Methods of Financing Working Capital In Canada – Leveraging Current Assets

 

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Unlocking the Secrets of Successful Working Capital Financing

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Financing Working Capital: Unlocking the Power of Current Assets  | 7 Park Avenue Financial

 

 

Beyond Traditional Loans: Innovative Ways to Finance Your Working Capital

 

 

 
The Irony of Business Success  

 

Isn't it ironic that business can be actually quite good... Or even great..? This then becomes a problem only because in business survival and growth is all about  financing working capital... Turning those current assets of your firm into loans or monetization facilities for cash flow.

 

The Challenges of Business Liquidity

 

In a perfect world, Canadian business owners want to be able to meet their day to day operations, make any loan or lease payments and be able to plan to pay bills for upcoming expenses or growth. How could one statement like that induce so much stress?

A lot of that planning comes from the working capital current assets category of your financials, simply speaking your liquid assets such as cash on hand, receivables, and inventories if, in fact, your business has inventory. (Some services businesses just have A/R).

 

 

How does efficient working capital management affect a company's profitability? 

 

Efficient working capital management ensures that a company has a balanced mix of short-term assets and liabilities, allowing it to meet its obligations while investing in growth opportunities.

 

By reducing holding costs of inventory, optimizing collection periods, and managing short-term debts wisely, a company can improve its cash flow and ultimately enhance profitability. Poor management, conversely, can lead to missed opportunities, higher financial costs, and potential insolvency.

 

Working capital ratios, such as the current ratio and the quick ratio, are financial metrics used to assess a company's liquidity and short-term financial health.

 

The current ratio is calculated as current assets divided by current liabilities, while the quick ratio excludes inventories from current assets. These ratios provide insights into whether a company can cover its short-term obligations using its short-term assets. Consistently low ratios might indicate liquidity issues, whereas very high ratios might suggest inefficiencies in using available resources.

 

What external factors can influence a company's working capital requirements?

 

Several external factors can impact a company's working capital needs. These include:

 

1. Economic Conditions: In a recession, customers might delay payments, increasing accounts receivable, while suppliers might demand quicker payments.
2. Industry Trends: Seasonal industries might require more working capital during peak seasons.
3. Interest Rates: High-interest rates can increase the cost of borrowing, affecting the decision to finance working capital through debt.
4. Supplier Terms: If suppliers offer favourable terms, a company might require less immediate liquidity.
5. Competitive Landscape: Intense competition might require businesses to hold more inventory or offer lenient credit terms, increasing working capital needs via  the company's ability to do so

 

Recognizing these factors helps businesses anticipate changes in working capital requirements and adjust their strategies accordingly to make short term investments in the business

  
Sources of Working Capital  

Small and medium-sized businesses in Canada rely on either capital from their owner's personal resources, or their decision to take on loans and debt of some sort.

But what type of loans makes sense when it comes to liquidity? Perhaps a better rephrasing of that question would be 'What is good working capital debt?' In our personal credit lives, we think of good debt, i.e. a mortgage, and bad debt 'credit cards'!

Equity vs. Debt in Financing

 

Naturally considering new ownership or additional equity in your company or business (taking in a partner, etc.) is simply a dilution in the long run and somewhat downsizes the overall incentive for all owners to grow the firm.

And when it comes to debt the amount of 'debt' or loans your firm can take on is certainly often limited relative to your own current financials and the state of borrowing in Canada, which vacillates from great to not great as you may have noticed!

 

  Solutions for Working Capital Constraints 

 

So, what's the solution? Is financing working capital the way to go? (As opposed to term loans and more debt). It’s not as complicated as you think. And it all comes back to our friends, those two guys known as 'current assets'!

A large part of working capital financing in your business can come from yourself. Real basics such as ensuring you aren’t paying your payables before you're collecting your receivables... if you're doing that you're simply creating a working capital shortage that you have self-imposed.

And let’s discuss your solutions for working capital constraints. We get a huge kick out of receiving newsletters from banks that focus on how to manage your cash surpluses when they are writing about working capital and cash flow. We haven’t had one client come in today with a cash surplus problem, but it's only noon...

 
Practical Solutions to Manage Working Capital 

 

Canadian business owners and financial managers challenged with financing working capital have a solid handful of solutions. Naturally in a perfect world (you mean it's not?), you would prefer to not take on a term loan for permanent working capital. But back to that perfect world... that might mean you have an overdraft or bank line of credit. For many small and medium-sized businesses that simply is not attainable - or if it is, it’s not quite enough.

Real-world solutions for financing working capital and current assets without loans involve what we call the monetization or cash flowing of those current assets, Which typically is a working capital facility, non-bank in nature (yes they are available and exist!) that allows you to draw daily, as needed on your a/r and inventory in the form of a business line of credit. Larger facilities of this nature are termed 'asset-based lines of credit' - we call them ‘ABL’s... and they often are superior to bank facilities for a lot of different reasons.

 

Alternative Working Capital Solutions 

Other working capital solutions, but nonetheless real, are financing your tax credits, purchase order finance, or securitization of your contracts or receivables.

 

  

Key Takeaways  

 

Working capital is the difference between a company's current assets (like cash, accounts receivable, and inventory) and current liabilities (like accounts payable).


Importance: It represents the funds available to a business for day-to-day operations. A positive working capital indicates a company can cover its short-term liabilities with its short-term assets.

Role of Current Assets:


Current assets are assets that are expected to be converted into cash or used up within one year, including cash, accounts receivable, and inventory.

They are crucial liquidity indicators. Ensuring these are efficiently managed means businesses can quickly access cash.

The Need for Financing Working Capital:

Businesses often require more liquid funds than on hand, especially during growth or seasonal fluctuations.

Financing provides the necessary funds to keep operations running smoothly without disruptions due to cash flow gaps.


Main Methods of Financing Working Capital:

The common ways include short-term loans, bank overdrafts, accounts receivable financing, and asset-based financing.

Understanding these methods gives insight into how businesses can maintain liquidity and seize growth opportunities without compromising operational efficiency.

Risks and Benefits of Financing:

While financing provides immediate liquidity, it also introduces debt which comes with repayment obligations.

Businesses must balance the benefits of immediate liquidity against the costs and obligations of taking on debt to ensure long-term financial health while accessing additional working capital and cash flows

    

Conclusion    

 

Call 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor on the right method of leveraging cash flow from your assets and business. Today would be a good timeframe!

 

  

FAQ: FREQUENTLY ASKED QUESTIONS  / PEOPLE ALSO ASK  / MORE INFORMATION  

 

 

What exactly is "working capital" in the context of a business?

Working capital refers to the difference between a company's balance sheet such as cash,  marketable securities, accounts receivable, and inventory) and subtracting current liabilities (such as accounts payable and accrued expenses).  Fixed assets are not a part of the calculation Net working capital represents the short-term available funds a business has to support its daily operations and meet its financial obligations. Business owners should understand how to calculate working capital formula and the working capital ratio.

Why is the financing of working capital important for businesses?

Financing working capital is crucial because businesses, especially growing ones, often require more liquid funds than they have readily available. Ensuring adequate working capital helps businesses maintain smooth operations, cover short-term debts, and invest in opportunities, without the constant worry of running out of cash and achieving a negative working capital position.

How are "current assets" different from other assets in a business?

