Asset Based Lending Grows in Popularity in Canada

When one of my firm’s customers has their loan called by a Canadian chartered bank recently the firm was placed into the ‘special loans ‘division of the bank. When a firm goes into special loans the bank has to make a decision whether to liquidate the firm or continue supporting the company financially, albeit on a more structured ( and probably smaller! basis . Many Canadian business owners may, or may not, be surprised that my customer, who was a large commercial bakery, was profitable and had a relatively clean balance sheet.
So what was the problem – well the major issue was that the firm was ‘off covenant ‘on some of the key bank ratios that supported the loan.
We migrated this customer to an ‘Asset Based Lending ‘arrangement. This type of facility is, relatively speaking, new in Canada and had its origins primarily in the U.S. asset based financing industry.
More and more firms are migrating to this type of financing facility. We believe it is growing popular because of several factors, primarily two in nature.
1. Many firms are in high growth mode and can’t support traditional bank based financing which is focused on a more ‘ steady as you go ‘ approach
2. The current economic downturn of 2008-2009 has significantly restricted bank and other facilities – customer look for alternatives – Asset based lending is a popular alternative

So what’s ‘ABL ‘(Acronym for ‘asset based lending’) about? It’s all about one word ‘collateral ‘. It’s your assets that are financed, not your ratios! So firms that are service based are generally not the best candidates, other than their receivables, which in fact are one of the key aspects of an ABL facility. Traditionally was being financed is:
Receivables
Inventory
Equipment
Real Estate
Sounds great so far, right? The reality is that an ABL facility is a popular method of financing, but it is clearly 99% of the time more expensive than bank financing. We can as a general statement say that larger and better deals get better rates. The popularity that we speak of in our article in part revolves around the fact that the ABL facility works even for companies that are losing money or have some key problems.

In general some fairly standard metrics are applied to what is financed, and that is all of your receivables, a significant amount of inventory, and the liquidation value of your equipment. We can’t stress that those are general comments with respect to how much is financed in each asset category.

Asset based financing rates in Canada range from 9% per annum to sometimes 2% per month; it really depends on the size of the facility and the overall credit quality of the Canadian firm.

So again, why gaining in popularity. Well we spoke of those bank covenants, and they don’t exist in our ABL facilities, we simply finance assets. Also, asset based lenders, the good ones, are very experienced in cyclical industries, they understand seasonality, and are usually exceptionally experienced in the different asset categories we spoke of.

We spoke of some of the negative attributes of this type of financing – and in general they are:

Higher rates
ABL lenders can be more aggressive when terminating a facility they do not like
ABL is gaining in popularity and is no longer considered a ‘last resort ‘option – We would also note that some of Canada’s well known names in business are financed in this manner. Quite frankly some firms just don’t want to spend all their time talking to traditional financiers with whom they might not be successful, the premium paid can be worth the time alone.
Many companies migrate to an asset based lending facility, and when their financials improve they are once again, believe it or not, wooed by the banks that shunned them previously.
In our overview of ABL popularity we won’t cover who the players are in the Canadian industry, other than commenting they range from some well known corporate names to smaller boutique firms that are privately funded.

So whether your Canadian business is troubled or challenged, or if you have a unique merger or acquisition opportunity that is asset based you should clearly be talking to an asset based lending expert familiar with the Canadian marketplace .
Oh, and what happened to my customer who was in special loans, went to an asset based lending facility.. Well they were courted by another Canadian chartered bank and its business as usual!