What Is Asset Based Lending | 7 Park Avenue Financial

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YOUR COMPANY IS LOOKING FOR CANADIAN ASSET-BASED LENDING! 

ASSET BASED LOANS IN CANADA- THE COMMERCIAL BANKING ALTERNATIVE

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        Financing & Cash flow are the biggest issues facing business today 

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

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WHAT IS ASSET BASED LENDING?   

Asset Based Lending - Canadian business owners and financial managers continue not to take advantage of or investigate the asset based loan, one of the most powerful business financing strategies & business credit available to Canadian firms today. Understanding how asset based lending works is crucial for businesses, especially SMEs, as it involves leveraging their assets as collateral to secure funding. This type of financing can help manage cash flow challenges and support growth by providing access to capital based on the value of the company's assets. Afraid to investigate? Let’s dig in.

Problem-Agitate-Solution (Title: "Trapped Capital: Your Business Assets Hold the Key") Canadian businesses are sitting on millions in locked-up capital within their assets. Every day, this trapped value prevents growth, stalls expansion, and limits operational flexibility. Asset Based Lending unlocks this dormant potential, converting your existing assets into immediate working capital without diluting ownership or requiring real estate security.

3 Uncommon Takes:  

1. ABL can actually improve supplier relationships by enabling early payment discounts

2. Using ABL during high-growth periods can be more strategic than equity financing

3. ABL facilities can serve as excellent acquisition financing tools in consolidating markets

DID YOU KNOW  

• 78% of businesses using ABL report improved cash flow management

• Average ABL facility size in Canada: $5.2M

• 65% of ABL users are in manufacturing or distribution

• ABL market growing at 12.3% annually in North America

• 82% retention rate among ABL borrowers

OVERCOMING FINANCING AND INDUSTRY CHALLENGES VIA ABL   

While asset-backed lending, or “ABL lending” as it is sometimes called, is a widespread U.S. and European financing tool, Canadian business has been slow to catch on and investigate this collateral financing option to secure needed funds. However, a larger percentage of companies worldwide are investigating the ABL finance solution in search of a maximum loan solution for their funding needs.

In contrast, cash flow lending evaluates a company's cash flow to determine borrowing eligibility, relying on the stability of cash flow metrics like EBITDA. This differs from asset-based lending, which focuses on the value of a company's assets as collateral, providing flexibility for businesses with variable cash flows.

Solutions from Canadian asset based lending banks are also available but these facilities typically are larger in excess of 5M$ , etc. ABL banking often competes internally with Canadian chartered banking divisions to a certain degree.

WHAT IS ABL?

How Asset-Based Loans Work

Asset-based loans are a dynamic financing option that allows businesses to leverage their assets as collateral to secure funding. These loans are particularly useful for companies needing to finance working capital, purchase equipment, or expand operations. The process of obtaining an asset-based loan typically involves several key steps:

1. Identifying Collateral: The borrower identifies the assets they wish to use as collateral, such as accounts receivable, inventory, or equipment. Financial statements and other documentation are provided to the lender for evaluation.

2. Asset Evaluation: The lender assesses the value of the assets and determines the loan amount based on the loan-to-value ratio. This ratio is crucial as it dictates the maximum loan amount relative to the asset’s value.

3. Agreement on Terms: Both parties agree on the loan terms, including the interest rate, repayment schedule, and any covenants or restrictions.

4. Disbursement of Funds: Once the terms are finalized, the borrower receives the loan proceeds and can use the funds for the intended purpose.

5. Repayment and Monitoring: The borrower makes regular payments on the loan. Throughout the loan term, the lender monitors the borrower’s financial performance and the value of the collateral to ensure compliance with the loan agreement.

By understanding how asset-based loans work, businesses can effectively utilize their assets to secure the necessary funding for growth and operations.

SOME BACKGROUND ON COLLATERAL ASSET BASED LOANS & ASSET BASED LENDERS   

Collateral asset-based loans are a powerful financing tool that allows businesses to secure loans using their assets as collateral. These assets can include accounts receivable, inventory, equipment, real estate, and other types of property. The lender places a lien on these assets until the loan is fully repaid, providing a safety net in case of default.

Asset-based lenders are specialized financial institutions that focus on providing these types of loans. They employ teams of experienced professionals who meticulously evaluate the value of the assets and determine the loan amount based on the loan-to-value ratio. This expertise ensures that businesses receive the maximum possible funding while maintaining manageable risk levels.