Current assets are short-term assets expected to be converted into cash or used up within a year. This includes cash, accounts receivable, and inventory as part of the company's short term liquidity.In contrast, long-term assets, like property, plant, and equipment, are used over longer periods and aren't readily converted to cash.

What are some common ways businesses can finance their working capital to maintain a company's financial health?

Businesses can finance their gross working capital through various methods, such as bank overdrafts, short-term loans, trade credit, factoring or accounts receivable financing, and asset-based financing. The best method to generate cash often depends on the business's financial health, industry, and specific needs around the company operating cycle. Financial modeling and cash flow forecasts are important tools in effective working capital management and understanding of the cash flow statement.

Isn't taking on debt to finance working capital risky for a business?

While any form of debt or long term debt  comes with inherent risks, when managed prudently, debt can be a beneficial tool for a business. Financing working capital allows businesses to seize growth opportunities, manage cash flow gaps, and handle seasonal variations in revenues. The key is to ensure that the cost of the debt is outweighed by the benefits it brings, and that the business has a clear strategy for repayment.


 

Straight Talk On Why Asset Based Lines Of Credit Are Alternatives To Debt Financing

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Asset Based Lines of Credit: A Smarter Business Financing Option | 7 Park Avenue Financial

 

Asset Based Lines of Credit as a Business Financing Solution and Bank Alternative

 

Canadian business owners and financial managers continue to hear about newer forms of business financing in Canada, mainly asset based finance / asset based lending, and, even more remarkably, an asset based line of credit facility.

 

 

Understanding Asset Based Finance 

 

Clients always ask us the same thing - Is this a form of debt financing, and exactly what is the difference between this and a Canadian chartered bank facility? Let’s examine those questions more closely.

 

In general asset based finance is a broad term which, could refer to several things. We have the same problem with other terms such as working capital and cash flow; they seem to be 'catch-all' phrases for several types of business financing and to make things more complicated they infer different things to different people.

 

Understanding the Terminology

 

 

So let’s be clear, using asset-based lines of credit jargon we are talking about a business line of credit that a Canadian chartered bank offers, and comparing it to the new kid in town, as asset-based line of credit via an independent commercial finance company.

 

 

Utilizing Asset-Based Credit Facilities 

 

When your firm originates an asset-based credit facility, you are in effect, using the liquidity in your current assets (typically those are receivables and inventory) and in some cases, pulling some liquidity out of fixed assets such as equipment and real estate. Yes, you can access cash flow on a revolving basis out of your equipment and land if they are unencumbered.

 

We still probably have most business owners confused because they are asking themselves right now that this seems exactly what my bank does (or what you would like them to do).

 

 The Specialization of Asset Based Lenders 

 

So here’s the difference - asset-based lenders are highly specialized. Unlike many bankers who are generalists, they are highly focused on the actual true underlying value of your assets on an ongoing basis.

 

By ongoing we mean daily, weekly, monthly, not long-term. In the old days (and boy, do we wish the old days were here in business financing), you met with your banker quarterly or yearly, reviewed your financials, reset the credit line, and went on to grow, prosper and succeed.

 

However, business banking has changed in Canada, and accessing the cash flow and working capital you need daily has become more challenging. Banks are regulated by provincial and federal governments around their capital bases and what they can lend on and are subject to concentration issues. By that, we mean that a bank could not choose to lend all its capital to one industry, such as autos, etc.

 

 ABL is The Key Differentiator 

 

So the key differentiator in asset based lines of credit is simply that you are working with a company that is often not regulated and is staffed by a specialist with a firm handle on your asset base.

 

That's where the good news kicks in because you can sometimes access up to 50 -100% more in revolving credit facilities. After all, the advances against receivables, inventory (yes inventory!) and other assets are maximized to the hilt.

 

In essence, you are working with an asset-based finance lender that can provide you with maximum cash flow and work with you to give you vital insights into asset turnover and help you through special situations. Remember, this is not debt financing via term loans or additional debt on your balance sheet; you are monetizing your liquid assets to the maximum.

 

Key Takeaways

Asset-Based Financing Basics: Understanding the fundamental concept that asset-based financing leverages your company's assets, such as receivables and inventory, to secure a line of credit is crucial. This concept is the cornerstone of asset-based lines of credit.

Differences from Traditional Banking: Recognizing that asset-based lines of credit differ from traditional bank financing is essential. Highlight the key distinctions, including the specialization of asset-based lenders, their focus on asset values, and the flexibility they offer.

Asset Monetization: The concept of monetizing your liquid assets, like equipment and land, without adding long-term debt to your balance sheet is critical. This illustrates how asset-based financing provides cash flow without traditional loans.

Benefits of Asset-Based Financing: Understand the advantages, such as higher credit limits via a higher loan to value ratio on the borrowing certificate, more significant cash flow potential, and tailored financing solutions. These benefits make asset-based financing an attractive alternative to conventional banking.

 

Conclusion

 

So there’s the main difference, and if this type of financing for your business seems to make sense for your company's cash flow needs, Call 7 Park Avenue Financial to a trusted, credible and experienced business financing advisor to guide you through the next evolution in Canadian business financing when you choose asset based lending and when you need to secure funding.

 

FAQ

 

What exactly is an asset based line of credit, and how does it differ from traditional bank financing?

An asset based line of credit is a type of business financing that leverages your company's  valuable assets, such as receivables, inventory, and even fixed assets, to provide a revolving line of credit. Unlike traditional bank financing, asset based lenders are highly specialized and focus on the actual value of your assets on a daily, weekly, and monthly basis, allowing for more flexibility and potentially higher credit limits.



How can I access cash flow from assets like equipment and land using asset based lines of credit?

Asset based lines of credit enable you to access cash flow from assets like equipment and land if they are unencumbered. This means you can monetize these assets to their maximum potential without adding additional debt to your balance sheet.


Why should I consider asset based financing over traditional bank loans?

Asset based financing offers several advantages, including the ability to access more substantial credit facilities, increased flexibility, and a focus on maximizing your asset's value. Unlike traditional banks, asset based lenders are not as heavily regulated, allowing for more tailored financing solutions.

Are asset based lines of credit suitable for businesses of all sizes?

Asset based lines of credit can benefit businesses of various sizes, but they are particularly advantageous for businesses with significant assets, such as receivables and inventory. Small, medium, and large businesses can leverage these credit facilities to optimize their cash flow.

How can I get started with asset based financing, and whom should I consult for guidance?

To explore asset-based financing for your business, it's advisable to consult with a trusted and experienced business financing advisor such as 7 Park Avenue Financial. They can help you navigate the nuances of these credit facilities and guide you through the process of securing asset based lines of credit tailored to your specific needs and goals.

 

What are the typical eligibility criteria for businesses seeking asset-based lines of credit?

Eligibility criteria often include having a solid asset base, sales revenues, and a history of general creditworthiness, and the ability to demonstrate consistent asset turnover. The specific requirements may vary among lenders.

Are startups eligible for asset-based lines of credit, or is this financing option primarily for established businesses?

Asset-based lines of credit are typically more accessible to established businesses with a track record of assets and operations. Due to their limited asset base, startups may find it more challenging to qualify.

What potential risks are associated with using asset-based lines of credit for business financing?

