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Say Goodbye to Business Credit Cash Flow Challenges: Exploring Asset-Based Financing in Canada
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Unlock Financial Flexibility: Discover the Advantages of Asset-Based Financing Business Credit Loans
Asset based financing is a unique part of the business finance landscape in Canada, providing flexible financing to businesses of all sizes and industries. Let's dig in!
INTRODUCTION
Maintaining a robust cash flow is a cornerstone of any business's success in today's swiftly changing Canadian business financing environment. However, accessing conventional financing can pose a hurdle for many firms for many different reasons.
Here, asset-backed lending presents a solid solution. Asset-backed lending utilizes a unique methodology to address liquidity issues by using a firm's physical assets like inventory, machinery, and accounts receivable as collateral. This flexible funding solution provides firms with the necessary capital to cater to immediate liquidity requirements, finance growth strategies, and capitalize on new market prospects.
Through asset-backed lending, enterprises can monetize the worth of their assets, enhance their financial adaptability, and confidently maneuver through liquidity challenges in their business.
Business owners and financial managers want to know how they can utilize these types of loans as a great solution for cash flow and working capital purposes to fund their business.
UNDERSTANDING ASSET BASED FINANCING
Asset-backed lending is a financial solution enabling companies to obtain loans or credit lines by pledging their assets as security.
Unlike conventional funding methods that heavily depend on a firm's credit score, asset-backed lending considers the company's asset value. Businesses can exploit assets like inventory, machinery, and accounts receivable to generate capital to overcome liquidity problems and spur expansion.
This method of financing proves especially advantageous for entities that fail to meet the rigid standards set by traditional financiers. These include newly established enterprises, companies with minimal business credit history, or those operating in sectors subject to seasonal variances.
By collateralizing tangible assets, asset-backed lending offers an alternate financing route that bridges liquidity shortfalls and sustains business activities during difficult periods.
WHAT DOES ASSET BASED LENDING MEAN FOR YOUR BUSINESS
The reality is that asset-based lending means different things to different business folks. The truth is that it's part of the nontraditional method of financing a business in Canada that might be temporary or in some cases, more permanently challenging.
Although the owner/manager might think their need is somewhat unique, financing needs typically revolve around sales growth or key balance sheet issues that need a fix. We've never missed the true irony around how fast-growing or even explosive sales can become a huge financial and operational challenge, as many have experienced.
Fixed assets are often a key part of an ABL lending solution for additional liquidity. The equipment your company requires or has can be in a broad range of asset categories. Owners/financial managers are looking to acquire new or used equipment or refinance existing assets via better high leverage - That 'refinancing' can often be part of a 'sale leaseback', a key category in asset-based lending. That strategy allows owners to 'free up' equity in assets and harness that equity via new cash flow and working capital.
How does that sale-leaseback strategy work for certain physical assets? It's quite simple. Although business owners often have a strong sense of what a company's assets are worth, that is not what counts. It all usually comes down to an appraisal being done on the equipment, and when the appraisal comes back, a loan-to-value ratio decision is made against the appraised value.
For example, a lender may grant for a specific asset up to 90% of the face value for a security, 75% for residential real estate, or 60% if it is commercial. Real estate ABL is often a term loan structure with various options available, such as interest-only, annual renewals, prepayment conditions, etc
Usually, business owners can expect to receive a fairly high percentage of the liquidation value of the equipment and achieve the maximum loan amount. Still, this amount tends to be less than the asset's fair market value. It is essential to understand that the asset has to be free and clear of any liens or charges. In cases where a small amount might be owed to another lender, that amount can be paid out and bundled into the new loan transaction.
A key point in equipment refinancing is that the commercial lender will emphasize both the asset value and your firm’s ability to prove cash flow for repayment.
There is a huge difference in how an asset-based lender looks at your asset and advances funds against it, versus a Canadian chartered bank.
There is technically no limit on the amount that can be advanced against equipment, although most transactions we see in the marketplace are less than 5M dollars.
In summary, asset-based financing means different things to different people. One of the key context areas of this type of financing is equipment financing - yet numerous other forms of key categories in asset-based lending play a key part in solutions your firm might require and have access to.
