|ABL Finance: Unlocking Your Business's Hidden Treasure Chest | 7 Park Avenue Financial

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A Smarter Approach to Business Funding: Exploring ABL Loans and Asset Finance Revolvers

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        Financing & Cash flow are the biggest issues facing business today 

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EMAIL:  sprokop@7parkavenuefinancial.com

"The art of business is converting assets into cash." - J. Paul Getty

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ABL FINANCE  and working capital solutions  – Save time and focus on profits and business opportunities

7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”

ABL Loans and Asset Finance Revolvers: A Winning Combination for Financial Stability   

WHAT IS ABL FINANCE

Let’s get right to the point. Are you not surprised that many Canadian business owners and financial managers are unaware of the importance of asset-based lending (ABL) finance, a form of asset-based lending (ABL) that leverages a company's assets to secure funding, via abl lenders in the asset finance arena in Canada?

INTRODUCTION

Did You Know:

1. The global asset-based lending market size was valued at USD 440.67 billion in 2020 and is expected to grow at a CAGR of 7.5% from 2021 to 2028.
2. In Canada, asset-based lending volumes increased by 15% in 2019, reaching CAD 32 billion.
3. Approximately 70% of ABL borrowers report improved cash flow management after implementing this financing solution.
4. The average advance rate for accounts receivable in ABL arrangements is between 70-85% of eligible receivables.
5. Small and medium-sized enterprises (SMEs) account for over 60% of the ABL market in North America.

Asset-based lending, known as ' ABL,' is a financing method that allows a business to use its assets as collateral for a loan or revolving credit facility. Common assets secured are accounts receivable, inventories, fixed assets, and even commercial real estate.

The assets are combined into a revolving credit facility/business line of credit, allowing the business to meet day-to-day working capital needs for operating expenses versus an unsecured loan.

As the company uses the facility, it borrows and repays based on incoming collections/ cash flow receipts from sales and sufficient assets in  a/r, inventory and equipment. -

The business can re-borrow as needed based on the credit limit that was assigned to the facility -  This is a cost-effective means of financing a business as the companies pay for funds only as used and fluctuates based on business needs.

Business owners should focus on how these asset lending facilities work, how much they cost, and the eligibility criteria.

WHY CONSIDER ASSET-BASED LOANS?

ABL loans continue to be a popular alternative financing method in Canada for businesses unable to meet traditional financial institution approvals for business financing.

Using sales and a wide range of assets for collateral provides a business with a flexible financing solution as a funding source for their business. The terms and conditions of an asset-based loan depend on the type and value of the assets pledged, highlighting the risk factors involved for lenders.

Businesses can use ABl financing to stay competitive and access the funding they need when traditional cash-flow lending solutions are impossible.

Asset-based lending, or asset-backed finance, ABL financing or an asset-based loan, is a flexible form of funding that allows small and medium businesses to optimize cash generation.

The availability of this type of funding maximizes growth opportunities while managing successful turnarounds to maximize profits.

Are you not even surprised that this type of loan financing (actually, it’s not a loan - more on that later), called a ‘revolver,’ competes with Canadian chartered banking facilities on a day-to-day basis and wins !?

ABL LOANS FROM ASSET BASED LENDERS ARE COVENANT LIGHT

Asset finance offered a huge benefit to business borrowers, in that the covenant restrictions and ratio requirements required by banks are NOT a focus under ABL LOANS.

Lenders offering asset finance solutions via a senior credit facility are focused on asset values, and, unlike banks place less focus on liquidity. Lenders conduct regular appraisals to evaluate the current market value of collateral assets and make informed decisions regarding credit availability and risk management.

ABL LOANS ARE A NEW FORM OF FINANCING

Asset-based lending is a form of financing in which you can access the funds whenever needed and pay them back as soon as possible.

Asset-based lending helps businesses secure funding by leveraging their assets, facilitating quicker and more flexible access to capital than traditional loan structures.

