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Transforming Business Finance with Asset-Based Lending Non-Bank Revolving Facilities
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Capitalizing on Your Assets: The Power of Asset-Based Lending and Non-Bank Revolving Facilities
Asset based lines of credit are a unique way for Canadian business owners to achieve operating liquidity outside the chartered bank environment. How does the asset-based loan work compared to other types of funding, and is it right for your business to address issues in cash flows? Let's dig in!
INTRODUCTION
Are you a business owner aiming to optimize your cash flow and expand your business? If that's the case, asset-based lending might be the solution you've been seeking. In today's highly competitive business environment, conventional loan options might not always align with your financial requirements.
This is where asset-based lending " ABL' comes into play. By utilizing your company's assets, such as accounts receivable, inventory, or equipment, you can obtain the working capital necessary to drive your growth.
Unlike traditional lending, ABL emphasizes the value of your assets rather than solely relying on your creditworthiness. As a result, it presents a viable alternative for businesses with less-than-perfect credit. In this article, we will explore the advantages of asset-based lending and how it can assist you in strategically managing your cash flow while bolstering your liquidity.
Understanding Cash Flow Challenges for Businesses
Maintaining a healthy cash flow is vital for business success, yet many businesses struggle with effective cash flow management. One common challenge is the timing gap between accounts receivable and accounts payable. While you've completed the work or delivered the product, it takes considerable time for customers to settle their invoices, straining your working capital as you need to cover expenses and payroll.
Another hurdle is the uncertainty of sales and revenue, influenced by seasonal variations, market trends, and unforeseen costs. These factors make it challenging to plan for the future. Traditional lending options may not offer the flexibility and expedited access to funds businesses need to navigate these obstacles.
Asset-Based Lending vs. Traditional Lending
While the traditional bank loan and business line of credit established options for borrowing, they may not always be the ideal choice for businesses seeking to optimize their cash flow. Traditional lenders heavily rely on owners' business and personal credit scores and healthy financial statements to evaluate creditworthiness. This can pose challenges for companies with limited operational history or previous financial difficulties and cannot meet traditional bank lending standards for approval.
In contrast, asset-based lenders offer an alternative approach by prioritizing the value of your assets over your credit history in the asset-based lending facility. This makes it a more accessible option for businesses that may not meet the criteria for traditional loans. Furthermore, asset-based lending provides greater flexibility in loan amounts and repayment options, enabling companies to customize the loan to their specific requirements.
Demystifying Asset-Based Lending and Non-Bank Revolving Facilities
Asset based lending, aka 'ABL' financing in Canada, is not debt financing, and is also not cash flow based, and should not be confused as such. It is operating and working capital financing via revolving facilities.
Asset based lines of credit are used by medium-sized firms and larger firms throughout Canada and are growing in popularity when compared with traditional commercial banking. They are inappropriate and difficult to structure for small firms and start-ups. In those two cases, it might be more advisable for firms with those overall credit ratings to focus on straight accounts receivable financing solutions or consider a working capital term loan.
One example is factoring for firms without significant sales or physical assets / fixed assets on the balance sheet. To learn more about factoring, click here.
A traditional lender may take measures to protect themselves against loan losses if they lend money, such as using the ability to increase interest rates - In 'ABL, ' your assets minimize lender risk.
As a credit facility, Canadian asset-based lines of credit are structured around some of the following parameters- including a focus on a ' covenant light structure.'
- Industry fundamentals such as asset quality and perceived industry risk
- Your general credit profile
- Size of the financing facility and who is offering the facility (the industry is somewhat fragmented in Canada)
We noted your firm's 'general credit profile' as a key consideration. Probably the most surprising of our clients are those who now understand that while overall financial statement strength is one factor in a financing facility such as this, it is not the most important factor. Why? That is because an ABL facility focuses more on assets than operational performance.
We are not telling clients they can get an asset-based line of credit if their firm is in a serious death spiral. However, if your firm has challenges such as temporary operating losses or an extenuating circumstance setback, you still are a strong candidate for asset-based financing business credit.
HOW DOES THE ABL FACILITY WORK
How do these facilities work? Very simply, it's a similar version of a bank operating line of credit via traditional financial institutions, but without many of those restrictions, covenants, additional collateral requirements, etc.
Receivables, inventory, and sometimes equipment and real estate are margined to their proper values. Typically that is receivables at 80-100% of invoice face value, inventory at 40-80%, and equipment and real estate per acceptable appraised values.
Are there any drawbacks to such a facility - we can think of two discussion points, and they aren’t necessarily hard and fast disadvantages for many companies- those two points are:
- Pricing
- Reporting
Asset-based lines of credit traditionally have higher pricing than bank lines, and you are more often than not required to do detailed reporting of A/R, inventory values, etc., every month. We point out to customers that additional reporting can sometimes benefit you as it helps you better understand your business!
In summary, asset-based lines of credit are financing facilities that provide alternative funding to typical banking-type arrangements. They almost always give you more capital, you do not incur debt, and in many cases, can help your firm regain its financial footing or grow more quickly.
CASE STUDIES
Case Study 1: Manufacturer
ABC Manufacturing is a medium-sized company specializing in the production of industrial equipment. Despite having a solid reputation in the industry and a steady stream of orders, ABC Manufacturing faced a common challenge: limited cash flow due to extended payment terms from their clients and the need to maintain sufficient inventory levels.
Due to stringent credit requirements, traditional bank loans were not readily available to ABC Manufacturing. Recognizing the potential of their valuable equipment and accounts receivable, ABC Manufacturing approached an asset-based lender for financing. The lender assessed the company's assets, including their production machinery, inventory, and outstanding invoices, and offered them an asset-based loan.