TYPES OF ASSET-BASED FINANCING AVAILABLE TO CANADIAN BUSINESSES FOR OPTIMAL WORKING CAPITAL
Accounts Receivable Financing solutions: Factoring, Confidential Receivable Finance Via factoring companies
Inventory Financing Loans
Tax Credit Financing (Primarily SR&ED)
Cash flow loans
Equipment Leasing
Royalty Financing
Bridge Loans
HOW ASSET-BASED FINANCE SOLUTIONS HELP OVERCOME THE CASH FLOW CHALLENGE
Asset-backed lending can be a lifesaver for firms grappling with liquidity problems. By using assets like stock, machinery, and accounts receivable, companies can acquire the necessary capital to balance their payable and receivable accounts, ensuring seamless business operations.
A principal advantage of asset-backed lending is its adaptability. Unlike traditional funding options, asset-backed lending is not restricted to a particular purpose.
Companies can utilize the funds obtained through asset-backed lending for diverse objectives, like acquiring stock, covering payroll expenses, investing in new machinery, or financing promotional campaigns. This flexibility enables companies to meet immediate liquidity needs while supporting long-term growth plans.
Furthermore, asset-backed lending can aid companies in bolstering their financial stance. By capitalizing on the value of their assets, companies can liberate otherwise occupied capital. This enhanced financial flexibility can be used to negotiate more favourable terms with suppliers, capitalize on early payment discounts, or invest in strategic initiatives that improve profitability.
CASE STUDIES :
Case Study 1: Manufacturer
A manufacturing firm confronted a severe liquidity crunch resulting from delayed client payments and the necessity to procure new machinery to satisfy escalating demand. The firm opted for asset-based financing, employing their accounts receivable and machinery as security. This decision facilitated them in acquiring a significant credit line, enabling them to purchase the needed equipment and bridge the liquidity gap. Thus, they could fulfill orders, augment their production capacity, and ultimately expand their operations, demonstrating how asset-based financing solutions can aid in overcoming financial hurdles and fostering business growth.
Case Study 2: Retailer
During a seasonal downturn, a retail outlet encountered liquidity issues. They held a large stock but suffered from limited cash flow due to declining sales. The retail outlet addressed its financial needs via asset-based financing, using its inventory as collateral.
The capital obtained allowed them to sustain their operations, settle supplier invoices promptly, and initiate marketing strategies to stimulate sales during the slow season. Asset-based financing's financial flexibility allowed the retail outlet to successfully steer through the liquidity obstacles and prepare for expansion, highlighting its effectiveness as a financing solution during challenging times.
SUMMARY OF BENEFITS OF ASSET BASED ' ABL ' FINANCING
Asset-backed financing provides numerous advantages for businesses dealing with liquidity issues:
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Access to Capital: Unlike traditional financing options involving protracted approval procedures, asset-based financing enables firms to leverage their existing assets to procure funding rapidly. This becomes particularly beneficial when urgent liquidity needs crop up, or firms aim to capture new market opportunities.
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Enhanced Financial Flexibility: Asset-based financing doesn't rely solely on a company's creditworthiness. Instead, it focuses on the value of a pledged asset as collateral. Liquid assets such as accounts receivable are a large part of asset-based credit lines. This gives firms with imperfect credit histories or limited creditworthiness a chance to access funding based on their assets' strength. It also provides a pathway for businesses to realize the value of their assets and free up capital that could otherwise be locked up and underused.
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Support for Business Growth: An asset-based loan can facilitate business expansion compared to traditional bank loan financing or an unsecured loan/business credit line / revolving line of credit. By offering access to capital, firms can invest in growth strategies, such as enlarging operations, introducing new products or services, or penetrating new markets. This ability to finance growth initiatives is vital for businesses striving to stay competitive and seize market opportunities.
CONCLUSION
Companies often confront liquidity issues in the present economic environment and might find conventional financing avenues inadequate. Here, asset-backed lending provides an intelligent resolution. By collateralizing tangible assets, companies can obtain the necessary capital to alleviate liquidity problems, finance growth strategies, and navigate uncertain periods.
Asset-backed lending has numerous advantages, including rapid capital access, enhanced financial adaptability, and backing for business expansion. Companies can make enlightened decisions about their funding requirements by comprehending the range of assets that can be collateralized, the procedure to secure asset-backed financing, and the considerations when selecting a financier.
Although asset-backed lending can transform many companies' financial situations, exploring alternative funding options and considering what best aligns with your company's distinct needs and objectives is crucial. By diligently scrutinizing your choices and collaborating with the appropriate finance partner, you can surmount liquidity problems and set your company up for enduring success in the current market.
Whether your firm is growing quickly, has restructuring issues, or other unique situations, you will benefit from call to 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor with a track record of success to help with your growth opportunities via asset-based lenders in Canada.
FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION
What is asset based finance?
