YOUR COMPANY IS LOOKING FOR AN ABL ASSET-BACKED BUSINESS CREDIT FACILITY!
ASSET BASED LENDING WORKS!
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Read this article because the ABL business credit line is transforming Canadian business financing, offering easier access to capital in an evolving lending landscape
INTRODUCTION
The business credit line in Canada. Have you kept up with the newest alternative for this key Canadian business financing tool? It's ' ABL’... which is the acronym for asset based lending in Canada. Specifically, we're talking about a non-bank revolving credit facility. Let's dig in.
The ABL business credit line is revolutionizing the way companies access capital and fuel their growth in today's competitive market Could the ABL business credit line be the key to unlocking unprecedented financial flexibility and agility for businesses, leading to unprecedented success?
ONE KEY BENEFIT OF ASSET BASED LENDNG - EASY TO OBTAIN!
In business, it's all about benefits. So what then is so beneficial about asset based lending business credit? Easier to obtain is frankly one key benefit, given that lenders everywhere, including of course here in Canada have tightened credit standards over the last 4-5 years.
WHAT IS A BUSINESS CREDIT LINE
The concept of the credit line is simple - it’s an overdraft allowing a company to enjoy working capital flexibility in the financing of current assets such as inventory and receivables. When banks put such a facility in place they focus on certain restrictions and are structured in such a way that when things go wrong the revolving loan is 'called'.
5 REASONS TO CONSIDER AN ASSET BASED CREDIT LINE FACILITY
While we have identified ABL asset based lending as fundamentally a business overdraft it’s important to realize that it’s a solid tool for a number of different business circumstances.
Those circumstances? They include:
1. The refinancing of an existing bank line of credit
2. A Corporate restructuring - this often allows business owners to maintain ownership without seeking additional equity dilution
3. Acquiring a business or competitor in a merger/acquisition type scenario
4. High growth situations - ( It's an irony of business that traditional lenders such as banks steer away from explosive high growth situations - it throws the ratios out of whack!)
5. Management buyouts utilizing the assets of the company as a key financing mechanism
ABL EQUALS MORE BORROWING POWER - HERE'S HOW
Another key focus of the ABL business credit line is the ability of the business owner/financial manager to borrow higher amounts than in a traditional bank scenario. Managers of ABL firms have a laser-like precision focus on the value of your current and fixed assets.
What type of asset depends on your borrowing needs. Fixed assets? Yes, because a true asset based non-bank line of credit will allow you to borrow, under one umbrella, against accounts receivable, inventory, and fixed assets that are not otherwise collateralized.
Real estate equity can also be bundled into your one single borrowing facility or treated separately as a bridge loan. The ABL lender will undertake the appropriate level of due diligence via your financial statements and ageings of assets such as a/r, a/p, etc.
ABL VERSUS ' THE BANK'
While Canadian banks continue to be the most respected (and liquid) lending institutions in the world Canadian business has simply realized there are other alternatives available when it comes to business credit. (ABL is a lot more popular in the United States where it originated, given bank liquidity, there is a whole different kettle of fish.)
4 KEY OTHER TYPES OF ASSET BASED LOANS
While we have spoken of a ' true' asset-based lending credit line there are some solid ' subsets’. They include:
A/R Financing
Inventory Financing
Tax Credit Financing
Purchase Order/Supply Chain financing
These can be singularly considered for any firm seeking business credit or combined in a number of ways that make sense for your operational and growth needs.
ANY BUSINESS CAN ACCESS ABL CREDIT
While any type of business is theoretically eligible to be considered for non-bank credit lines certain industries such as manufacturing, wholesalers, etc are perfect for this type of business solution.
THE COST OF ASSET BASED LINES OF CREDIT
While we focus a lot on the benefits of the asset business credit line it’s important to note that these facilities are more often than not more costly from a financing and interest rates point of view.
The simple explanation? Non-bank lenders borrow from banks... so it’s a higher cost of capital for them. Typically the risk premium is often higher also as companies financed cannot meet the same level of liquidity and meet traditional lender criteria such as acceptable profits, debt to equity covenants, etc.
Remember these facilities revolve, so you only pay for what you used, and this is not a term loan that brings debt to the balance sheet. It's all about monetizing the balance sheet.
That cost though is offset nicely by the ability to get approved. Fundamental requirements are your ability to provide monthly financial reporting and acceptable turnover of A/R and inventories. Appraisals will often be required if you're throwing fixed assets into the mix.