With the asset-based loan, ABC Manufacturing could leverage its machinery and inventory to secure the necessary working capital. The loan allowed them to purchase raw materials, cover operating expenses, and invest in new equipment. As a result, ABC Manufacturing was able to fulfill large orders, expand its production capacity, and improve its cash flow management. The flexibility of asset-based lending helped the company navigate their financing challenges and support its growth trajectory.
Case Study 2: Distributor
XYZ Distributors is a wholesale distribution company specializing in electronics products. As the business grew, XYZ Distributors faced a significant challenge in managing their cash flow effectively. The company often had to make large upfront payments to suppliers but had to wait for extended periods for their customers to pay their invoices.
XYZ Distributors sought a solution to their cash flow gap and turned to asset-based lending. The company had a substantial amount of valuable inventory and accounts receivable that could be leveraged to secure financing. An asset-based lender assessed their inventory and outstanding invoices, offering them an asset-based line of credit.
With the asset-based line of credit, XYZ Distributors had access to a revolving source of working capital directly tied to the value of their inventory and accounts receivable. They could borrow against their eligible assets to finance operations, pay suppliers promptly, and bridge the gap between their payments and collections.
Asset-based lending gave XYZ Distributors the flexibility and liquidity necessary to support their operations and growth plans. By using its assets as collateral, the company overcame their financing challenges. It reduced the strain on its cash flow, enabling them to seize new business opportunities, expand product lines, and strengthen its market position as a distributor.
WHAT ARE COMMON MISCONCEPTIONS ABOUT ASSET BASED LENDING
Misconceptions about Asset-Based Lending include :
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Only for businesses in financial distress: Asset-based lending is not limited to businesses facing financial difficulties. It is a strategic tool for growth and expansion, offering working capital to seize opportunities and invest in new initiatives.
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Suitable only for large businesses: Asset-based lending benefits companies of all sizes, including small and mid-sized businesses. It can be particularly advantageous for smaller businesses that may not qualify for traditional loans due to limited operating history or credit challenges.
KEY BENEFITS OF ASSET BASED LENDING
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Unlock the value of your assets: Asset-based lending enables businesses to convert assets like accounts receivable, inventory, or equipment into working capital, providing access to funds as needed.
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Asset-based evaluation: Unlike traditional lending, asset-based lending considers the quality and value of your assets rather than solely relying on creditworthiness. This makes it a viable option for businesses with less-than-perfect credit or those in higher-risk industries in the borrowing company's operations for firms with collateral value assets.
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Flexibility in loan structure: Asset-based loans offer flexibility, allowing businesses to tailor the terms and repayment schedules to their specific needs. This flexibility provides better control over cash flow and the ability to adapt to market changes. Financial covenants are typically not part of an asset-based credit line compared to the types of covenants and balance sheet ratios banks require.
CONCLUSION - ASSET BASED FINANCE
Optimizing cash flow is crucial for success and growth in today's competitive business environment. Asset-based lending offers a strategic solution to enhance cash flow, boost liquidity, and drive business growth.
Regardless of creditworthiness, leveraging company assets allows access to necessary working capital.
Asset-based lending provides the flexibility, speed, and accessibility that traditional lending options may lack, making it an invaluable tool for maximizing cash flow. Business owners seeking financing solutions aligned with their growth goals should consider asset-based lending as a strategic approach to fuel success and efficiently manage funding needs.
Asset Based Lending is already in use for many decades. Asset-based loans are generally designed to protect booming businesses from financial distress. Still, some Canadian banks have been slow on the uptake, and ABL funding largely remains not marketed by them either.
However, there has recently been an increase among companies wanting more capital than traditional bank lending offers.
Talk to 7 Park Avenue Financial, a trusted, credible, experienced financing expert for information on this unique type of financing for the needed capital to run and grow your business.
FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION
What is asset-based lending?
Asset-based lending allows companies to borrow money using their assets as collateral. Asset-based loans are secured by collateral. A company's assets such as the business's accounts receivable, inventory, machinery and equipment, real estate and potentially even intellectual property can be financed. Interest rates tend to be higher in asset-based lending but provide more access to business credit.
The ABL lender establishes A monthly borrowing base, allowing a firm to draw down funds as needed. Firms experiencing rapid growth or those can cant meet the demand of the financial covenant requirements of banks can benefit from this type of Canadian business financing.
Firms expanding into global markets or taking advantage of an economic downturn can also use this credit line.ABL facilities are typically not term loans but are structured as revolving facilities- providing greater liquidity to borrowers.
What is cash flow lending?
Cash Flow Lending is a popular and effective way to receive business funding versus traditional bank lenders. Not all borrowers have sufficient collateral, but that is not necessary with unsecured loans via cash flow-based lending! Lenders look at projected revenues, the company's cash flow,as well as the overall credit rating of the business.
This type of financing has many advantages: companies get more money faster since there isn't any need for security, and low rates are often associated with cash flow loans for firms that qualify under a bank's lending process.
How Does A Business Maximize Cash Flow with Asset-Based Lending
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Quick access to working capital: Asset-based lending provides swift access to funds, allowing businesses to seize opportunities and meet financial obligations promptly, unlike traditional lending with lengthy approval processes.
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Flexibility to borrow against various assets: Asset-based lending enables businesses to leverage different types of assets, such as accounts receivable, inventory, or equipment, to access necessary funds. This flexibility optimizes cash flow according to unique business requirements.
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Bridging the gap between accounts receivable and accounts payable: Asset-based lending helps businesses manage the timing mismatch between accounts receivable and accounts payable. By utilizing the value of accounts receivable, companies ensure a steady cash flow to cover operational expenses, payroll, and other financial obligations. This is particularly advantageous for those with extended payment cycles or industries affected by seasonal fluctuations.
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