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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ABL Credit lines 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”
Understanding the ABL Credit Lines
Asset-based financing in Canada is another term for a ‘simple design tweak’ in the business credit line requirement your firm needs for cash flow/working capital operations.
Asset-based lending allows businesses to secure loans using their physical assets as collateral, providing flexible and reliable financing.
Clearly, ‘the chase is on’ for alternate methods of financing your business in the current environment. Understanding asset-based lending involves recognizing how it operates differently from traditional bank loans, focusing on using physical assets to secure the loan. Let’s dig in.
What is Asset-Based Lending (ABL)?
Asset-based lending (ABL) is a financing method that allows businesses to use their assets as collateral to secure a loan.
Unlike traditional bank loans, which heavily weigh financial statements and credit history, ABL focuses on the value of the pledged assets.
Businesses with substantial assets but limited credit history can still access the funding they need.
Whether it’s accounts receivable, inventory, equipment, or even commercial real estate, the value of these assets forms the basis of the loan, making ABL a versatile and accessible financing option for many businesses.
Break Free from Cash Flow Constraints with ABL Financing
Problem: Canadian businesses often struggle with seasonal fluctuations and growth opportunities due to limited access to traditional financing.
Without adequate working capital, you might miss crucial expansion opportunities or face challenges meeting operational expenses.
Let the 7 Park Avenue Financial teamshow you how an ABL Line of Credit converts your accounts receivable, inventory, and equipment into immediate working capital, providing flexible financing that scales with your business needs.
Three Uncommon Takes
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ABL Lines of Credit can improve supplier relationships by enabling early payment discounts, creating a positive cash flow cycle.
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Using an ABL facility can enhance your business's credit profile more effectively than traditional loans due to the regular reporting requirements.
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ABL financing can serve as a strategic tool for acquisition financing, allowing businesses to leverage target company assets immediately post-purchase.
Benefits of an ABL Asset-Based Credit Facility
An ABL Credit line offers businesses a flexible and scalable funding solution. Companies can draw funds as needed, up to a predetermined limit, and repay them as their cash flow allows.
This flexibility is particularly beneficial for businesses with fluctuating cash flows, providing a financial safety net during periods of low cash flow.
Additionally, ABL lines of credit can be used for various business needs, including working capital, expansion, and refinancing. This adaptability makes them invaluable tools for managing day-to-day operations and supporting long-term growth.
Who Can Benefit from an ABL Lines of Credit?
Businesses with valuable assets such as accounts receivable, inventory, equipment, and commercial real estate are prime candidates for an ABL line of credit.
This type of financing is especially advantageous for companies experiencing fluctuating cash flows, as it offers a flexible and scalable funding source.
Manufacturing, distribution, and retail industries, as well as sectors like construction and agriculture, can particularly benefit. These businesses can secure the necessary funding to navigate economic challenges and support their growth ambitions by leveraging their assets.
Challenges with Traditional Bank Credit Lines
The Canadian chartered bank requirement for a revolving credit facility for firms large and small is obvious: track records and financial statements that measure up in every way, from clean balance sheets to profits and cash flow coverage.
But what if your firm can’t meet one, much less all, of those criteria? One solution is the ‘ABL’—commonly called the asset-based line of credit—which provides flexibility and fewer compliance requirements for businesses.
This covenant-light structure allows companies to borrow against their assets with fewer restrictions than traditional cash-flow lending.
How Asset Based Lending Credit Lines Work
These facilities mirror bank financing and typically secure the same assets - i.e. receivables and inventory.
However, an asset-based loan offers benefits and applications for businesses beyond those facing liquidity issues, such as growth-driven companies with valuable assets.
Asset financing credit lines differ in that they can, at your option, also include fixed assets/equipment and even real estate as a part of that revolving credit line.
In asset-based lending, physical assets are used as collateral, allowing companies to access capital by evaluating their physical assets to determine eligible collateral and advance rates. Talk about an increase in business borrowing power.
