How to Qualify for an ABL Loan Facility in Canada
ABL LENDING - CANADA
ABL Loan Facility
A profitable business can still run short of cash when receivables and inventory grow faster than collections.
An ABL loan facility converts eligible business assets into revolving working capital. Drawing on experience arranging Canadian asset-based financing for growing and transitional companies, 7 Park Avenue Financial helps owners understand borrowing-base availability, lender controls and the true cost before choosing a facility.
What Is an ABL Loan Facility?
An ABL loan facility is a revolving loan secured primarily by accounts receivable, inventory and, in some cases, equipment or real estate. The lender determines availability through a borrowing-base formula rather than relying mainly on profitability or conventional financial ratios.
An ABL Asset-Based Line of Credit for Canadian businesses is, in some ways, a solution to the ' entitlement ' that business owners and financial managers feel around the necessity of accessing commercial credit.
In some ways, it's access to a ' kinder, gentler' method of getting approved for revolving credit to run your business. Let's explain.
What is ABL Lending?
When we talk to clients about their needs and challenges accessing business credit, it’s surprising that many owners and managers have never heard of ABL business loans or credit facilities.
Why is that? Actually, you can forgive that, since asset-based lending is a newer financing method in Canada that is gaining traction every day. These credit facilities grew popular in the United States, and the solution has migrated into the Canadian business financing landscape.
Asset-based financing solutions allow businesses to leverage their assets to secure funding.
If your company is focused on expanding operations, increasing working capital and cash flow, or navigating day-to-day financial challenges, understanding ABL can be a game-changer.
One type of ABL is accounts receivable financing, where businesses use outstanding invoices as collateral to secure a loan. This type of financing provides working capital, helps manage cash flow, and is based on the creditworthiness of a company's customers.
HOW DOES YOUR FIRM OBTAIN APPROVAL FOR ABL FINANCING?
Approval for business financing revolves, of course, around a company's credit rating, which is not dissimilar to the rating that follows us around as consumers.
That business credit rating depends on the quality of financials, the ability to meet obligations to suppliers and lenders, the character and capability of management, and, more specifically, cash flow and profit generation.
However, eligibility for asset-based lending (ABL) is determined based on the value of collateral rather than the borrower's credit history, making it a viable option for businesses with a lower credit score or no credit history.
WHEN THE BANK SAYS NO
But what happens if the new or challenged firm can’t access the tremendous rates and flexibility our Canadian chartered banks offer? Businesses still need access to credit—enter stage left ‘ABL’ business lines of credit.
Another alternative is cash flow lending, which involves borrowing money based on a company's projected future cash flows.
3 Uncommon Takes on ABL Loan Facilities
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Your “boring” assets are your best negotiators. Banks underwrite you; ABL lenders underwrite your collateral. That shift often means better terms when your receivables or inventory are stronger than your credit file.7parkavenuefinancial+1
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An ABL loan facility can be a growth throttle, not just a safety net. Because the line grows with eligible assets, seasonal spikes or new contracts can automatically unlock more capital without re-applying.
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Covenants focus on assets, not EBITDA. If your earnings are lumpy but your receivables are solid, ABL can be more forgiving than traditional term loans that punish you for timing mismatches
WHAT ARE ASSET BASED LENDING CREDIT LINES
Simply put, they are revolving loans to businesses secured by balance sheet assets, including A/R, inventories, and, uniquely, fixed assets.
These balance sheet assets can be used as collateral for financing. That’s the ‘big difference’ relative to a bank business credit line - simply that the focus is on the current and fixed asset collateral, not the unique emphasis that our banks place on ratios, covenants, and secondary sources of repayment such as outside personal collateral, etc.
What Are Typical Canadian ABL Advance Rates in Asset-Based Loans Borrowing Base
| Asset | Typical indicative advance |
|---|---|
| Eligible accounts receivable | 80%–90% |
| Finished-goods inventory | 40%–60% |
| Raw materials | 25%–50% |
| Machinery and equipment | Percentage of appraised orderly liquidation value |
| Commercial real estate | Percentage of appraised market or lending value |
BANK LENDING VERSUS ABL ASSET-BASED LENDING
Because Canadian banks, and rightly so we believe, are highly regulated, they can’t take the additional risk that is posed by ongoing management of receivables, inventory, fixed asset valuation, etc. That’s where the ABL facility excels, simply because if you have assets and revenues, those ratios become almost meaningless.
Asset-based loans often offer competitive interest rates because the collateral mitigates risk for the lender.
How Is ABL Different From a Bank Operating Line?
|
Issue |
Conventional bank line |
ABL loan facility |
|---|---|---|
|
Primary underwriting focus |
Cash flow, ratios and overall credit strength |
Collateral quality and borrowing availability |
|
Availability |
Often a relatively fixed limit |
Changes with eligible assets |
|
Financial covenants |
Usually more restrictive |
Often fewer maintenance covenants |
|
Collateral reporting |
Monthly or periodic |
Monthly, weekly or sometimes daily |
|
Field examinations |
Less frequent |
Common |
|
Cost |
Usually lower |
Usually higher |
|
Tolerance for temporary losses |
Limited |
Potentially greater when collateral remains adequate |
|
Growth support |
May be constrained by a fixed cap |
Can expand with eligible collateral |
|
Best fit |
Stable, profitable and bankable companies |
Asset-rich companies needing additional flexibility |
SOME BANKS DO OFFER ASSET-BASED SOLUTIONS FOR BUSINESS CREDIT, INCLUDING ACCOUNTS RECEIVABLE
While it’s a bit of an unadvertised secret that banks in Canada, or at least most of them, offer ABL facilities, the reality is that, more often than not, they are not unlike traditional banking when it comes to facility size, appraisals, reporting, etc
HOW IS THE BORROWING AMOUNT DETERMINED? LOAN TO VALUE RATIO
The asset-based credit line approval amounts fluctuate and are geared toward the constant growth and change in the sum of your A/R, inventory and fixed asset values.
