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From Collateral to Cash: How Asset-Based Loans are Revolutionizing Business Financing in Canada
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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:
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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.
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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.
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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
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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.
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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:
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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
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Diverse Range of Businesses: A broad spectrum of companies can benefit from ABL due to their asset-rich nature.
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Manufacturing Businesses: Companies like commercial truck trailer manufacturers facing economic slowdowns that impact demand. Capital is essential to navigate volume dips and modernize production.
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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.
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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
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Enhancing Online Presence: ABL assists retailers in funding operations and online improvements during challenging times, bolstering their ability to adapt.
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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.
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Stable Small and Mid-Sized Companies: Typically, small and mid-sized companies possessing valuable physical assets are frequent users of asset-based borrowing.
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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:
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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.
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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.
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