There are no penalties for paying it off early, and interest will not accrue at any point.

Part of the confusion, misconceptions, and misinformation around this type of financing comes from the name and terms around the ABL revolver, which can mean different things to different people when it comes to ‘asset-based lenders’.

ABL FINANCING AND ' FACTORING ' - CLEARING UP THE CONFUSION WITH ACCOUNTS RECEIVABLE FINANCING

Invoice factoring, or accounts receivable financing, is when a lender advances funds to an organization based on outstanding invoices (usually <90 days old).

This means that factoring companies lend money from your unpaid bills via a receivable finance solution. The company gets its cash up front, and you get paid soon after.

Factoring can be considered asset-based lending because the business’s receivables act as collateral for funding with lenders.

While many traditional factors offer Accounts Receivable Financing services, they will not typically provide loans in other assets such as inventory or equipment finance options due to less chance of repayment owing to longer terms.

WHO USES AN ABL LOAN FACILITY FOR WORKING CAPITAL?

Asset-based loans are used by companies that need working capital to operate or grow.

Often, these cash flow problems stem from rapid growth when a company requests the ABL facility and it helps position them for future success in managing their finances even if they have not yet reached a point of profitability.

In the pure sense and most relevant meaning of the term in Canadian asset finance, the ABL facility provides comprehensive asset financing or monetizing of current (and in some cases) fixed assets that significantly enhance their working capital facilities.

This type of facility competes head-on with Canadian charted bank facilities. Unlike a cash flow loan or a term loan, this type of funding monetizes assets.

ABL loans are well suited to asset-focused businesses with fluctuating cash flow needs while still requiring capital to operate and access growth opportunities.

Industries such as manufacturing and retail, distribution, and transportation are extensive users of asset-based finance.

In larger transactions, the lender may require some form of appraisal based on asset values. This helps maximize the business's borrower power based on advance rates on the assets.

COMPARING BANK REQUIREMENTS FOR A REVOLVING CREDIT LINE?

The asset finance lenders in Canada have recently gained significant traction.

At 7 Park Avenue Financial, we feel the primary reason is simply that their facilities offered enhanced borrowing with a focus on assets, unlike comparable chartered bank facilities, which come with a stringent requirement of a clean balance sheet, profitability, ability to maintain ratios and covenants, and in many cases requiring outside collateral.

The 2008 and 2009 global recessions enhanced the viability and visibility of ABL loans. Banks all over North America pulled back on commercial lines of credit and revolver finance.

That leaves thousands of companies with reduced, restricted, and, in some cases, no borrowing or operating facilities. And let's not even talk about post-pandemic Covid challenges to business and economic uncertainty.

Most Canadian business owners and financial managers are unaware of who the ABL asset finance lender is. Typically, they are smaller boutique firms, often subsidiaries of major U.S. corporations and banks.

Their teams are small, highly focused on one thing (monetizing assets for cash flow and working capital!) and offer facilities anywhere from 250k to hundreds of millions of dollars.

Many Canadian companies are also unaware that several Canadian chartered banks have created asset finance lenders within their banks.

The irony is that when a chartered bank calls a loan, a competing division within the bank can often rescue the company. We'll let you mull that one over!

As we noted, abl facilities are available for any amount over 250k. Still, the pure-play ABL revolver typically comes in at 3 to 5 Million dollars as an entry point, with loans typically secured by accounts receivable, inventory, fixed assets, and real estate if applicable.

It is these key assets that are used as collateral and they become your ongoing ' borrowing base '.

A SIMPLIFIED REPORTING PROCESS

Businesses using asset-based loan solutions are required to provide monthly reports on their business - typically, that is an interim balance sheet and income statement and proper agings of accounts receivables, inventories, and accounts payable.

Current technologies allow companies to simplify reporting via various digital solutions to upload necessary information efficiently.

