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IS ASSET BASED LENDING RIGHT FOR YOUR COMPANY

Canadian businesses looking asset based loans need to understand the benefits of an asset-based lending structure and the key issues and themes for borrowers to consider as compared to more traditional forms of secured lending such as unsecured loans/term loans and business lines of credit from commercial banking institutions.

If you are looking for a more creative way of financing your sales and assets, then an asset-based lending structure may be right up your alley. Let the 7 Park Avenue Financial team show you how these types of loans can benefit both borrowers with their unique advantage over many of the traditional secured or unsecured forms of Canadian business financing!

Asset-based lending provides an excellent means of financing during periods where cash flow is uncertain or not enough to cover business growth and day to day operations. This can be especially true for businesses that need capital but have sales and assets as collateral.

The value of certain assets will remain constant as collateral for a loan, even when companies may be more challenged in terms on cash flow and earnings. Asset-based lending will continue to provide financing through any economic or industry crisis in almost all cases.

WHAT IS ASSET BASED LENDING

Asset-based lending is a niche market in Canada with ABL lenders advancing funds under lines of credit and term loan structures to borrowers based on an agreed percentage of asset values.

Asset-based loans are more closely tied with your assets than typical secured or non-security types of business finance and can offer better access to capital for those looking into this form of securing funding for growth and operations, and in some cases... survival!

The main difference between asset based borrowing versus others occurs because these types rely heavily upon what's being lent on a loan to value ratio as opposed ot just pure cash flow from regular income-producing opportunities

Funds are advanced to your business based on an agreed percentage basis on sales accounts receivable and certain physical assets, most commonly receivables, inventory, fixed assets and equipment, and in some cases commercial real estate.

Asset-based lending is on the rise in Canada, no surprise - As the greater focus is placed on collateral and liquidity, compared to traditional bank loans and facilities that are cash flow and formula driven.

HOW DOES ASSET BASED LENDING WORK ON A DAY TO DAY BASIS

Asset-based lending transactions can appear complex and mechanical at first but will be well understood by borrowers with the benefit of some specific financing advice from the 7 Park Avenue Financial team.

IT'S ALL ABOUT THE BORROWING BASE! FINANCING THE BALANCE SHEET

The borrowing base is the most important factor in determining how much financing your firm is eligible for . This formula determines what your total facility size will be, and it's usually determined by looking at an agreed asset pool of sales/business assets. It's a key part of your final loan agreement.

ABL lenders will take standard reserves against the facility in case of insolvency or government crown arrears.

Typical assets in your borrowing base are commercial company-owned real estate that has equity in excess of any existing mortgages

Asset-based financing firms will finance your inventory based on resale value and whether your inventory consists of raw materials, work in process, or finished goods in that order of magnitude for financing as a part of your credit facility.

When equipment is included in your line of credit or term loan the value of the asset will be made in the form of a form or informal appraisal and what encumbrances might be in place.

Accounts receivable will almost always represent the largest part of the facility - high value and outstanding receivables make loan eligibility key as part of your business credit line/revolving line of credit. This type of financing within a facility resembles factoring and invoice financing which are often stand-alone financings in a broad range of non-traditional funding sources available and popular today.

UNDERSTANDING COLLATERAL IN TERMS OF THE BORROWING BASE

It is important for owners and their financial managers to remember that, in asset-based lending, the borrowing base which supports the loans is not the same as the collateral that secures them. The borrowing base is simply the formula used to determine the amount of the loans that the borrower can draw under the loan agreement from time to time. However, the collateral securing the asset-based loan will often extend beyond those assets that are in the borrowing base (and may indeed extend to all of the assets of the borrower) - This is often managed via an all-encompassing general security agreement, which is the same document a Canadian bank would use for their facilities.

Interest rates for ABL loans can often be higher, not always, but when compared to bank financing from traditional bank lenders - Additional ABL finance firms will want to closely monitor the finances of an organization when giving them an abl loan.

MORE ASSETS = MORE LIQUIDITY AND ACCESS TO WORKING CAPITAL

For the borrower, it is crucial that, in a default scenario that they understand that ABL companies have tools to take control of assets and convert those liquid assets such as receivables into cash. Solutions offered to your firm will vary depending on what kind of asset classes are at play, as well as facility size.