Risks can include the potential for higher interest rates compared to traditional loans, the risk of asset devaluation affecting credit limits, and the need to regularly monitor and report asset values.

How can businesses mitigate asset-based financing risks to ensure financial stability?

Mitigation strategies include prudent management of  balance sheet and physical assets, careful selection of asset-based lenders, and maintaining strong financial discipline to prevent over-leveraging for this type of cash flow financing.


What does the application process for asset-based lines of credit typically involve, and how long does it take?

The application process may include a detailed review of your assets, financial statements, and credit history. The timeline can vary but may take several weeks to complete, depending on the complexity of your financial situation. Some companies may simply choose accounts receivable financing facilities.


Are there any specific documents or information businesses should prepare when applying for asset-based lines of credit?

Businesses should be ready to provide documents for asset based loans, such as financial statements, accounts receivable and inventory reports, and details about their assets. Being well-prepared can expedite the application process.




 

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Rise of ABL Finance : A New Era in Canadian Business Funding

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The Challenges of Traditional Bank Financing in the Modern Canadian Landscape

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Unlocking the Power of ABL Financing Loan Revolver in Canada

Exploring Asset Based Lending in Canada

 

Introduction

 

A recent article  by Michael A Cappabianca  / Aird & Berlis was an excellent summary of Asset-based lending post-Covid -

 

In the article, the author maintains that the COVID-19 pandemic deeply affected the global economy, with Canada's asset-based lending (ABL) market experiencing significant changes in demand, credit availability, and overall dynamics.

 

The pandemic led to a notable shift in ABL demand as companies across sectors like manufacturing, retail, and hospitality utilized it to manage liquidity, fund operations, and harness growth opportunities. Pandemic-induced disruptions saw many businesses unable to fulfill financial obligations, leading them to turn to ABL, especially with the lure of record-low interest rates.

 

Cappabianca further maintains the future of the ABL market in Canada holds several considerations. Interest rates play a crucial role, with ABL loans typically having higher rates than traditional cash flow loans; a rise in rates could make ABL less appealing to borrowers.

 

The market is also influenced by volatile asset values due to changes in demand, interest rates, pandemic-related supply chain challenges, and global unrest. Lenders for an asset  based loan must assess risks in sectors like travel while identifying growth in health care and e-commerce areas. Other factors include rethinking supply chain management, adhering to a potentially changing regulatory landscape, and the vital role of ABL in post-pandemic business recovery.

 

As summary, the author maintains that despite the challenges brought about by the pandemic, ABL's versatility has proven to be a critical tool for businesses in Canada. Its adaptability has been essential in helping companies navigate the tumultuous economic environment. As the nation's economy begins its recovery phase, ABL will be pivotal in fostering growth and supporting enterprises in their rebound efforts.

 

 

Understanding ABL  Versus  The Challenges of Traditional Bank Financing

 

Are you totally on top of the newest trend in Canadian business financing? Then, of course, you're fully aware and knowledgeable on ABL  asset based loans for a business credit revolver loan versus the alternative... a bank line of operating credit.

 

What's that? You're not? No problem... read on!

 

Nowadays, no Canadian business owner or financial manager disputes with us the challenges of obtaining what everyone seems to call 'traditional' bank financing. For all the right reasons (probably... hopefully?!) Canadian banks hunkered down and tightened the lending strings after the 2008-2009 financial debacle. Current higher rates in 2023 and generally poor economic and market conditions inhibit bank financing for many firms.

 

The Rise of ABL Financing

 

 

Therefore, it’s not hard to determine how various specialized funds and independent finance firms became prominent by offering ABL funding . A = Asset B = Based L = Loan... It’s as simple as that.

 

 

  

Finding a Solution to Business Financing Challenges  

 

Do you recognize any parts of the following story... we think you will. You feel as if you have hit an impasse in expanding your firm. Personal funds have been depleted, and your efforts to find that elusive 'traditional' financing have failed. Additionally, your firm might have some real challenges in returning to profit after your industry has been out of favour with those in the glass towers who seem to know everything...

 

Asset Based Financing: An Alternative to Bank Lines

 

Is there really a viable solution to that business financing challenge, i.e. a real-world alternative to a bank line/cash flow financing and credit revolver loan? Enter asset based financing and asset-based lines of credit!

 

  

Assessing the Cost of Asset Based Loans

 

Interest rates for ABL Funding can vary depending on factors like the borrower's creditworthiness and the assessed risk of the collateral. In some cases, ABL Financing rates may be higher than traditional bank loans, but they offer unique benefits, such as greater flexibility and access to liquidity based on assets.

 

Depending on the size of your facility and the overall financial condition of your firm, the cost of ABL financing will either be lower, competitive, or higher than your current finance arrangements. ‘Thanks a lot' we can hear you say, as that sure wasn’t very informative!

But we stand by that comment because of the complexity involved in assessing the size of your financing requirements, the overall creditworthiness of your company, and the mix of financing you need when it comes to ABL . The bottom line is simply that every situation is unique and needs to be addressed in that manner.

 

Unlocking High Liquidity Ratios

 

The essence of our message is hopefully clear - you do have a Canadian business financing alternative. It's a non-bank revolving credit revolver via an independent firm that provides very high liquidity ratios on a loan to value ratio on key balance sheet assets such as credit and loan terms on receivables, inventory, and in many cases, fixed assets and commercial real estate.

 

  

Qualifying for  Asset Based Lending ABL Financing  

 

Do we qualify? is question number 1 or 2 more often and not from clients. The answer in the ABL  world is that everyone qualifies with only one required criterion - you have sufficient assets and sales and a need for working capital via that borrowing base of sales and assets.

 

Because that’s what an asset based line of credit revolver is all about. And, as we said, it might be more expensive, and due diligence on your operations and assets might be a bit more rigorous (in fact, it will be for sure - ABL lending focuses on assets, not ratios!).

 

  

The Canadian ABL Loan Marketplace  

 

What's happening in the Canadian ABL loan marketplace? Lots. Billions of dollars of financing are being accessed every day by your competitors who are knowledgeable about this new type of Canadian business financing. And it’s sure cheaper than bringing in additional equity if in fact, that could be arranged.

 

 

Key Takeaways

 

 

1. Definition of ABL -  Understand that ABL stands for Asset-Based Lending, a financing method where a business uses its tangible assets, such as accounts receivable, inventory, and equipment, as collateral to secure a line of credit or loan.

2. Benefits of ABL Financing: Recognize that ABL  loans offer advantages like increased liquidity, flexibility in funding use, and access to capital even when traditional bank financing is challenging to obtain.

3. Differences from Traditional Bank Loans: Differentiate asset-based loans from traditional bank loans, noting that it relies on assets rather than creditworthiness, making it accessible to businesses with valuable collateral but potentially weaker credit profiles.

4. Qualification Criteria: Understand that the primary qualification for ABL Financing is the presence of business assets, making it more inclusive compared to traditional loans.

5. Cost and Risk Considerations: Acknowledge that the cost of ABL  can vary, and due diligence on assets and operations is more rigorous. Balancing the benefits against potential higher costs and risks is essential.

 

 Conclusion 

 

Interested? Intrigued? Want to know more? Call 7 Park Avenue Financial,  an experienced, trusted, and credible Canadian business financing advisor, for the scoop on an ABL loan versus bank line. We guarantee you will be glad you did.