In almost all cases, a strong assessment of these values will be made to ensure you've got maximum borrowing power. A ' borrowing base ' is established for assets such as accounts receivable and inventory, allowing you to drawn down on funds as needed on a day-to-day basis.
Case Study
From The 7 Park Avenue Financial Client Files
Company: ABC Company — an industrial pump and valve manufacturer supplying industrial and municipal clients across Ontario
Challenge: ABC Company had strong order volume but was carrying $1.8M in receivables and raw material inventory that its bank line couldn't adequately support. The business needed more availability but was wary of a facility with reporting demands its small finance team couldn't sustain.
How We Got There: 7 Park Avenue Financial structured a $2.4M ABL loan facility against receivables and eligible inventory, and worked with the client to set a monthly (not weekly) borrowing base reporting cadence tied to their transaction volume, with a semi-annual field exam schedule built in from day one rather than negotiated after the fact.
Results: ABC Company increased available working capital by roughly 60% over its prior bank line, passed its first two field exams with no material findings, and moved to a reduced exam frequency after 18 months of clean reporting history.
Case Study #2
Company
ABC Company, a Canadian industrial distribution business with steady receivables but limited bank credit.
Challenge
Growth stalled because the bank operating line was capped well below the value of receivables and inventory; seasonal orders required more flexible working capital.
Solution — How We Got There
We structured an ABL loan facility that borrowed against eligible receivables and inventory, replacing the constrained bank line with a collateral-driven revolver.
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Completed asset appraisal and set advance rates aligned with ABC’s turnover.
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Implemented simple monthly borrowing base reporting and periodic field exams.
Results
ABC Company increased available working capital by roughly 40–60%, funded larger purchase orders without equity dilution, and smoothed cash flow through peak seasons.7parkavenuefinancial+2
Asset-Based Lending (ABL) involves leveraging a company's assets, such as accounts receivable, inventory, and equipment, to secure financing.
Key concepts include understanding common asset types, recognizing benefits such as improved cash flow and growth potential, and grasping the fundamental differences between asset-based lenders and traditional lending.
The ABL lending process for an asset-based line of credit typically involves asset valuation to determine the maximum loan amount based on asset lending values, underwriting, and ongoing monitoring. Understanding the risks, such as potential asset liquidation, is crucial to using ABL effectively.
CONCLUSION
Asset-based lending (ABL) is not merely financing for companies rejected by banks. It can provide a scalable revolving facility based on eligible receivables, inventory and equipment—so borrowing capacity can increase as the business grows.
Asset based lenders are the ultimate working capital solution for your business capital needs. That borrowing base certificate can include company-owned real estate with an equity component, further adding to your borrowing ability! It is the power of financing the balance sheet.
Call 7 Park Avenue Financial to ensure you have access to business credit and asset-based loans that Canadian banks may not offer.
We are a trusted, credible, and experienced Canadian business financing advisor who can assist you with your borrowing needs.
7 Park Avenue Financial originates ABL loan facilities
FAQ/FREQUENTLY ASKED QUESTIONS
What is Asset-Based Lending?
Asset-Based Lending (ABL) is a financing method in which businesses use their assets, such as accounts receivables or inventory, as collateral to secure loans.
How does ABL differ from traditional lending?
ABL focuses on the value of a company's assets, whereas traditional lending often relies on creditworthiness and cash flow for loan approval. ABL is a covenant light structure compared bank covenanats
What types of assets can be used in ABL lending?
Common assets used by asset-based lenders in ABL lending include accounts receivable, inventory, machinery, equipment, and bridge loans on physical assets such as commercial real estate. Fixed assets facility limits will sometimes depend on appraisals.
What are the benefits of ABL lending?
The asset based lender provides improved cash flow, flexibility in financing, and the ability to leverage existing assets or a pledged asset for business growth.
What are the risks associated with ABL lending?
The primary risk of ABL lending is the potential liquidation of assets if the borrower defaults on the loan.
Statistics
- Advance rates on eligible receivables commonly fall in the 80–90% range across Canadian ABL lenders
- Inventory advance rates typically range from 30–65% depending on inventory type and liquidation value
- ABL facilities are generally sized from $250,000 up to $25 million or more, covering small businesses through mid-market borrowers
- Facility approval and close typically move faster than a comparable bank facility once collateral reporting is in place, largely because underwriting centers on asset value rather than multi-year cash flow history
Citations
Business Development Bank of Canada. "Asset-Based Lending: A Financing Option for Growing Businesses." BDC. https://www.bdc.ca
7 Park Avenue Financial."Asset Backed Lending in Canada: ABL Loans Guide".https://www.7parkavenuefinancial.com/business-collateral-loans-asset-based-loan-abl.html
Canadian Federation of Independent Business. "Financing and Cash Flow Reports." CFIB. https://www.cfib-fcei.ca
Export Development Canada. "Working Capital and Asset-Based Financing Resources." EDC. https://www.edc.ca
Medium."ABL Loan for Business"https://medium.com/@stanprokop/abl-loan-for-business-your-assets-your-capital-your-growth-937f8e0a35a6
Innovation, Science and Economic Development Canada. "Financing Statistics for Canadian Businesses." ISED. https://www.ic.gc.ca
