you receive cash for receivables and inventory as fast as you can sell and move our product and services!



Your firm will probably find that anyone in the asset based finance area has a stronger knowledge of your business model and assets. If your company has a strong focus on understanding the true collateral value in your business, and is focused on asset turnover in a/r and inventory your firm will be a true beneficiary of the asset based credit line. The general attributes of ABL financing

What Does Asset Based Lending Cost? Factors To Consider

Asset based lending credit lines and facilities usually are higher cost than bank financing when it comes to credit in the capital markets. The low interest rate environment has allowed asset based lenders to become more competitive and in a small number of cases asset based lenders can be competitive or on par with banks on higher quality deals. From a borrowers perspective clients need to weight the access to significantly more business capital versus the cost, more so when your company cannot in fact access bank credit.

Other tradeoffs are the requirements for more regular reporting on your receivables and payables and inventories and any miscellaneous audits or appraisals that might be required by the asset based lender to justify the higher borrowing levels. As we have stated the ability to access cash without the typical bank covenants and operating metrics is always top of mind with borrowers utilizing asset based lending. The overall flexibility in an asset based credit line tends to work well beyond traditional finance when all the options of each type of financing are considered.



While determining your borrowing strategy should be individualized based upon each business and tailored to your business’s specific needs, borrowers seeking working capital financing need to seriously consider the benefits of working with an asset-based lender, as it can provide greater flexibility and options for businesses seeking to look beyond traditional bank lending. Share which lending strategy has worked best for your business in the comments below.






Since asset-based loans don’t rely on the borrower’s operating performance, but on the quality of the collateral, fewer financial covenants are required of the borrower, and as compared with traditional bank lending, ABL lenders typically require a much more limited degree of reporting back to the lender.

KEY POINT - ABL facilities usually start at a minimum of 250k relative to the approved sized of the borrowing facility. This is the lowest end of the scale and there is no real upper limit to a company borrowing if the firm satisfies assets and sales revenue size.


If a company is too small, or for some reason is not eligible for abl lending then a factoring/ receivable financing facility should always be considered. Even startups or very early stage and smaller firms can consider the factor funding solution. Access to cash flow is fairly quick and easy for firms looking to just finance receivables. Providing your financials, aged payables and receivables and some other general info on your firm will typically get you started and approved quickly.

7 Park Avenue Financial recommends a CONFIDENTIAL RECEIVABLE FINANCING facility for firms considering just an a/r solution, outside of the asset based credit line.

This type of facility allows you to cash flow all your sales immediately, and your firm is responsible for all the billing and collecting very similar to a bank facility. In lieu of an interest rate commercial factoring firms chared a fee for discounting the invoice, and this is typically in the 1.5-2% range , so if your firm absorbs that fee and has good margins your cash flow problems are certainly solved.



We recommend that you seek out and talk to an experienced and credible advisor in Canadian business financing to determine if the advantages of an asset based line of credit work for your firm! It is a business loan with collateral that works.




7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.


Click here for the business finance track record of 7 Park Avenue Financial







Stan Prokop
7 Park Avenue Financial/Copyright/2020