 

  

FAQ / FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

  

 

 

 

What is ABL Finance, and how does it differ from traditional bank financing?

ABL Financing, short for Asset Based Lending, is an alternative to traditional bank financing in Canada. It revolves around using your business assets, such as receivables, inventory, and fixed assets, as collateral for a line of credit.

Why have asset based business credit lines gained prominence in Canada?

Canadian banks became more cautious with lending after the 2008-2009 financial crisis, leading to challenges in obtaining traditional bank financing. ABL Financing became prominent as an alternative solution for businesses.

How does ABL Financing address the challenges faced by businesses needing funding?

ABL Financing offers a real-world alternative for businesses that have struggled to secure traditional financing. It provides liquidity based on tangible assets rather than solely on financial ratios.

Who qualifies for ABL Financing, and what are the criteria?

The primary qualification for ABL Financing is the presence of business assets. As long as your company has assets, you can potentially qualify. However, the due diligence process on your operations and assets may be more rigorous than traditional financing.

 

What types of businesses in Canada are best suited for ABL Financing?

ABL Financing is suitable for a wide range of businesses, including manufacturing, distribution, retail, and services. It is especially beneficial for companies with substantial tangible assets, such as inventory and accounts receivable, that can be used as collateral.


Are there any limitations on how businesses can use funds obtained through ABL Financing?

Generally, businesses have flexibility in using funds obtained through ABL Financing. They can use the capital for various purposes, such as expanding operations, managing cash flow, purchasing inventory, or financing acquisitions. The borrower and the lender often negotiate the specific use of funds.

What are the key differences between ABL Financing and equity financing in Canada?

ABL Financing involves securing a line of credit using a company's assets as collateral, while equity financing typically involves selling ownership shares of the company to investors. ABL Financing allows businesses to maintain ownership and control while leveraging their assets for funding, whereas equity financing dilutes ownership.

Are there any risks associated with ABL Financing that businesses should be aware of?

While ABL Financing offers valuable benefits, it also carries risks. Businesses need to be cautious about overleveraging their physical assets, as failure to meet repayment obligations could lead to the loss of valuable collateral. Additionally, the due diligence process for ABL Financing can be rigorous, and lenders may closely monitor a company's financial health throughout the financing term. Businesses must understand these risks and manage them effectively.

 

Inventory Financing In Canada: Solving The Working Capital & Cash Flow

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 Inventory Financing and Working Capital   Loan Solutions In Canada | 7 Park Avenue Financial

 

 

 Inventory Financing Working Capitals Loan Solutions

 

Introduction

Canadian business owners and financial managers focus on the term ‘inventory loan' when addressing this balance sheet component for additional working capital and cash flow.

 

While it is possible to get an inventory loan to finance and purchase inventory, the reality is that, more often than not, inventory financing is a critical component of additional working capital facilities or a business line of credit or non-bank asset-based loan in conjunction with receivable financing.

 

 
The Significance of the Cash Conversion Cycle  & Asset Turnover In Inventory Loans 

 

Let’s examine some key aspects and types of inventory financing for the business owner and determine how to access this and how the inventory financing loan solution is often used as additional funding for business expenses.

 

For starters, when you are successful in financing inventory, you are in essence freeing up the cash that is tied up in that critical part of your balance sheet.

 

When we talk to clients about working capital and cash flow financing in general, the term ‘cash conversion cycle’ is one on which we place critical importance. It may sound like a textbook finance definition, but the reality is that it’s simply the formula for determining how one dollar of capital flows through your business. And that dollar of capital usually in fact comes from the initial purchase of inventory. This is in turn, converted into accounts receivable, which are (hopefully!) collected and turned into cash. The time that dollar stays on your inventory line is a key part of the cash conversion cycle.

The Importance of Inventory in the Balance Sheet

 

It would help if you focused on inventory financing when in fact, your investment in this balance sheet category is significant, often only rivalled by accounts receivable. We have worked with many firms that have to carry more inventory than A/R. That becomes a financing challenge.

 

The Challenge of Traditional Inventory Financing

 

Naturally, traditional financing institutions such as chartered banks don’t place a lot of reliance on their lending or their ability to secure and dispose of this type of asset.

 

The reality is that your inventory might be in the form of raw materials, work in process, or finished goods. Depending on the lender's knowledge of inventory, the ability to margin or finance that inventory becomes limited. In order to get a bank loan to secure inventory financing firms must demonstrate clean balance sheets, profitability, and cash flow. These facilities from banks are often accompanied by accounts receivable financing facilities for firms with good business credit history.

 

Small firms not qualifying for conventional/traditional bank loan financing often consider a merchant cash advance to generate cash for inventory, as well as other purposes.

Optimal Inventory Financing

 

Inventory financing on its own tends to be challenging – it is not impossible in some circumstances. The reality is though, that inventory financing works best when it is tied to a full working capital or asset-based financing facility that covers the inventory itself, your receivables, and in some cases, supplemental assets such as equipment or real estate.

Key Considerations for Financing Inventory

 

As a cautionary note, we must add that for your inventory to be financed, you should be able to demonstrate that it ‘turns' and that there is only a small percentage of obsolescence attached to this asset category.

 

You can quickly determine how fast inventory turns by going to your income statement, taking your ‘cost of sales' line, and dividing it by ‘inventory on hand'. So, what is a good turnover number? The answer is that it depends on overall industry benchmarks for your type of business. A grocery store might turn over its inventory many times more often than a manufacturing company with a complex build process.

Importance of Efficient Inventory Management

 

We should also add that inventory becomes more financeable when you are running a perpetual inventory system and you can demonstrate you have a solid handle on what is on hand and provide reporting in that regard.

 

Key Takeaways

 

1. Inventory Financing: At its essence, inventory financing is a loan or line of credit that business owners get using their inventory as collateral. The main aim is to provide working capital to businesses to continue their operations smoothly, even if funds are tied up in inventory.

2. Cash Conversion Cycle: This is how capital flows through a business. It begins with the purchase of inventory, which is then sold, turned into accounts receivable, and eventually collected and converted back into cash. The quicker this cycle moves, the better it is for the business's cash flow. Inventory financing aims to optimize this cycle by providing funds when cash is tied up in inventory.

3. Traditional Financing Challenges: Traditional financial institutions, such as banks, often see inventory financing as riskier compared to other forms of lending often requiring personal assets and personal guarantees.  This is because the inventory value can fluctuate, and in the event of a default, selling off merchandise might not recover the total loan value. Understanding this challenge is crucial to knowing why alternative inventory financing solutions are sought.

4. Working Capital & Asset-Based Financing: Beyond just existing inventory financing, a holistic solution often ties in the inventory, receivables, and other assets like equipment or real estate. This combined approach can often offer better terms and greater flexibility for businesses.

 

Conclusion

 

Speak to 7 Park Avenue Financial,  a trusted, credible, and experienced financing advisor in this very specialized area of business financing for SME's and small businesses – that will allow you to determine if your inventory is properly financed and, if not, what financing options are available. Working capital loans and business financing that make sense for your business needs.

 

  

 FAQ   

 

What are the 4 components of inventory?