Key Differences Between Bank and ABL Credit Facilities
Business owners and financial managers need not struggle to understand how an asset credit facility differs from a bank line. Bank lending in Canada is steeped in what banks consider time-tested methods of analyzing risk—i.e., debt ratios, covenant breaches, etc.
Canada’s strong banking system also imposes a lot of regulations on banks. Asset-based credit facilities, or asset-based loans, are typically offered by commercial finance firms that are not regulated by banks’ constraints by governments and shareholders.
These asset-based loans provide flexibility and are suitable for liquidity-strapped businesses and growth-oriented companies with valuable assets to pledge as collateral.
Unlike traditional bank loans, asset-based lending often offers more flexible terms and potentially lower overall financial burdens, as it does not carry the high interest rates associated with cash flow financing.
Understanding the Borrowing Base Concept with Accounts Receivable
The concept of a business credit line’s uses and needs in Canada is based on what lenders call your ‘borrowing base’ - the pool of financed assets.
Asset-based lending provides significant business benefits by offering liquidity and stability, especially during uncertain times. This type of financing positively impacts a business's cash flow by focusing on the value of the business's assets rather than traditional cash flow metrics, which assess financial health based on cash flow stability.
Typically, current assets, i.e., A/R and inventory, form the majority of your borrowing base. These asset categories will fluctuate based on sales and asset turnover, i.e., days, outstanding sales, and inventory turns.
ABL vs. Term Loans: Impact on Business's Cash Flow
It’s always important to remember that neither a bank line nor an asset-based credit line are ‘term loans.’
Asset-based lending provides businesses with flexible financing options and ongoing support, allowing them to leverage their assets for growth.
Your business credit line fluctuates daily and does not add debt to the balance sheet. It suffices to say there are no fixed payments or amortization schedules.
Industry-Specific Considerations for ABL Financing with Physical Assets
Certain types of businesses present challenges to the need for a credit line—some examples might include exposure to the construction industry or government receivables.
Also, 'inventory' is a key asset for many companies and a large part of the current asset mix. While banks might often be reluctant to finance specific inventory, the asset-based lender prefers to determine inventory and advance market values based on that assessment.
CASE STUDY:
A Toronto-based manufacturer faced seasonal demand fluctuations that strained working capital. By implementing an ABL Line of Credit, they:
- Increased available working capital by 40%
- Reduced supplier payment terms by 15 days
- Captured early payment discounts worth $75,000 annually
- Supported 25% year-over-year growth
- Eliminated cash flow gaps during peak seasons
Results: The company achieved sustainable growth while maintaining healthy margins and strong supplier relationships.
Key Takeaways
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Advance rates determine your borrowing power based on asset quality
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Borrowing base calculations drives available credit
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Regular collateral reporting ensures maximum availability
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Asset quality matters more than company size
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Operational integration streamlines funding access
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Understanding asset-based lending provides insights into how ABL operates by using physical assets as collateral, highlights the differences from traditional bank loans, and offers examples from a direct lender's perspective
Conclusion
Looking to explore business credit line options and alternatives via a bank or asset-based financing solution.
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your needs.
FAQ
What collateral is required for an ABL Line of Credit?
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Accounts receivable (typically up to 85% advance rate)
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Inventory (usually 50-65% advance rate)
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Equipment and machinery (varies by type and condition)
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Real estate (if applicable)
How quickly can I access funds from an ABL facility?
What minimum revenue does my business need?
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Typically $5M+ annual revenue
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Some lenders may consider $2M+ for specialized industries
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Credit quality of receivables matters more than absolute revenue
What makes ABL lines of credit different from traditional financing?
How does an ABL facility grow with my business?
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Automatic credit line increases with asset growth
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Seasonal flexibility built-in
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Multiple asset classes accepted
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Scalable reporting systems
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International expansion support
What minimum requirements exist for ABL financing?
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Quality accounts receivable
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Regular financial reporting capability
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Organized asset tracking systems
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Professional management team
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Clear growth strategy
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Evaluation of physical assets to determine eligible collateral and advance rates
What role do borrowing base certificates play?