THE BORROWING POWER OF AN ASSET-BASED REVOLVER FACILITY

Lenders are flexible on the loan-to-value ratio. For example, they may give up to 90% of the face value for highly marketable security such as receivables.

If the borrower defaults, lenders can recover their investment by liquidating the secured assets, making the value of the collateral crucial for determining loan amounts and terms.

Generally, your asset-based loan is calculated on up to 90% of your accounts receivable, up to 90% of the net realizable value of inventory and equipment you own, and 75% for pre-sold merchandise.

Your assets are evaluated based on their estimated worth to provide a lending limit that can be used by businesses like yours with specialized needs or unsecured credit issues.

This way, entrepreneurs get what they need without being penalized for not having perfect credit! - Bottom line? Enhanced borrowing power!

Asset-based loans are designed to cover the borrower’s assets in case of default, but they never total 100% of the estimated value. The margin is held as a buffer for liquidation costs should that be necessary, and this includes things like discounting and paying any accrued interest if it will help them sell faster.

WHAT ARE ASSET BASED LENDING RATES?

The interest rates on asset-based loans vary significantly from one transaction to the next. Typically, these are based on what type of assets you have available as collateral and your business's financial performance.

Rates on an asset-based abl loan revolver facility are higher but competitive with overall credit quality. Small firms can pay a significant premium in financing charges, but the offset is the ability to access working capital to facilitate growth and profits.

In summary, every business owner or financial manager concerned with operating finance should investigate and consider an asset-based financing solution. Standard banking criteria do not apply, and you can grow, restructure, and in some cases quickly acquire a competitor using this finance strategy with your company's assets being the key focus.

You consider your firm unique, so investigate a new and unique type of short-term business financing via a revolver credit line that works! One of the critical benefits of asset-based loans is their ability to provide working capital.

This type of financing is ideal for companies that need extra cash, especially rapid growth start-ups or those with existing cash flow problems from rapidly growing too quickly and needing more money upfront than regular bank financing can offer them.

Two uncommon takes on ABL finance:

1. ABL finance is a strategic tool for seasonal businesses to smooth out cash flow fluctuations

2. The potential of ABL finance in facilitating mergers and acquisitions for mid-sized companies

KEY  TAKEAWAYS

Borrowing base calculation: Understanding how lenders determine the amount you can borrow based on eligible assets

 

Collateral valuation: Grasping the methods used to assess the value of your assets for lending purposes

 


Asset eligibility criteria: Knowing which types of assets qualify for ABL financing and their respective advance rates

 
 
Monitoring and reporting: Comprehending the ongoing requirements for financial reporting and asset tracking


Covenant compliance: Familiarizing yourself with common financial covenants and their impact on the lending relationship

Unlock your business's hidden wealth: Turn your assets into instant cash flow with ABL finance!

KEY TAKEAWAYS  

• Asset valuation forms the foundation of ABL, determining borrowing capacity and terms.

• Collateral management ensures lenders maintain security while borrowers maximize available funds.

• Working capital optimization through ABL enables businesses to seize growth opportunities swiftly.

• Cash flow forecasting helps companies leverage ABL effectively, aligning financing with business cycles.

• Understanding borrowing base calculations allows businesses to anticipate available credit accurately.

CONCLUSION

Asset-based lending revolutionizes how Canadian businesses access capital, offering a game-changing alternative to traditional financing methods.

ABL loans and asset finance revolvers are solid alternatives to traditional bank cash flow lending. By understanding and focusing on the financing's eligibility and advantages, business owners can make informed decisions about access to capital needed for growth.

Any company with seasonal or fluctuating cash flows is a potential beneficiary of ABL loan solutions.

Confused? Hopefully not. Interested?

Call 7 Park Avenue Financial. A trusted, credible and experienced  Canadian business financing advisor on ABL loans today and a customized business loan arrangement that works for your firm.

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

What is asset-based lending?