Inventory can be broadly categorized into four primary components based on the stages of production and the purpose they serve:

1. Raw Materials: These are the essential components or ingredients companies purchase to produce finished goods. Raw materials are not yet processed and are used in the manufacturing process. For instance, a furniture manufacturer might purchase timber as a raw material to produce wooden chairs.

2. Work-in-Progress (WIP): These are goods that are in the process of being manufactured but are not yet complete. They represent a middle stage in production, between raw materials and finished goods. For the furniture manufacturer, chairs that have been assembled but not yet stained or varnished would be considered work-in-progress.

3. Finished Goods: These are completed products that are ready for sale. They have undergone the entire manufacturing process, from raw materials to final product, and are waiting to be sold to the end customer. Using the previous example, a fully assembled, stained, and varnished chair ready for sale would be a finished good.

4. MRO (Maintenance, Repair, and Operations) Inventory: These items aren't directly used in production but are essential for the production process. They support operations and help maintain the production equipment and facilities. Examples include lubricants, tools, spare parts, gloves, etc.

 

Why is the ‘cash conversion cycle’ mentioned to be of critical importance?

The 'cash conversion cycle' is critical because it is the formula for determining how one dollar of capital flows through a business. It starts from the initial purchase of inventory, which then gets converted into accounts receivable and eventually collected and turned into cash. The time this dollar stays within the inventory is a pivotal part of the cycle.

How do traditional financing institutions typically view inventory financing?

Traditional financing institutions, such as chartered banks, often don't rely much on their lending or their ability to secure and dispose of inventory as an asset versus non bank inventory financing lenders.

Their capacity to finance the inventory often becomes limited, depending on their knowledge and understanding of the nature and type of the inventory (raw materials, work in process, or finished goods).

What are the conditions that make inventory more financeable?

When business owners ask how inventory financing works it is important to realize that for inventory to be more financeable, a business should be able to demonstrate that the inventory 'turns' or gets sold and replenished via purchasing inventory regularly. Moreover, only a minimal percentage of obsolescence should be attached to this asset category. Another factor that aids in financing inventory is if the business runs a perpetual inventory system and can show that they have a firm grasp of what is on hand and can provide regular reporting.

Who should businesses consult to determine if their inventory is properly financed?

Businesses should consult a trusted, credible, and experienced financing advisor, especially one specializing in this specific area of business financing. Such an advisor will help them ascertain whether their inventory is currently adequately financed and inform them about the available financing options if it's not.

What is the Just-in-Time inventory system, and what benefits does it offer to businesses?

The Just-in-Time (JIT) inventory system is a management strategy that aligns raw material orders from suppliers directly with production schedules, aiming to reduce inventory holding costs by receiving goods only when they are needed in the production process. The benefits of JIT include reduced storage costs, minimized waste due to perishable or obsolete stock, improved cash flow, and the potential for quicker response to market changes. However, it requires precise forecasting and is vulnerable to supply chain disruptions.


How does RFID technology enhance inventory management processes?

RFID (Radio-Frequency Identification) technology uses electromagnetic fields to automatically identify and track tags attached to objects. When integrated into inventory management, RFID offers real-time visibility into inventory levels, allowing for accurate tracking, reduced human errors, and streamlined warehouse operations. This leads to efficient stock replenishment, reduced shrinkage, and the ability to seamlessly manage inventory across multiple locations. It also provides insights into product movement and behaviour, helping businesses make more informed decisions about stock rotation and sales strategies.

 

Click here for the business finance track record of 7 Park Avenue Financial

Financing A Business Purchase Ownership Transfer In Canada

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YOU ARE LOOKING FOR FINANCING TO BUY AN EXISTING  BUSINESS!

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

        Financing & Cash flow are the biggest issues facing business today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT  BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

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Understanding Business Acquisition Loans : How to Buy a Business | 7 Park Avenue Financial

 

 

BUSINESS ACQUISITION LOANS

 

TABLE OF CONTENTS

    Introduction to Business Acquisition in Canada
    What is a Business Acquisition Loan?
    The Right Capital Structure is Key
    What Type of Financing Do You Need?
    Understanding What Lenders are Looking For
    Putting the Valuation on the Business You are Purchasing
    Buyer Commitment / Down Payment: Your Equity Contribution
    Senior Debt - The Most Critical Aspect of Your Financing
    Choosing the Best Business Acquisition Loan for Your Needs
    Vendor Financing: The Seller Note Solution via the Current Business Owner
    Closing the Gap - The Mezzanine Financing Solution
    Government Loans for a Business Purchase
    Check Your Eligibility
    Asset-Based Lending / Leveraging the Assets!
    Do...Your Due Diligence!
    Post-Acquisition Financing Needs?
    Conclusion - Business Acquisition Financing: Talk to the Experts
    FAQ

 

 

INTRODUCTION

Buying a business in Canada is the perfect way to quickly a client base, increase the existing capacity of an established business or company, or gain access to new markets. Some entrepreneurs even focus on acquiring a competitor or supplier!

 

 

 

WHAT IS A BUSINESS ACQUISITION LOAN? 

 

 

A business acquisition loan is a specialized form of financing explicitly designed to purchase an existing business or franchise. These loans can be sourced from traditional bank loan solutions, credit unions online lenders, or specialty finance institutions. They can be secured or unsecured, and the structure, terms, and rates can vary widely depending on the lender, the financial health of the business being acquired, and the buyer's financial situation.


Acquisitions are a part of business life, but how does financing the business purchase work? Sometimes, a company is too small for some lenders to consider an acquisition deal, but that doesn’t mean a business financing solution exists.

Combining an existing company with another to expand is also a great way of increasing your current business’s success. However, if you want the acquisition to be successful, ensure you are working with a business financing expert.

Numerous critical issues around your financing need to be addressed, including appropriate funding for fixed assets and, in some cases, company-owned commercial real estate. Long-term financing of certain assets will be very beneficial in the long run - at the opposite end of the spectrum, if the business has intangible assets that can sometimes, but not always, be a challenge.

THE RIGHT CAPITAL STRUCTURE IS KEY

The right capital structure will position your business for continued growth and make the transition around the business purchase smoother while presenting more opportunities for success.


The proper financing structure can make all the difference.  When buying a company, it's essential to understand how each type of loan works and find the perfect mix for your needs to help guarantee future success.

 
WHAT TYPE OF FINANCING DO YOU NEED?

 

Financing will often come down to either term financing of some sort, or cash flow financing.

 

UNDERSTANDING WHAT LENDERS ARE LOOKING FOR

Cash flow financing allows businesses without sufficient tangible or significant intangible assets to finance an acquisition. This type of debt is based on the company's capacity for debt service and  interest coverage, which is essentially judged by its performance in past years as well as through projected future results.

A reasonable acquisition price based on the valuation method is vital to any business purchase. The company must also have proven capacity to generate enough profit to cover debt service obligations and the need for future capital expenditures as deemed by competent management!

PUTTING THE VALUATION ON THE BUSINESS YOU ARE PURCHASING

One of the first tasks when trying to buy a company is determining its value. This can be not easy because many factors determine how profitable a company has been or can be. To represent future cash flow and earning potential accurately, a buyer needs to carefully ' normalize ' the financials to reflect new ownership -

 

Here is where detailed 'micro analytics ' around your due diligence pays off! Often, averaging several years of cash flow generation is an excellent tool.