In addition to asset-based loans, these lenders often offer other financing options such as factoring and invoice discounting, providing businesses with a range of solutions to meet their financial needs.

SOME BACKGROUND ON COLLATERAL  ASSET BASED LOANS & ASSET BASED LENDERS   

ABL lending via asset-based lending companies is coming into popularity on a slow but increasing basis in Canada because it provides your firm with increased liquidity - i.e. more working capital and cash flow! Asset-based lending is certainly not the only choice. A pledged asset, used as collateral in asset-based lending, can come with risks and restrictions, such as a negative pledge clause that limits additional borrowing against the same asset.

Your firm can be financed by, for example, unsecured loans from a [Canadian Chartered bank line of credit](http:// https://www.7parkavenuefinancial.com/Canadian-business-banking.html), or, in other cases, a single factoring or related invoice discounting facility for accounts receivable, or possibly by some other mix of financing strategies from an asset lender.

Asset-based lending for real estate can be financed separately or in conjunction with other facilities.

While the interest rates are the lowest and most competitive in Canada not all businesses can access the credit they require to fund and grow their company - that is why an asset based loan makes sense.

 FINANCING THE BALANCE SHEET   

Balance sheet assets such as accounts receivable, inventory, and fixed assets make up the traditional asset based loans & ABL credit facility lines of credit and are used as the asset collateral - note though that real estate equity can be included in the credit line. These are the assets that are typically reviewed under asset based lending due diligence. Asset based lending for real estate will typically involve a proper third-party appraisal.

The terms and conditions of an asset-based loan depend on the type and value of the assets pledged as collateral. Lenders favor highly liquid collateral, while using physical assets can present additional risks and may lead to lower maximum loan amounts compared to the book value of those assets.

When we meet with business owners and talk about why ABL financing and asset-based lending is coming into vogue, it is our opinion that this is not a fad. Still, a financing solution and reality brought about by the 2008 and 2009 liquidity crisis in Canada affected every aspect of Canadian business financing. Let’s not even talk about pandemics and the effect on business borrowing for the [SME/SMB economy](http:// https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03114.html#a01)!

KEY USES OF ASSET BASED LOANS    

The most common uses of an  asset loan or ABL lines of credit include:

Growth finance solutions when traditional financing cannot be accessed

Buying a company/acquisition finance

Addressing issues of cyclicality and seasonality in a business/ 'bulge financing'

Ideal for companies that are highly leveraged and outside traditional debt and other covenants required by traditional lenders

Turnaround situations/restructuring for equipment /lines of credit

Management buyouts

BENEFITS OF ASSET-BASED LOANS / BUSINESS CREDIT LINES: EVERY BUSINESS AND EVERY INDUSTRY!    

Asset-based loans offer numerous benefits that make them an attractive financing option for businesses across various industries. Here are some key advantages:

1. Access to Capital: Asset-based loans provide businesses with access to capital that might otherwise be unavailable through traditional financing methods.

2. Flexibility: These loans can be used for a wide range of purposes, including financing working capital, purchasing equipment, and expanding operations.

3. Lower Interest Rates: Compared to other types of loans, asset-based loans often come with lower interest rates, making them a cost-effective financing option.

4. Less Restrictive Covenants: Asset-based loans typically have fewer restrictive covenants than traditional loans, offering businesses more operational flexibility.

5. Leverage Assets: Businesses can leverage their existing assets to obtain financing, maximizing the utility of their balance sheet.

By leveraging these benefits, businesses can secure the funding they need to grow and thrive in a competitive market.

BENEFITS OF ASSET-BASED LOANS / BUSINESS CREDIT LINES:  EVERY BUSINESS AND EVERY INDUSTRY!  

Flexible Structuring suited to your line of credit  and debt needs

Higher margin advances on receivables, inventory and equipment, and physical assets  margining

Ability to create a term loan structure on apprised assets such as equipment and real estate

Credit limes are based on sales and assets and can very easily be adjusted upwards

Forex  funds and facilities available based on cross border receivables, suppliers, etc

ABL ADDRESSES EVERY STAGE OF COMPANY GROWTH AND MATURITY   

New, start-up, and even established corporations found it generally more difficult to get loan and business financing money that suited their needs, so, necessity being the mother of invention, Canadian business owners looked to see what was working where, and weighted the cost of capital versus access to capital.

ABL, or asset-based lending, in Canada is a huge industry, with many market participants. Like other aspects of Canadian and U.S. business comparison, the Canadian marketplace is smaller, more fragmented geographically, and a bit less robust.