Asset-based lending is a collateral-based loan for businesses.  Financing solutions via Asset-based loans or lines of credit / revolving credit agreement are secured by inventory, accounts receivable, equipment or other property owned by the loan applicant. Asset-based lending maximizes cash flow for small and medium-sized businesses. Whether looking to grow or manage a successful turnaround, asset-backed financing provides maximum flexibility.

How quickly can I access funds through ABL finance?

ABL finance typically offers faster access to funds compared to traditional loans. Once your credit facility is set up, which can take 4-6 weeks, you can usually access funds within 24-48 hours of submitting a borrowing request. The initial setup involves due diligence, asset valuation, and legal documentation.

What types of assets qualify for ABL finance?

Common assets that qualify for ABL finance include:

• Accounts receivable

• Inventory

• Equipment and machinery

• Real estate

• Intellectual property (in some cases) The exact eligibility and advance rates depend on the lender and the quality of the assets.

How does ABL finance compare to traditional bank loans?

ABL finance differs from traditional bank loans in several ways:

1. It's based on asset value rather than credit history for the company's sales and valuable assets

2. It often provides a higher line of credit for borrowing limits for the company's cash flow needs versus bank revolving lines of credit or unsecured loans or a personal loan. - Liquid assets such as a/r and inventory come  with higher margins

3. Businesses choose asset-based lending as it offers more flexibility in terms of repayment.

4. It typically has faster approval processes.

5. It may have less stringent financial covenants for loaned funds and eligible collateral.

However, ABL finance may have higher interest rates and require more frequent reporting.

Can I still use my assets while they're leveraged for financing?

Yes, you can generally continue to use your assets in the normal course of business while they're leveraged for ABL finance. The lender takes a security interest in the assets but doesn't take possession. You can sell inventory, collect receivables, and use equipment as usual, but you'll need to report these activities and maintain agreed-upon borrowing base levels.

What are the typical interest rates and terms for ABL finance?

A: Interest rates for ABL finance typically range from  Prime + to several percent higher, depending on asset quality, business stability, and overall risk.

Terms usually include:

• Revolving credit lines with 12-36 month terms, often renewable

• Monthly interest payments

• Regular reporting on asset levels and quality

• Periodic audits or field examinations

• Financial covenants, though often less restrictive than traditional loans

Rates and terms can vary significantly based on the lender, borrower's profile, and market conditions.

What are the qualifications for asset-based lending?

There is a general misconception about who qualifies for asset-based financing. In reality, the company must be stable and have financed assets. The company's current debts cannot already be pledged to another lender—small and middle-market companies are large users of ABL finance.

What are some uses of asset-based loans?

An abl credit facility can be used for :

Growth finance

Mergers and acquisitions

Addressing seasonal or cyclical cash flows

Companies with high leverage /debt

Firms unable to access conventional credit

Turnaround and restructuring

Management buyouts/leveraged buyouts

What is the main difference between ABL loans and traditional cash-flow lending?

ABL loans focus on the value of business assets used as collateral, while traditional cash-flow lending focuses on a historical company's  cash flows

What types of assets can be used as collateral for ABL loans?

Common types of collateral financed by the asset based lender include common physical assets such as receivables, inventories, fixed assets and real estate - in some cases,  intellectual property can be monetized within a facility.

What makes ABL finance more flexible than traditional loans?

• Borrowing limits based on asset value, not fixed amounts

• Credit line can grow with your business

• Ability to access funds quickly as needed

• Less emphasis on credit history and more on asset quality

How can ABL finance improve my business's cash flow?

• Converts accounts receivable into immediate cash

• Provides working capital to manage seasonal fluctuations

• Allows for quicker inventory turnover

• Reduces reliance on customer payment timing

Can ABL finance help my business during rapid growth phases?

• Provides scalable funding that grows with your business

• Enables large inventory purchases to meet increased demand

• Supports expansion into new markets or product lines

• Offers flexibility to seize time-sensitive opportunities

What types of assets can be used in ABL financing?

