Asset-Based Lending Advance Rates: Key to Better Business Financing

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Asset-based lending advance rates are essential for businesses seeking to leverage their assets for financing.

Struggling to secure business financing? Discover how asset-based lending advance rates can unlock the capital you need!

ABL ASSET-BASED LENDING ADVANCE RATES IN CANADA

Your mission, should you choose to accept it, is to determine the difference between ABL lending in the Canadian marketplace vs. similar business financing loans offered by chartered banks.

Asset-based lending advance rates are the most important factor in determining how much financing a business can secure against its assets in an ' ABL ' solution.

These rates directly impact the liquidity available to your company, allowing you to access better and manage cash flow and invest in growth opportunities. Understanding how advance rates are calculated on eligible assets, and the factors that influence them is essential for business owners looking to maximize their borrowing potential in Canadian asset-based lending when comparing solutions such as traditional bank loans.

Let the 7 Park Avenue Financial team show you the basics of asset valuation methodology and how collateral management affects overall asset liquidity in the loan facility, such as asset turnover in ABL's receivable financing area.

Asset-Based Lending Advance Rates in Canada: The Ultimate Working Capital Solution

A significant amount of confusion exists in the Canadian business financing arena around the definition and use of asset-based lending.

In the context we are talking about, we’re focusing on a comprehensive business financing credit arrangement that provides you with a total borrowing facility based primarily on receivables and inventory and equipment / other assets and real estate when that comes into play.

An asset-based lender evaluates purchase orders to understand customer creditworthiness and value, ensuring that the financing is tailored to the business's specific needs.

There are many types of asset-based loans in Canada. The two dominant factors that play a role in these subsets are the size of the facility and single-focus financing, such as receivables only. In addition, your firm's overall credit quality (i.e., the good, the bad, and the ugly) ultimately drives what type of facility you choose.

Can anyone raise their hand and answer why abl loans (by the way, they are not loans per se) are deemed by many to be the saviour of Canadian business financing?

We sure can - it’s because they can offer finance when traditional bank financing is not available. Even to a more substantial point, abl loan doesn’t discriminate regarding the size of the facility.

WHO USES ASSET-BASED FINANCING?

Generally, these facilities range from 250k on the small end to tens of millions of dollars on the high end.

Businesses can leverage their company's assets, such as accounts receivable, inventory, machinery, equipment, and real estate, to obtain financing. By the way, many of Canada’s largest corporations use this type of financing, unbeknownst to the average follower of Canadian business financing.

THE ADVANTAGES OF ASSET-BASED LOANS VERSUS TRADITIONAL FINANCING

Asset-based loans can be obtained quickly, and the approval process to obtain them is easier than obtaining unsecured loans and lines of credit from traditional banks/financial institutions. They solely focus

HOW IS A BORROWING BASE DETERMINED ON AN ONGOING BASIS?

Quick example based on a real-world scenario. Manufacturing company 'A' has a bank financing operating facility that margins their receivables to 75% of the total value and inventory to a cap of, say, 750k.

However, the manufacturing company 'A' is growing quickly, requires additional inventory and has receivable growth commensurate with sales growth. ABL finances the balance sheet and your sales.

The challenge in a traditional banking arrangement is that the company is restricted in its ability to grow commensurate with its working capital needs. Would banks step in? Maybe, possibly, who knows?

However, we can almost guarantee that this problem or challenge our company 'A' faces would be met head-on in an ABL lending scenario. Why? Simply because abl financing is based on assets, so as the firm's inventory and receivable investment grow, so does the facility, pretty well automatically.

WHAT IS THE DIFFERENCE BETWEEN ASSET-BASED FINANCING AND FACTORING?

Many small Canadian firms that are, unfortunately, don’t qualify for what we call a true pure-play ABL, based on deal economics and size of facility and asset categories. In those cases, an accounts receivable facility/ factoring will usually work. Mid-sized companies are frequent users.

Definitely not, as working capital facilities, mini ABLs we could call them, are available that finance a combo of A/R and inventory, liquid assets such as accounts receivable (typically called factoring financing), with the potential to add on purchase order financing when that makes sense.

The loan-to-value ratio of your borrowing power will always increase in asset financing compared to traditional banking.

Our mini ABLs, aka working capital facilities, are priced significantly higher than proper asset-based lines of credit but offer the same flexibility and access to capital.

So, is there a bottom line on asset-based lenders? The old saying 'the trend is your friend' is applicable - more and more firms are investigating abl lending and benchmarking it against bank loans.

KEY TAKEAWAYS

CONCLUSION: ASSET-BASED LOANS

Do not, we repeat, do not investigate this type of financing if you have all the business credit you need and have no challenges in working capital financing and business growth!

If that’s not you, call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can help you benchmark abl loans vs. bank financing facilities. When raising funds from traditional sources is not an option, let our team get the job done—let's get started.

FREQUENTLY ASKED QUESTIONS

ABL lending is a financing agreement for a line of credit or a term loan structure secured by the company's collateral assets if the borrower defaults. Typical assets secured and used as collateral are inventories, accounts receivables, equipment/fixed assets and company-owned real estate if applicable - Asset-based financing serves corporate borrowers, not consumers - ABL lenders assess asset value to minimize potential loss.

Advance rates are determined based on the value and type of assets pledged as collateral, market conditions, and the borrower's financial health.

Typical assets include accounts receivable, eligible inventory, machinery, equipment, and commercial real estate.

They determine how much financing a business can secure, affecting cash flow and investment opportunities.

Advance rates vary by industry due to differences in asset liquidity and market volatility.

Highly liquid assets typically have higher advance rates because they can be easily converted to cash.

Asset-based lending relies on collateral value, while traditional lending often depends on creditworthiness and cash flow.

By maintaining high-quality, easily liquidated assets and demonstrating strong financial performance.

Risks include asset devaluation, market volatility, and potential difficulties in asset liquidation.

Startups with substantial assets and sales can use asset-based lending, but they may face higher scrutiny and lower advance rates.

Businesses use their receivables as collateral to secure loans from a factoring company or abl lender. They receive funds based on a percentage of their outstanding invoices - known as the ' advance rate'. Companies use these facilities in place of traditional bank lending. Factoring fees are not expressed as interest rates.

What is the significance of Loan-to-Value (LTV) ratios in asset-based lending?

LTV ratios indicate the proportion of an asset's value that can be borrowed, influencing the amount of available financing in standard credit risk due diligence.

Effective collateral management ensures the assets retain their value, supporting higher advance rates.

Favorable market conditions can lead to higher advance rates, while adverse conditions may reduce them.

Huge, higher-quality ABL deals are competitive with bank financing. Transaction rates of most asset-based lenders typically vary based on asset quality, credit quality, transaction size, and the overall level of risk associated with any transaction or industry.

While the annual percentage rate of an ABL asset-based loan is higher in almost all cases, asset-based lending in Canada delivers more capital as firms constantly borrow for cash flow needs on an ongoing basis with fewer covenants than business banking, which is the asset-based lenders focus - assets, and no covenants!

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Asset-Based Lending Advance Rates: Unlocking Business Financing | 7 Park Avenue Financial

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