We strongly recommend that business owners work with a trusted, experienced and credible advisor in this area to map out an asset-based lending solution that works best for your firm, as each industry differs concerning asset-based and capital requirements. Other key partners on your team are your accountants, lawyers, advisors, etc.

We have all heard the term 'perception versus reality and asset-based lending is a great example of that phrase. By that, we mean that many perceptions exist about asset-based lending that isn't true, or if they were perhaps true once, they certainly are not now when it comes to business loan reality.

 For example, your company might not be willing to entertain asset-based financing because 'ABL' is simply unknown to many of your business peers.  The reality is that many of the largest and most successful organizations in Canada, some of the public entities, utilize ABL solutions. You'd be surprised what company is using this method of funding.

Asset-based lending is clearly an 'alternative financing' form for your business liquidity. Many companies we talk to view the word 'alternative' as a negative statement, which might infer financial problems. ABL should not be viewed in such a negative way.

TIME TO REVISIT THE ASSET-BASED LENDING MODEL?     

If your Canadian firm had an asset-based financing facility that gave you more working capital, greater cash-flow turnover, less restrictive covenants, and competitive pricing, would you view that as a negative? We clearly don't think so!

In summary, investigate asset-based lending for your firm as an alternative long-term source of working capital and cash flow. Work with  7 Park Avenue Financial, a dependable and experienced advisor to structure an asset-based line of credit facility that meets your working capital needs. While asset based lending interest rates are higher than traditional financing they can provide you with all the funding you require to run and grow a business.

You might quickly find that other firms in your industry and your competitors start to realize that your firm differentiates itself in a very positive manner based on your new financing facility - i.e. access to more working capital, better relations with suppliers, ability to finance more inventory and receivables and grow your business sales and services. Those are the business goals of most companies!

NEED MORE INFORMATION ON ASSET-BASED LENDING?    

Think of asset-based lending in Canada as loans against your sales and liquid assets such as receivables when you are focused on raising funds and cash flow for growth opportunities   - The ability to pledge specific assets that have value provides short-term working capital for the business.

Asset-based loans and credit lines are focused on liquidity and higher loan to value financing is provided based on the liquidity of the asset- an example would be that receivables are typically financed at 80-90%, and sometimes 100% of their face value, while hard assets such as inventory or real estate would have lower borrowing power, but still nevertheless potentially significant.

ELIGIBILITY CRITERIA FOR BUSINESSES  

To qualify for an asset-based loan, businesses generally need to meet specific criteria. These include:

1. Sufficient Assets: Businesses must have sufficient assets to use as collateral for the loan. This can include accounts receivable, inventory, equipment, and real estate.

2. Stable Cash Flow: A stable cash flow is essential to ensure that the business can make regular payments on the loan.

3. Positive Financial Performance: Demonstrating a positive financial performance reassures lenders of the business’s ability to repay the loan.

4. Industry Eligibility: Certain industries, such as construction and real estate, may have specific eligibility requirements for asset-based lending.

Meeting these criteria helps businesses secure the necessary funding while ensuring they can manage the loan effectively.

THE ASSET-BASED LOAN PROCESS  

The process of obtaining an asset-based loan involves several steps, each designed to ensure that both the lender and borrower are aligned on the terms and conditions of the loan. Here’s a step-by-step overview:

1. Initial Consultation: The borrower meets with the lender to discuss their financing needs and the assets they wish to use as collateral.

2. Application Submission: The borrower submits a detailed application, including financial statements and other relevant documentation.

3. Asset Evaluation: The lender evaluates the value of the assets and determines the loan amount based on the loan-to-value ratio.

4. Loan Approval: Once the evaluation is complete, the lender approves the loan and agrees on the terms with the borrower.

5. Closing: The loan is finalized, and the borrower receives the loan proceeds.

6. Repayment: The borrower makes regular payments on the loan, while the lender continuously monitors the borrower’s financial performance and the value of the collateral.

Understanding this process helps businesses navigate the complexities of asset-based lending, ensuring they can secure the funding they need efficiently and effectively.

KEY TAKEAWAYS

• Strategic borrowing base composition drives optimal funding availability - understanding this alone unlocks maximum facility potential

• Mastering collateral monitoring requirements ensures continuous access to working capital flexibility

• Leveraging accurate asset valuation methods determines the entire success of your ABL relationship

• Maintaining pristine receivables aging directly impacts your borrowing power

• Understanding advance rates across different asset classes maximizes your accessible capital

CONCLUSION - ASSET BASED LENDING ABL  

ABL: investigate and inform yourself of the possibilities! Speak to 7 Park Avenue Financial for your Canadian business financing needs! Let our team work with you to understand your funding needs and business while tailoring a finance solution via the types of asset based financing within ABL that allows you to succeed and grow sales for your products and services.