MINIMUM AND MAXIMUM FACILITY SIZE - SPOILER ALERT - THERE IS NO MAXIMUM
While there is no upper limit for facilities via asset based lenders - typical deals will start on the low end in the 250k range. However, as we have noted, there's no ceiling in business credit in ABL and it may come as a surprise to many that some of Canada's largest and well-known corporations abandoned traditional commercial banking for this type of credit.
KEY TAKEAWAYS IN UNDERSTANDING ABL
- Asset-Based Lending (ABL): A financing method where loans are secured by a company's assets.
- Collateral Valuation: Assessing the value of assets used as collateral for ABL.
- Borrowing Base: The maximum amount a company can borrow based on collateral value.
- Working Capital: Funds available for day-to-day operations.
- Revolving Credit: A flexible credit line that can be reused as debts are paid.
- Risk Assessment: Evaluating the likelihood of default and potential losses.
- Credit Facility: An agreement specifying the terms of ABL financing.
- Advances: Funds disbursed by the lender based on collateral value.
- Covenant Compliance: Adherence to financial agreements and conditions.
- Interest Rates: The cost of borrowing money in ABL arrangements.
- Default Remedies: Actions taken by lenders in case of non-payment.
- Non-Recourse ABL: Lending where lenders cannot pursue additional assets.
- Due Diligence: Thorough investigation of borrower and collateral.
- Liquidation Value: The amount assets could fetch if sold quickly.
- Financial Reporting: Providing accurate financial information to lenders.
- Inventory Financing: A type of ABL focused on inventory assets.
- Accounts Receivable: Money owed to a company for goods or services.
- Loan-to-Value Ratio: Comparing loan amount to collateral value.
- Competitive Advantage: How ABL can give businesses an edge.
- Default Risk Mitigation: Strategies to reduce the risk of non-payment.
CONCLUSION
While the ABL business credit line is often associated with large corporations, a unique viewpoint suggests that smaller businesses could use ABL creatively to forge partnerships and collaborate, enabling them to access new markets and resources previously beyond their reach
Don't get caught being up to date on financing solutions that are available to your firm. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of delivering solid financial solutions for your firm's growth needs.
FAQ
What is an ABL business credit line, and how does it work?
An ABL business credit line is a financing option where a company secures a loan using its assets as collateral. The credit line amount is determined by the value of these assets, such as accounts receivable and inventory. Borrowers can draw funds as needed, up to the established limit.
What are the benefits of using an ABL business credit line?
ABL financing offers flexibility, as you can access funds when necessary. It helps improve working capital, enabling you to cover expenses and seize growth opportunities. Moreover, it can be easier to obtain than traditional loans, especially for businesses with valuable assets.
How is an ABL credit line different from a traditional bank loan?
Unlike traditional loans, ABL credit lines focus on asset value rather than creditworthiness. This makes ABL accessible to businesses with strong assets but weaker credit profiles. Additionally, ABL credit lines often have revolving terms, allowing you to reuse the credit as you pay down the balance.
Are there any specific industries that benefit the most from ABL business credit lines?
ABL financing is versatile and can benefit a wide range of industries. However, it is particularly advantageous for manufacturing, distribution, and service companies that have substantial assets tied up in accounts receivable and inventory.
What happens if a borrower defaults on an ABL credit line?
In case of default, the lender may take possession of the collateral to recover the outstanding debt. However, ABL credit lines can be structured as non-recourse, meaning the lender cannot pursue additional assets beyond the collateral.
How long does the approval process for an ABL business credit line typically take?
The approval process can vary but usually takes several weeks. It involves due diligence, collateral appraisal, and legal documentation.
Are there restrictions on how I can use the funds from an ABL credit line?
Generally, there are no restrictions on fund usage. You can use the funds for working capital, expansion, debt consolidation, or any business-related purpose.
What types of assets can be used as collateral for an ABL credit line?
Common collateral includes accounts receivable, inventory, machinery, equipment, and sometimes commercial real estate, depending on the lender's policies and the industry.
Can you explain the difference between asset-based lending (ABL) and invoice factoring?
ABL uses a broader range of assets as collateral, while invoice factoring specifically involves selling accounts receivable to a third party.
How does the lender determine the borrowing base in an ABL credit line?
The borrowing base is calculated by applying advance rates to eligible collateral categories. For example, accounts receivable may have a higher advance rate than inventory.
What are the key factors lenders consider when deciding the credit limit for an ABL credit line?
Lenders consider the quality and value of your assets, your financial performance, industry trends, and the specific terms of the credit facility when determining the credit limit.
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