In many cases, particularly in larger transactions, sellers or buyers may enlist the help of a professional business valuator, commonly known as a chartered business valuator.  Anyone with proper experience will look at performance around operating cash flows,  rates of return, and return on investment, all of which can be tied to the business's growth potential.


Every industry or economic sector in Canada has issues around competitiveness, profits, and the need for additional assets or technology. Sometimes, a business may have recurring revenue, which is almost always considered a plus.


As a buyer, you want a recent return on your business at an acceptable purchase price/valuation.


There is no perfect way to determine the value of your target company, but you can often use cash flow as a starting point. Other areas to focus on are depreciation policies, taxes, and the timing of expenses. In some cases, significant investments made recently will have long-term benefits seen later on down the road.

BUYER COMMITMENT / DOWN PAYMENT: YOUR  EQUITY CONTRIBUTION

The equity portion you put into the business, of course, decreases the amount needed to be borrowed, demonstrates your commitment to your deal, as well as helping to lead to a  successful acquisition.

 
SENIOR DEBT - THE MOST CRITICAL ASPECT OF YOUR FINANCING 

The senior lender in any acquisition deal provides a loan secured on your company's assets. While specific items may not fully guarantee this amount, it's called senior debt because there is a first charge on all assets. In Canada, lenders typically register a ' GSA ' ( general security agreement ), giving them a first charge/priority on present and future assets via the loan agreement and its stringent loan requirements from traditional financial institutions.

CHOOSING THE BEST BUSINESS ACQUISITION LOAN FOR YOUR NEEDS

Senior lenders have priority over other creditors when liquidating a business. They will most often have in place specific restrictive terms and conditions of repayment - these are called covenants and often involve specific ratios in the financial statements.

VENDOR FINANCING: THE SELLER NOTE SOLUTION

It's not uncommon for sellers to help finance their purchase with a note, sometimes referred to as a seller note or ' VTV ' - Vendor take back from the seller.

The seller agrees that they will be paid back over time, and in many cases, this is done through an incentivized deal where bonuses or other incentives are offered.


This financing, also called an  ' earn-out ', is a popular way for buyers to compensate sellers of a business; it is sometimes based on how much profit or loss a company produces during the repayment period.


Vendor notes offer many benefits for buyers because they don't come with many conditions similar to senior lender conditions, and the interest cost is usually low. Plus, if purchasers face trouble repaying, the vendor will often cooperate.

CLOSING THE GAP - THE MEZZANINE FINANCING SOLUTION

Mezzanine financing, also called cash flow finance, can be a flexible option for those looking to fill any gaps in their finances of business purchase to achieve the optimal financing structure.


Mezzanine funding can be an excellent solution for bridging the gap between buyer investment and any available financing from bank loans, for example. The interest rates can be lower than those on traditional loans, which makes this deal more attractive in some instances. Typical structures are 3-5-year term amortizations.


Mezzanine financing is sometimes called  'patient financing, 'as the company needs to have its cash flow available for repayment to senior lenders while it executes a growth strategy.

GOVERNMENT LOANS FOR A BUSINESS PURCHASE

Borrowers will find that not all banks or lenders they might deal with for traditional bank loans will be keen on providing loans for business acquisitions - this will include a business-oriented credit union. -  Personal finances should be in order with a good credit history and credit score.

 


CHECK YOUR ELIGIBILITY

 


For smaller transactions, the Canada Small Business Financing Program 'CSBFP '  will finance existing business purchases, including franchise financing.  Talk to the 7 Park Avenue Financial team about how this program works, including eligibility criteria and info on loan payments tailored to your transaction size. This term loan is based on your historical and forecasted cash flow and your ability to make debt payments. A limited personal guarantee is required on the transaction - not for the full loan.

No personal assets are taken in government small business loan financing.

Financing options for government loans can include long-term loans based on the value of fixed assets such as land or buildings. Now, SBL Loans can finance working capital, intellectual property, or leverage existing resources, etc.  Talk to the 7 Park Avenue Financial team about the Business Development Bank solutions in this area. Many prospective small business owners will find government loans a suitable solution.

ASSET-BASED LENDING / LEVERAGING THE ASSETS!

Leveraged buyouts and asset-based financing solutions are quite common as business acquisitions for firms with substantial assets relative to financing needs. In this financing structure, you leverage assets (equipment or property, accounts receivable / inventory ) to finance the acquisition with a commercial loan, typically via a non-bank lender.

Seller financing can also be utilized in these types of ' ABL '  deals.

 
DO...YOUR DUE DILIGENCE! 

Due diligence means carefully examining a company's financial statements, income tax returns, and additional information to make an informed decision about your business purchase.


The value of tangible assets (equipment, inventory, buildings, etc.) should be properly adjudicated. As a buyer, you should request everything that has a material impact on the business before making an offer.  Focus on profits, the ability to forecast reasonable growth potential, and areas for potential improvement. Incorporate such ideas into a detailed business plan with proper financial projections that can be defended and are conservative and realistic.

 

  7 Park Avenue Financial prepares business plans that meet and exceed the requirements of banks, non-bank commercial lenders, and finance companies.


A proper level of due diligence will make your purchase offer more sound and appealing to a lender / lenders.

 
POST-ACQUISITION FINANCING NEEDS?

 
 

Financing Operations upon the Purchase:  The purchase of a business always comes with some level of future financial needs and consideration to obtain financing. You will have multiple options for financing operations after purchasing your new company: cash reserves or self-funding,  business lines of credit,  sales leasebacks, etc.  Business credit cards or a business line of credit are helpful for businesses with immediate access to funds at a set limit, and you only pay interest on funds you draw.


Invoice financing is an arrangement that allows a business to finance its business sales via the financing of invoice receivables. Small companies mostly use it to improve working capital and cash flow without a term business loan. There are two leading solutions - traditional factoring and Confidential Receivable Financing.

  


CONCLUSION - BUSINESS ACQUISITION FINANCING


TALK TO THE EXPERTS  

 

Let the 7 Park Avenue Financial team, a trusted, credible, and experienced Canadian business financing firm, want to be your partner in financing your loan application.

 

We will demonstrate customized solutions tailored uniquely to your business purchase needs and requirements around the target business credit score so that you can know that your investment and optimal loan structure will lead to business success without surprises. Guaranteed the ability to secure financing for the business acquisition you are contemplating.

 

 

FAQ

 

 

 

What criteria do lenders look at when considering a business acquisition loan?

Lenders evaluate several factors before approving a business acquisition loan:
    • Buyer's credit history and financial stability: A good personal credit score and solid financial background can increase the likelihood of approval.
    • Business's financial performance: Lenders will want to review the business's financial statements, including profit and loss statements, balance sheets, and cash flow statements, to evaluate its profitability and stability.
    • Down payment: Generally, lenders expect buyers to put down a percentage of the purchase price. The required down payment can vary, but it's often between 10% and 25%.
    • Experience: Lenders may favour applicants with experience in the industry or in managing a business.
    • Collateral: For secured loans, lenders will require some form of collateral, which could be assets of the business or other personal assets.

How do business acquisition loans differ from traditional business loans?