WHAT DOES ABL FINANCING COST?

Interest rates on asset-based lending are typically higher than traditional forms of borrowing. Before signing anything make sure that the terms of this type of transaction suit your business and its' ability to bear financing costs via your gross margins.

Asset-backed financing is a great solution for most businesses that cant access the capital they need. Your business gets the working capital that your business needs to grow and expand, including new global markets.

If asset-based lending isn’t an option in your case we recommend exploring other types of finance by talking to the 7 Park Avenue Financial team.

THE ROLE OF THE ABL LENDER IN ASSET MANAGEMENT

Asset-based lending is a type of borrowing where the lender has more control and influence than other secured or unsecured lenders.. This means they get to view ongoing asset reporting schedules around a/r, accounts payable, and new asset acquisitions.

The asst back lender has a more ongoing interest in that borrowing base than on other secured loans. This means that they can negotiate for reporting frequency and extent of financial information required, which may differ from standard practice in collateral loan agreements.

There are operational costs associated with having to monitor and report as part of the asset-based financing due diligence process - however, borrowers often view this as an acceptable price of borrowing money since they now have access to capital otherwise unavailable.

LOOKING FOR A CASH FLOW / WORKING CAPITAL TURNAROUND?

Assets based lending is a great option for companies looking for greater financial leverage and improved access to cash flows. As businesses recover in 2022, many will face a sudden spike of activity due to the pent-up demand that arises from being unable to find funding before then.

Management may well want to consider using asset-based loans so they can scale quickly as needs increase without worrying about running out of money too soon while avoiding the process of ' traditional' loan requests and longer timelines from banks.

While it is difficult to secure and access quickly unsecured cash flow lending until there's evidence of a clearer economic recovery, an asset-based model could help unlock additional finance for those with substantial assets and sales as well as businesses that can demonstrate growth.

The asset-based lending model can provide additional funds as sales and trading increase.

The advice of a reputable Canadian business financing advisor is paramount for borrowers in understanding how the mechanical aspects of their facility work when it comes to sales revenues and the company's assets.

CONCLUSION - WHY CHOOSE ASSET BASED LENDING

Asset-based lending is a way for business owners to get the working capital they need. With asset backed loans, you can use your assets as collateral and obtain cash more quickly, and usually significantly more substantially.

Loans for small businesses can be challenging. The majority of traditional loans from banks require that you have solid equity in your company as well as proven cash flow and profits,, Fortunately ABL has different lending criteria which differs as to how banks view your company when a borrower defaults or can't meet bank covenants.

The lending landscape is changing. ABL lending provides an alternative that does not involve giving up control of ownership and equity, and places a much small reliance on owner personal credit history -While still providing access to capital you need.!

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

What are the pros and cons of asset-based financing solutions?

Asset-based lending via an asset backed lending company is useful for a company looking for growth opportunities and greater credit availability when cash flow needs to be accessed on an ongoing basis for a more maximum loan amount - it gives your firm flexible financing to manage and focus on growth with high margin loan advances on assets with multiple forms of collateral such as accounts receivable when incoming cash flows are tight.

ABL finance distinguishes itself from traditional financing by being an immediate solution to cover all short-term and unexpected needs and is much easier and quicker to obtain from non-bank lenders. Additionally, it is known as being a covenant light structure, with less dependence on performance ratios, etc - In some cases, solutions are comparable in pricing to traditional banks and other financial institutions.

Borrowers should recognize your firm must have good sales and that assets pledged to other lenders cannot be financed.

Can a business benefit from ABL?

Businesses in Canada that are asset rich and who have fluctuating cash flow still will often have the need to expand and grow their revenues. Every industry in Canada can benefit from asset-backed finance solutions when they have fluctuating sales revenues and sales. demand may be lower, which will reduce haul volume and increase demand for trailers. Using cash flow formulas and credit structuring tailored and tied to your business cycle provides flexible financing around cyclical challenges that can now be more easily be overcome.

' 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 Loans Via Asset Based Lenders | 7 Park Avenue Financial