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An Asset-Based Loan (ABL) is a strategic financing option that transforms your business assets into immediate working capital.
Unlock hidden cash flow with Asset-Based Loans and drive your business forward.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ABL Asset Based Loan solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
7 Park Avenue Financial - “Canadian Business Financing with the intelligent use of experience
ABL Asset Based Loan: An Overview
Introduction to Asset-Based Lending in Canada
Asset-based lending in Canada. What’s with the ‘new’, ‘improved formula’ - Are we discussing laundry detergent?
Not really, of course; we’re referring to how an ABL business credit line differs from the traditional Canadian chartered bank line of credit facility.
Businesses might choose asset-based lending because it offers flexibility, access to significant financing, and relative freedom from traditional lending covenants.
Securing the right financing is important to growing and operating. An Asset-Based Loan (ABL) offers a potential solution by leveraging a company's assets, such as receivables and inventory, as well as equipment and potentially commercial real estate, to provide essential working capital. This form of financing is the right solution for businesses facing cash flow challenges, offering a reliable and flexible alternative to traditional bank loans.
Enhanced Liquidity with ABL
And those ‘new improved formulas’ in fact then bring substantially more liquidity to your business when it comes to cash flow and working capital needs.
Asset-based lending (ABL) can significantly improve a company's cash flow by allowing businesses to leverage their assets to finance growth, acquisitions, restructuring, and turnarounds.
Why Choose an ABL Business Credit Line?
Let’s examine why that is, how it works, and why this business credit line might ideally suit your business.
Positive financial performance is crucial in qualifying for asset-based lending. Lenders assess a company's financial health, stable cash flow, and debt service coverage ratio to minimize risk and ensure the business's ability to repay the loan.
Traditional Assets in Business Credit Lines
Receivables and Inventory
Receivables and inventory are traditional assets that are margined for liquidity under a business credit line (bank or ABL).
If your receivables are eligible, i.e., they are earned and less than 90 days and not subject to any contra, return provisions, etc., you can typically get an advance of 90% of this A/R.
Accounts receivable financing, or factoring, allows businesses to use outstanding invoices as collateral to secure a loan. This provides a source of working capital to manage cash flow better and meet ongoing financial obligations.
Comparing Bank Lines and ABL
Of course, this differs from the bank in that bank lines traditionally advance 75% of accounts receivable.
The bottom line is that you’re up 15% already in total liquidity. Asset-based loans are backed by collateral, such as accounts receivable, inventory, machinery, equipment, or real estate, and provide larger capital flows and higher maximum loan amounts in contrast to unsecured loans.
Expanding Borrowing Eligibility
If you are working with the right firm, we point out that things like government receivables and U.S. A/R are fully eligible for borrowing.
Receivable financing allows businesses to use outstanding invoices as collateral to secure a loan, providing a source of working capital. When your A/R is outside of North America, you might have to arrange some credit insurance - but that makes sense anyway when the business owner and financial manager recognize the risk, sovereign or otherwise, of a foreign receivable.
Inventory Eligibility in ABL
So what inventory is eligible under an ABL facility?
Asset-based financing provides fast, flexible financing to businesses by leveraging their valuable assets, such as inventory, as collateral. Here, we also point out to clients that in many cases, a bank might not be able to or interested in including an inventory component in their credit facility.
The Due Diligence Process
Assessing Inventory Eligibility
A typical due diligence process in asset-based lending will quickly determine if your inventory is eligible for borrowing.
When completed, that part of your facility may well margin anywhere from 30-70% of your current inventory, depending, of course, on the nature of your business and industry. The terms and conditions of an asset-based loan depend on the type and value of the assets offered as security, with lenders preferring highly liquid collateral for lower interest rates.
Upfront Due Diligence for Higher Borrowing
A major difference in how asset-based lending delivers higher borrowing is simply that more due diligence is done upfront when assessing your overall borrowing power.
This due diligence often includes evaluating pledged assets, where physical assets are used as collateral to secure the loan, highlighting the limitations and risks associated with such collateral.
Advantages of ABL Business Credit Lines
Enhanced Cash Flow and Liquidity
In this manner, the ABL business credit line delivers more new cash flow to your business.
You are borrowing against a larger borrowing base of inventory and receivables, thus providing more liquidity to optimize working capital. Asset-based lending can significantly improve a company's cash flow by allowing businesses to leverage their assets to obtain loan amounts that can finance growth, acquisitions, restructurings, and turnarounds.
Key Takeaways
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Benefits of Asset-Based Lending: Provides immediate working capital by leveraging existing assets.
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ABL vs. Traditional Bank Loans: ABL offers higher liquidity by allowing borrowing against a broader range of assets.
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Eligibility Criteria for ABL: Focuses on the value of receivables and inventory rather than creditworthiness.
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Receivables Financing: Allows businesses to borrow against accounts receivables
Conclusion
Naturally, there are numerous other advantages and differences between an asset-based business line of credit (ABL) and a bank facility.
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you in maximizing advantages and determining if asset based finance works for you. It works for thousands of others in Canada.
FAQ
What is an Asset-Based Loan (ABL)?
An Asset-Based Loan (ABL) leverages a company's assets, such as receivables and inventory, to provide working capital.
How does ABL differ from traditional bank loans?
ABL allows businesses to borrow against a broader range of assets, offering higher liquidity compared to traditional bank loans.
What types of assets are eligible for ABL?
Eligible assets typically include accounts receivable and inventory but may also encompass machinery and equipment.
How can ABL improve business cash flow?
By providing immediate access to funds based on asset value, ABL enhances cash flow and supports ongoing operations.
Who can benefit from an ABL?
Businesses facing cash flow challenges or those needing flexible financing solutions can significantly benefit from an ABL.
What is the due diligence process in ABL?
The due diligence process thoroughly assesses a company's assets to determine their borrowing value.
How are interest rates determined for ABL?
Interest rates for ABL are generally based on the value and risk associated with the pledged asset or collateral assets.
Can startups qualify for an ABL?
Though terms may vary, startups with no negative credit history, and who have valuable assets like receivables and inventory may qualify for an ABL- but they must have sufficient assets , tangible assets, and sales.
Are there any fees associated with ABL?
ABL may include fees for appraisal, auditing, and ongoing loan management.
How does ABL impact business growth?
ABL provides the necessary liquidity to support expansion, inventory purchase, and operational enhancements via financing with a higher loan to value ratio.
What are the primary benefits of ABL?
Primary benefits include increased liquidity, flexible borrowing based on asset value, and improved cash flow management.
How does the ABL loan process work?
The process involves valuing eligible assets, determining borrowing limits, and providing funds based on asset value.
Why should a business consider ABL over other financing options?
By leveraging existing assets, ABL offers higher borrowing capacity and flexibility, making it ideal for businesses with valuable receivables and inventory.
How can ABL support seasonal businesses?
ABL provides flexible funding that can be adjusted based on asset value, which benefits seasonal cash flow variations.
Can ABL be used alongside other financing options?
ABL can complement other financing solutions, offering additional liquidity when needed.
What are the risks associated with ABL?
Risks include potential asset devaluation and the need for regular asset audits, but these are mitigated with proper management and valuation.