 

 While both types of loans provide financing for business-related expenses, business acquisition loans are intended explicitly for purchasing an existing business or franchise. As such, the approval process for an acquisition loan may involve deeper scrutiny of the target business's financials, history, industry trends, and associated risks. In contrast, traditional business loans are generally used for various purposes, such as expansion, purchasing equipment, or funding day-to-day operations.


How can a potential buyer determine the right price for a business?

Determining the right price involves research, financial analysis, and sometimes professional assistance. Key steps include:
    • Financial analysis: Reviewing the business's financial statements to evaluate profitability, debt, assets, and liabilities.
    • Market analysis: Comparing the business's asking price with similar businesses in the market.
    • Projected earnings: Estimating the business's potential and growth prospects.
    • Intangible factors: Considering non-tangible elements like brand reputation, customer loyalty, and intellectual property.
    • Professional valuation: Hiring a business valuation expert can provide an unbiased assessment of the business's worth.

Are there any potential pitfalls to watch out for when using a loan to buy a business?


Yes, here are a few pitfalls:

    • Over-leveraging: Borrowing more than you can afford to repay can put both the business and your assets at risk.
    • Not conducting due diligence: Failing to thoroughly investigate the business's finances, operations, and market position can lead to overpaying or inheriting undisclosed liabilities.
    • Restrictive loan terms: Some loans come with stringent terms or covenants that limit business flexibility.
    • Focusing only on interest rates: While rates are essential, consider loan terms, fees, and the lender's reputation and customer service.

 

What's the difference between secured and unsecured business acquisition loans?

 

Secured business acquisition loans require collateral, such as real estate, equipment, or other tangible assets, to guarantee the loan. If the borrower defaults on the loan, the lender has the right to seize and liquidate the collateral to recoup their funds. On the other hand, unsecured loans don't require collateral but typically have higher interest rates due to the increased risk to the lender. Approval for unsecured loans is often based on the borrower's creditworthiness and the financial health of the business being acquired.

Are there any potential tax implications to be aware of when financing a business acquisition?

Answer: How an acquisition is structured can have tax implications for both the buyer and seller. For instance, buying the assets of a business as opposed to its stock might have different tax consequences. It's crucial to consult with a tax advisor or accountant to understand the potential tax liabilities and benefits before finalizing the acquisition.

How does due diligence for a business acquisition loan differ from the due diligence for other business loan types?

Due diligence for a business acquisition loan focuses extensively on the target business's financial health, operations, and potential risks. It involves deeply reviewing financial statements, asset valuations, legal matters, operational processes, and industry trends. For other types of business loans, the emphasis might be more on the borrowing company's creditworthiness, repayment capability, and intended use of the funds.

Can the terms of a business acquisition loan be renegotiated after the purchase?

Answer: It's generally challenging to renegotiate loan terms after the purchase has been finalized, as the initial terms were based on risk assessments and valuations at the time of approval. However, some lenders might be open to discussions if there are significant changes in circumstances or if the business performs exceptionally well. Maintaining transparent communication with the lender and providing valid reasons for any renegotiation is essential.
 

What happens if the acquired business underperforms after the purchase?

If the acquired business underperforms, it could jeopardize the buyer's ability to repay loan debts. The buyer should communicate any challenges with the lender promptly. Lenders might offer solutions such as restructuring the loan, adjusting payment terms, or providing additional advisory support. However, in the worst-case scenario, if the borrower defaults and the loan is secured, the lender might seize the collateral to recover the funds.




 

Click here for the business finance track record of 7 Park Avenue Financial

Asset Based Lending Canada - Reboot Your Business Credit Needs

Asset Based Lending Canada -  Reboot Your Business Credit Needs

Do Not Pass Go... Do Not Collect $ 200.00 Until You Have Looked At Asset Based Lending

 

YOUR COMPANY IS LOOKING FOR  FINANCING COMPANIES FOR ASSET BASED

LENDING IN CANADA!

THE ASSET BASED FINANCING SOLUTIONS

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses today

ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

Unlocking Capital: Asset-Based Lending Financing Companies in Canada | 7 Park Avenue Financial

 

 

  

ASSET BASED LENDING / LINES OF CREDIT - CANADA  

 

 Table of Contents

    Introduction

    Understanding Asset-Based Lending (ABL)

    Comparing ABL with Traditional Bank Loans

    Asset-Based Lending in Canada: Meeting Diverse Funding Needs

    Assets Used in Asset-Based Financing

    Who Benefits from ABL Solutions?

    Understanding the Costs of Asset-Based Lending

    Lending Criteria and Transitioning Back to Traditional Financing

    Summary of the Benefits of Asset-Based Lending

    Conclusion

    FAQ

 

INTRODUCTION

 

Asset-based lending in Canada offers a wide range of options because when it comes to exploring alternative finance strategies for your business, it's time to 'REBOOT' your thinking.

 

What is asset-based lending (ABL), and how does it work in Canada?

 

Asset-based lending is a financial strategy where a business secures a loan using the company's assets, such as accounts receivable, inventory, or equipment and commercial real estate as collateral. In Canada, ABL companies provide loans to businesses based on the value of these assets.

 

Unlike traditional bank loans offering an unsecured loan that heavily relies on credit history, an asset-based loan solution primarily focuses on the quality and value of the assets used as collateral. While credit history may still be considered, it is generally not the sole determining factor for asset based lines of credit, making more flexible funding solutions from asset-based lenders more accessible to businesses with limited credit histories.

 

Consider asset-based lending for the business finance solution you're seeking. Let's dig deeper!

 

DO CANADIAN BANKS MEET YOUR FINANCING NEEDS?

 

Many business owners and financial managers, particularly in the SME sector in Canada,, find that all their financial needs can not always be met by traditional Chartered bank / Credit Union sources. While Canadian banks continue to have virtually unlimited capital to serve business needs in many cases, the borrower can't meet the requirements needed to attain those solutions.

 

So, while public companies and large, well-heeled corporations are borrowing at will, the challenge is much more difficult if you're not in one of those two categories.

 

COMPARING  ASSET BASED FINANCING WITH UNSECURED BANK LOANS

 

Asset-based lending (ABL) and unsecured bank loans are two distinct financing options with different characteristics. Here's a comparison between the two when evaluating business growth opportunities:

 

1. Collateral vs. No Collateral:

    Asset-Based Lending (ABL): An ABL revolving line of credit requires businesses to pledge specific assets, such as accounts receivable, inventory, equipment, or real estate, as collateral to secure the loan. The loan amount is typically based on these assets' value and requires fewer covenants.     Unsecured Bank Loans: Unsecured bank loans do not require collateral. These loans are granted based on the borrower's creditworthiness and financial stability and are not tied to specific assets.

2. Access to Capital:

    ABL: ABL provides quicker access to capital since the focus is on the value of assets, making it a suitable option for businesses that need funds promptly.
    Unsecured Bank Loans: Unsecured bank loans may take longer to obtain due to the rigorous credit evaluation process, making them less suitable for businesses in urgent need of funds.

3. Credit Requirements:

    ABL: ABL is often accessible to businesses with limited credit histories or lower credit scores because the primary consideration is the value of assets used as collateral in the due diligence process
    Unsecured Bank Loans: Unsecured bank loans typically require a strong credit history and a good credit score since they rely heavily on the borrower's creditworthiness.