• Accounts receivable

• Inventory (raw materials, work-in-progress, finished goods)

• Equipment and machinery

• Real estate (in some cases)

• Intellectual property (in specialized ABL arrangements)

How does ABL finance support long-term business stability?

• Provides a reliable source of ongoing working capital

• Helps maintain consistent cash flow during market fluctuations

• Reduces dependency on a single financing source

• Allows for strategic planning with predictable funding availability

What is the main difference between ABL and traditional bank loans?

• Focus on asset value rather than credit history  and the difference between revolving credit and term loans

• More flexible borrowing limits based on the pledged asset category

• Typically faster approval and funding process than unsecured bank loans

• Often available to businesses that may not qualify for traditional loans

Are there any industries that particularly benefit from ABL finance?

• Manufacturing (high inventory and equipment value)

• Wholesale and distribution (large accounts receivable)

• Retail (significant inventory levels)

• Transportation and logistics (valuable equipment assets)

• Seasonal businesses (fluctuating working capital needs)

How does the ABL finance application process work?

• Initial consultation and business assessment

• Detailed asset valuation and due diligence

• Proposal of lending terms based on asset quality

• Legal documentation and agreement finalization

• Ongoing monitoring and adjustment of credit line

What are the potential drawbacks of ABL finance?

• Higher interest rates compared to some traditional loans

• Requires regular reporting and asset monitoring

• May involve more complex loan agreements

• Potential for reduced borrowing capacity if asset values decline

How do lenders determine the borrowing base in ABL finance?

• Assess the quality and liquidity of assets

• Apply advance rates to different asset categories

• Consider historical performance and industry factors

• Conduct regular audits to update borrowing base calculations

• Adjust credit limits based on changes in asset values

How does ABL finance differ from factoring?

• ABL provides a revolving credit line based on multiple asset types

• Factoring typically focuses solely on accounts receivable

• ABL allows businesses to retain control of customer relationships

• ABL often offers lower costs for larger, established businesses

What role does technology play in modern ABL finance?

• Enables real-time monitoring of asset values and borrowing base

• Facilitates faster and more accurate credit decisions

• Improves transparency and reporting for both lenders and borrowers

• Enhances risk management through data analytics and forecasting

How can businesses prepare for a successful ABL finance application?

• Organize detailed asset records and financial statements

• Implement robust inventory management systems

• Establish clear processes for accounts receivable collection

• Develop accurate cash flow projections and growth plans

• Consider engaging an ABL advisor or consultant for guidance

How does ABL compare to traditional bank loans in terms of flexibility?

ABL finance offers greater flexibility compared to traditional bank loans in several ways:

• Credit limits can increase as your business grows and asset values rise

• Funding is typically faster and more readily available when needed

• Borrowing is based on asset value rather than strict financial covenants

• Repayment terms are often more adaptable to business cycles

• ABL can accommodate businesses with complex financial situations

Can ABL finance help my business during seasonal fluctuations?

Yes, ABL finance can be particularly helpful during seasonal fluctuations:

• It provides access to working capital based on current asset values

• Credit lines can expand to support inventory build-up for peak seasons

• Businesses can draw funds as needed to manage cash flow gaps

• ABL allows for quicker response to sudden market changes

• It helps maintain steady operations despite revenue fluctuations

What are the typical interest rates and terms for ABL financing?

Interest rates and terms for ABL financing can vary, but generally:

• Rates are often higher than traditional bank loans, typically 2-5% above prime

• Terms usually range from 1 to 3 years, with options for renewal

• Advance rates vary by asset type (e.g., 70-85% for receivables, 50-70% for inventory)

• Fees may include origination, unused line, and audit fees

• Interest is typically charged only on the amount drawn, not the entire credit line

• Covenants are often less restrictive than those in traditional bank loans