YOUR COMPANY IS LOOKING FOR BUSINESS CREDIT VIA AN ABL OR SECURED BANK FACILITY!
Asset Based Lending
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Financing & Cash flow are the biggest issues facing business today
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SECURED ASSET FINANCING via an ABL BUSINESS CREDIT or a bank line of credit. It's absolutely a tale of two. We guess the book might be called 'A TALE OF TWO FACILITIES’! Let's examine some of the key differences and benefits and disadvantages of both an ABL asset line of credit and the better recognized bank secured business credit facility.
UNDERSTANDING 2 DIFFERENT BUSINESS LINE OF CREDIT SOLUTIONS
Both public and private companies in Canada feel the squeeze when it comes to achieving the right financing for their firms in the current economic environment. Both the business owner and his or her financial managers can be forgiven for being a bit confused on alternative methods of line of credit finance.
So should you be doing what everyone else seems to be doing, or should you strike out on your own with some solid investigation in alternative business models when it comes to lines of credit for Canadian business?
Let's look at what some of those key issues might be in considering alternatives, the ABL FINANCE asset-based loan facility, and the Canadian chartered bank offering. Clearly in both cases you want to be able to ensure you can grow, not just survive in business. So asset-based lending should always be compared to the possibilities of accessing bank finance.
Price is a factor also; you want to know the total cost when it comes to acquiring the right finance facility. Naturally, relationships are important also, you want to be dealing with the right people, it’s as simple as that.
WHAT IS ABL?
In recent years ABL Finance has become a valuable source of financing for Canadian businesses who have been unable to access traditional financing. Utilizing assets such as receivables, inventory, unencumbered fixed assets, and even real estate allows the company to borrow against all these assets on an ongoing basis based on the current values of the assets. Asset based lending is one of the most flexible types of financing in that it can grow as the business grows in sales.
ASSET BASED LENDING CREDIT LINES
So let's take a first pass at asset based lending via an ABL facility. It is just a business credit facility secured by the assets of your company. Many firms that either cant raise bank financing, or, more importantly, cant raise the amount of financing they need from banks consider ABL. Hundreds of Canadian firms now use ABL finance as there preferred method of leveraging their assets for a credit line. Those assets are used to bridge the timing of cash in, and cash out in your business. ABL is available for companies of all size, from major public and private corporations, right down the pecking order to startups.
The facility fluctuates with the amount of asset that your firm generates, typically around A/R and inventory. Funds are typically managed through a blocked account - that simply means that you deposit all your inflows into one account, while your balances to reduce the line are managed through a separate account. It's not as complicated as it seems. Key benefits are higher margins on receivables and inventory.
CANADIAN BANK LINES OF CREDIT
The more traditional alternative to business credit via a secured facility is the Canadian chartered bank. Facilities are low cost and can be combined with term loans. Banks are cash flow lenders, the ABL facility tends to be asset based, not cash flow based. Your financial statements and current financial history will dictate whether your firm is more cash flow or asset oriented.
Banks will look to what they call secondary forms of repayment and are highly regulated with their offerings. ABL lenders for asset based lending tend to be independent commercial finance companies that are none regulated. It's a little known fact that many of the banks have small boutique divisions of ABL finance that in some ways compete with their peers in Commercial business credit.
NOTE - Asset-based lending banks do exist in Canada - they have tended to be smaller boutique divisions of Canadian banks and one perceived disadvantage of accessing ABL via a bank is that minimum deal sizes are often pegged in the 5-10 Million dollar range, which eliminates many companies seeking SME COMMERCIAL FINANCE working capital solutions.
ASSET BASED LENDING RATES
AT 7 Park Avenue Financial we advise clients that for the vast majority of cases ABL asset-based loans will always cost more than traditional bank lines. Additionally, the facilities might in some cases have an appraisal or due diligence fee. Bank ABL's will always cost less than non-bank commercial lenders but the overall ' credit bar ' to access a bank ABL is significantly higher, as well as what we have already mentioned - namely that bank ABL's often tend to start in the multi-million dollar range.
Note though that dealing with a non-bank asset-based lender still allows you maintain your deposit relationships at a Canadian chartered bank - that is accomplished by a system known as ' blocked ' accounts ' allowing loan advances to be made into your account under the ABL arrangement, as well as ensuring the lender has access to cash inflows from sales. Well managed bank lines in ABL or banking .. fluctuate!
CONCLUSION
Investigate both the ABL secured asset financing revolver, and the more traditional Canadian chartered bank line. Weight the benefits and potential disadvantages of both in coming up with your preferred method of business financing. Speak to a trusted, credible and experienced Canadian business financing advisor today on differentiating that ' TALE OF TWO FACILITIES '!
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Stan Prokop 7 Park Avenue Financial/Copyright/2020