4. Loan Amounts:

    ABL: The loan amount in ABL is determined by the appraised value of the collateral assets. It can be a percentage of the asset's value.
    Unsecured Bank Loans: Unsecured bank loans may offer higher loan amounts than ABL, but the actual amount depends on the borrower's creditworthiness and financial stability.

5. Interest Rates:

    ABL: Interest rates for ABL can be higher than those for unsecured bank loans due to the perceived risk associated with the collateralized assets.
    Unsecured Bank Loans: Typically, unsecured bank loans offer lower interest rates to borrowers with strong credit profiles.

6. Risk to Assets:

    ABL: Businesses risk losing their collateral assets if they fail to repay an ABL loan, which can impact their operations.
    Unsecured Bank Loans: Unsecured bank loans do not put specific assets at risk; however, defaulting can negatively impact the borrower's credit rating.

7. Use of Funds:

    ABL: ABL funds are often used for specific purposes such as working capital, expansion, or acquisitions, which are related to the assets used as collateral.
    Unsecured Bank Loans: Unsecured bank loans offer more flexibility in using funds, allowing businesses to allocate the capital as needed.

 

ASSET BASED LOANS MEET MANY FUNDING NEEDS

 

Enter... stage right... Asset-based lending in Canada.  Through a variety of, shall we call them ' subsets' of Asset financing your company can achieve the financing structure it needs to either grow your business or in certain cases even acquire a business?

 

WHAT ASSETS ARE PART OF AN ASSET BASED  FINANCING

 

Financing companies providing these solutions don't make it complicated either. They take all or certain of your assets (depending on the amount and type of capital you are looking for) and put them into a collateral pool you can borrow against. They can combine working capital/line of credit solutions or even term loans if that makes sense.

 

The assets in question? They include:

 

Accounts Receivable

Inventory

Equipment

Tax credits

Real estate

Large contracts/orders

 

And here's the good news. You can mix and match -  Classic flexible financing!

 

WHO USES ABL ASSET BASED LENDING SOLUTIONS

 

So who is this type of financing well suited for?  Typical clients we meet tend to be:

 

High growth

Start-Ups

Restructuring

Acquisition oriented

Management buyouts

 

A key attraction in Asset-based lending in Canada is that it requires less equity as the focus is all about those assets.

 

WHAT DOES ASSET BASED LENDING COST

 

In business financing, it's not always a perfect world, so funding typical/interest rate costs offered by financing companies that are in effect, non-bank lenders are going to be higher, one reason being those finance firms borrow the funds they need for you from the banks!  

 

LENDING CRITERIA  AND THE BRIDGE BACK TO TRADITIONAL FINANCING

We point out to our clients that if they can meet typical bank borrowing criteria, an asset-based line of credit will often be both competitive with the banks and, most importantly, give you a lot more borrowing power. The simple reason is that assets are more aggressively 'margined' or ' loaned against'. In many cases, companies that temporarily use Asset financing often migrate back to a traditional bank solution.

 

SUMMARY OF THE BENEFITS OF ASSET BASED LENDING

 

• Improved Liquidity: Asset-based lending provides immediate access to cash, helping businesses address short-term financial needs and improve their cash flow.

• Flexibility: It offers flexible financing solutions tailored to a company's specific requirements, allowing it to use the funds for various purposes, such as expansion, working capital, or debt consolidation.

• Accessibility: Asset-based lending is often more accessible to businesses with limited credit histories or lower credit scores since the focus is on the value of assets used as collateral.

• Quick Approval: The approval process for asset-based lending is typically faster than traditional bank loans, enabling businesses to secure funding promptly.

• Enhanced Borrowing Capacity: It allows businesses to borrow against a wide range of assets, potentially increasing their borrowing capacity compared to conventional financing.

• Asset Preservation: Businesses can retain ownership and use of their assets while using them as collateral, ensuring that operations continue uninterrupted.

• Tailored Financing: Asset-based lending can be customized to match a company's financial needs, providing a financing structure that aligns with its growth and operational goals.

• Potential Cost Savings: In some cases, asset-based lending may offer cost savings compared to other high-interest financing options, such as credit cards or unsecured loans.

• Debt Management: It can help businesses consolidate existing debts, simplifying their debt management and reducing the overall cost of borrowing.

• Seasonal Support: Asset-based lending is well-suited for businesses with seasonal fluctuations, allowing them to access capital during peak demand.

• Collateral Diversification: Businesses can use a mix of different assets as collateral, spreading risk across various asset types.

• Credit Improvement: Successful repayment of asset-based loans can positively impact a company's credit profile and potentially lead to better credit terms in the future.

 

 

 

CONCLUSION

 

Asset-based lending is suitable for businesses with valuable assets but limited credit histories needing quick capital access. On the other hand, unsecured bank loans are better for companies with strong credit profiles that can afford a longer application process and seek more flexible use of funds without collateral requirements. The choice between the two depends on a business's financial situation and its specific financing needs.

 

If your business is looking for innovative solutions for your firm's business assets and sales growth, then call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your needs. It's time to ' reboot ' your thinking on the financing solution you require and work with a financial services provider with your interests in mind!

 

FAQ

 

What types of assets can be used as collateral for asset-based loans in Canada?

 

In Canada, businesses can use various assets as collateral for ABL, including accounts receivable, inventory, machinery, equipment, real estate, and even intellectual property. The eligibility of assets may vary depending on the lending company's policies.

 

How do Canadian businesses benefit from asset-based lending compared to traditional bank loans?

 

Asset-based lending in Canada offers more flexibility and quicker capital access than traditional bank loans. It allows businesses with strong asset bases but limited credit histories to secure financing, making it an attractive option for growth and working capital needs.

 

What is the typical eligibility criteria for businesses seeking asset-based lending in Canada?

 

Eligibility criteria can vary among ABL financing companies, but businesses generally need valuable assets for collateral. Lenders may also consider the business's financial stability, industry, and repayment ability.

 

What risks should Canadian businesses be aware of when using asset-based lending?

 

While asset-based lending can provide financing solutions, businesses should be cautious about losing their assets if they cannot repay the loan. Having a clear repayment plan and understanding the ABL agreement's terms and conditions is essential.

 

What are the common industries or sectors that benefit the most from asset-based lending in Canada?

 

Asset-based lending can benefit manufacturing, wholesale distribution, retail, and service-based businesses. It's not limited to specific sectors and can adapt to the unique needs of different companies.

 

Are there any restrictions on how businesses can use the funds obtained through asset-based lending in Canada?

 

Generally, asset-based lending allows businesses flexibility in how they use the funds. Whether it's for working capital, growth initiatives, debt consolidation, or acquisitions, the utilization of the funds is often determined by the business's specific needs.

 

How does evaluating the value of assets for collateral work in asset-based lending in Canada?

 

The process involves a thorough assessment of the assets being offered as collateral. A qualified appraiser or valuation expert may be used to determine the value of assets like equipment, real estate, or accounts receivable. This valuation is crucial in determining the loan amount a business can secure.

 

What is the typical duration of an asset-based lending agreement in Canada, and can it be renewed or extended?

 

The duration of asset-based lending agreements can vary but often ranges from one to three years. These agreements can be renewed or extended based on the lender's policies and the borrower's financial performance. Renewal terms are typically negotiated before the agreement's expiration.

 

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