The asset-based lending industry provides commercial finance & financing via revolving lines of credit and term loans to small and mid-sized companies and larger corporations by using their collateral as security for short-term needs and day-to-day operations funding.
Accounts receivable, inventory, equipment, and real estate are collateral to back the loan for a line of credit or other business loan structure - this provides greater credit availability for companies that might not meet the credit history requirement of traditional financial institutions such as banks that offer unsecured loans. Lower interest rates for asset-based loans are commensurate with overall credit quality.
What are Common Challenges Faced by Businesses When Accessing Financing
In today's commercial landscape, companies encounter several hurdles that can affect their liquidity:
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Unpredictable Customer Payment Cycles: Late or deferred customer payments can disrupt a firm's cash flow and make meeting financial obligations difficult. Additionally, companies operating in seasonal industries may face periods of booming demand followed by slower times, which can strain liquidity.
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Limited Traditional Financing Options for SMEs: Small and medium-sized enterprises often struggle to access bank loans due to their limited credit history or lack of collateral. This can make securing essential funding to address liquidity issues or finance growth strategies challenging.
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Economic Uncertainties and Market Volatilities: Changes in market conditions, alterations in consumer behaviour, or supply chain disruptions can all bear significant financial implications for businesses.
What Are Types of Assets That Can Be Used for Financing
Asset-backed financing can be obtained using a variety of physical assets owned by a company. The most frequently used types of assets for this kind of financing include:
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Inventory: Firms can employ their stock as collateral to secure financing. This is particularly advantageous for companies with substantial inventory volumes or seasonal inventory fluctuations.
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Equipment: Financing that uses machinery, vehicles, or other apparatus as collateral is known as equipment financing. This is especially beneficial for sectors that heavily depend on specialized equipment.
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Accounts Receivable: Also referred to as invoice financing, accounts receivable financing allows firms to use their outstanding invoices as collateral. This enables businesses to access funds quickly rather than waiting for their customers to settle invoices.
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Real Estate: Firms that possess commercial properties or real estate assets can leverage them as collateral to obtain asset-based financing. Real estate collateral can grant businesses access to larger financing amounts.
The specific assets eligible for collateral may vary based on the financier and the industry in which the firm operates. Businesses must comprehend the particular prerequisites and constraints of different asset-backed financing alternatives.
What Is The Process of Obtaining Asset Based Financing
The procedure for acquiring asset-based financing generally involves several crucial stages. While specifics can fluctuate based on the financier, the overall process can be broadly outlined as:
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Application: The firm applies for asset-based financing by applying a financier. The application usually comprises details about the company, its financial status, and the assets designated as collateral.
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Asset Evaluation: The financier evaluates the worth and quality of the assets employed as collateral. This assessment aids in determining the maximum sum that can be procured.
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Due Diligence: The financier performs due diligence on the company, reviewing its financial statements, credit history, and industry prospects. This step assists the financier in assessing the comprehensive risk associated with extending financing to the company.
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Proposal: Based on the assessment and due diligence, the financier offers a proposal detailing the terms and conditions of the asset-based financing. This includes the loan amount, interest rate, repayment terms, and miscellaneous fees.
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Closing: If the firm consents to the proposed terms, the financier and the firm complete the required paperwork to formalize the financing agreement. This could involve legal documentation, security agreements, and other contractual duties.
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Funding: Once the closing process is finalized, the financier disburses the approved funds to the firm. The firm can utilize the funds to address liquidity issues, finance growth strategies, or fulfill other financial responsibilities.
Alternatives to Asset-Based Financing
While asset-based financing can provide numerous advantages, exploring other financing alternatives that may be more aligned with your business needs is crucial. These alternatives could include:
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Traditional Bank Loans: For businesses with robust credit histories and solid banking relationships, traditional bank loans can offer access to funds at competitive rates. However, these loans often demand collateral and may entail a more comprehensive approval process.
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Business Credit Cards: These can serve as a short-term financing solution to address urgent liquidity needs. While they provide convenience and adaptability, they usually carry higher interest rates than other financing options.
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Trade Credit: This involves negotiating extended payment durations with suppliers. It can assist businesses in managing cash flow by permitting them to delay payments until goods have been sold or services delivered.
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Invoice Factoring: This entails selling your outstanding invoices to a third-party company at a discounted rate in exchange for immediate cash. It can be an effective method to enhance cash flow and evade the wait for customer payments.
Each financing option has its unique benefits and considerations. Hence, businesses must evaluate their particular needs, financial circumstances, and growth targets to identify the most appropriate financing solution.
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