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

What is Asset Based Lending?

Asset-based lending, aka ' ABL ' allows businesses, via commercial lending,  to borrow against that sale ( via accounts receivable ) and other assets. Typical collateral for an ABL finance loan is receivables, inventories, fixed assets/equipment, and real estate if real property is applicable.

How do asset-based loans work?

Asset-based lending provides business capital by using a company's assets as collateral for loans and lines of credit. Small and medium sizes businesses that are the backbone of the Canadian economy use asset-based finance solutions to cover cash flow and working capital needs.

What is the collateral of an asset based lender?

Collateral is an asset that a lender accepts as security for extending loans. If a borrower defaults on obligations, then the collateral may be seized by the  ABL lender - The asset pledging process is called hypothecation.

What is the loan to value ratio in asset based financing?

The calculations that go into determining the amount companies can borrow from ABL lenders are easy to understand -  Loan-to-value ratio is calculated as follows: calculations are based on a percentage of asset value which in turn represents the loan amount.

How does Asset Based Lending improve business cash flow

• Converts receivables into immediate working capital

• Provides same-day access to funds from new invoices

• Enables early payment discounts with suppliers

• Supports seasonal inventory purchases

• Maintains consistent cash flow during growth periods

What makes Asset Based Lending different from traditional bank loans

• Focuses on asset quality rather than credit history

• Grows automatically with your business

• Offers higher advance rates on assets

• Provides more flexible covenant structures

• Enables faster access to capital

How quickly can my business access Asset Based Lending

• Initial setup typically takes 2-3 weeks

• Same-day funding once facility is established

• Immediate response to borrowing base updates

• Real-time monitoring of available credit

• Flexible draws based on business needs

What types of assets qualify for Asset Based Lending

• Accounts receivable from creditworthy customers

• Finished goods inventory

• Raw materials and work in progress

• Equipment and machinery

• Real estate and buildings

• Purchase orders from established buyers

How does Asset Based Lending support business growth

• Provides scalable financing that grows with revenue

• Supports larger inventory purchases

• Enables new market expansion

• Facilitates equipment acquisition

• Backs acquisition opportunities

What security requirements exist for Asset Based Lending

• First charge on specified business assets

• Personal guarantees may be limited or not required

• Real estate security often unnecessary

• Monthly reporting commitments

• Regular asset monitoring procedures

How are advance rates determined in Asset Based Lending

• Based on asset quality and liquidity

• Typically 70-85% on eligible receivables

• Usually 50-65% on finished inventory

• Equipment lending at 50-75% of forced sale value

• Rates adjust based on historical performance

What ongoing requirements come with Asset Based Lending

• Regular borrowing base reports

• Monthly financial statements

• Asset monitoring and verification

• Customer payment tracking

• Annual facility reviews

What costs are associated with Asset Based Lending

• Interest rates based on prime plus margin

• Monitoring fees for asset verification

• Facility setup charges

• Usually no standby fees

• Costs offset by improved cash flow

How does seasonality impact Asset Based Lending

• Flexible draws match seasonal needs

• Higher advance rates during peak seasons

• Automatic facility growth with inventory builds

• Reduced pressures during slow periods

• Built-in flexibility for cyclical businesses

What distinguishes successful Asset Based Lending applications

• Clean asset documentation

• Strong inventory management systems

• Reliable financial reporting

• Clear customer concentration metrics

• Professional management team

How does Asset Based Lending adapt to business changes

• Automatic increases with sales growth

• Flexible during seasonal fluctuations

• Adjustable advance rates

• Scalable facility limits

• Responsive to market opportunities

What role do lenders play in Asset Based Lending

• Regular asset monitoring

• Strategic growth planning

• Working capital optimization

• Risk management support

• Industry expertise sharing

What Is  Selective Invoice Discounting 

Some banks and asset-based lenders will offer forms of ABL transactions such as accounts receivable financing, including selective invoice and accounts receivable discounting. Businesses can insure their accounts receivables to mitigate non-payment risks, ensuring better financial management and lending opportunities. Here, specific more highly liquid receivables (liquid collateral) can be financed on a high loan-to-value ratio (typically 90%) to enhance the balance sheet from a cash position and is a separate funding solution. Smaller transactions in this area are known as ‘spot factoring’.