"Asset-Based Lending (ABL) revolutionizes business financing by leveraging company assets, offering a lifeline to businesses seeking a robust financial solution."
"Unlock your business's potential with Asset-Based Lending – where your assets pave the way for your financial success."
Asset Based Lending (ABL) Line of Credit: Maximizing Business Financial Borrowing
Introduction to ABL: The Paradigm Shift in Business Financing
ABL is a compelling business line of credit that utilizes the concept of asset based lending. But why does this type of financing differ from traditional bank lending?
Simply because when you utilize this type of operating financing your company is 'running on all cylinders' when it comes to maximizing your financial borrowing ability. Let's examine why.
The Concept of Operating Financing with ABL
An ABL facility in effect creates a borrowing umbrella around your assets. This allows you to meet all your short-term business operating needs, at the same time addressing key issues of both growth and any seasonality or cycles in your business.
The Flexibility of ABL in Handling Financial Fluctuations / ABL’s Response to Inventory and Receivable Fluctuations
On many occasions, if your company has inventory as a key current asset you are going to be in a position when that inventory and your receivables fluctuate dramatically. Typically in our experience, a traditional Canadian bank line of credit is unable to handle large fluctuations in business line of credit needs. Typically that’s because the bank lines have fixed limits, and are focusing on your historical needs, not your current 'bulge' requirements.
Credit Qualifications and Advantages of ABL
The credit qualifications that you might be associating with a typical bank line of credit essentially don’t come into play with ABL asset-based lending. You can say all those ratios, covenants, outside collateral, and emphasis on personal guarantees, etc are thrown out the door.
Comparing the Canadian Banking System and ABL The Role of Bank Business Lines of Credit
We've got nothing against a bank business line of credit / unsecured loan by the way. And no one is a supporter of the strong and credible Canadian banking system. It's just that the majority of clients we meet are unable to access all, or even any, of the business lines of credit that they need. That then hampers growth, ability to compete, etc.
Asset-Based Finance in Canada: A Rising Trend
Clients here at 7 Park Avenue Financial can be forgiven for understanding how an ABL business line of credit works or how they differ from what's generally available in Canada.
That’s simply because the trend toward asset-based finance has only received 'traction' over the last number of years. We’ll also add that that traction, in effect our 'firing on all cylinders' analogy gained a lot of steam during the global 2008-2009 credit recession when business financing dried up and came to as about as close to a standstill as we can imagine. And let's not forget the business downturns around COVID-19!
Understanding the ABL Business Line of Credit / The Fundamentals of ABL Financing
The essence of the ABL business line of credit could not be more fundamental - a facility is created under which you borrow against your assets on a revolving basis. You repay this business line of credit as your business fluctuates daily.
Key Reporting Requirements in ABL
The key difference is simply you must have assets to borrow against (inventory, a/r, equipment or real estate) and you must be able to produce proper (usually monthly) reports on key business metrics such as balance sheet, income statement, aged a/r and aged a/p and inventory lists. We submit that if your business can't produce these already you might have bigger problems!
Exploring the Benefits of ABL Asset-Based Lending
Investigate ABL asset-based lending. You might well find that this type of non-bank business line of credit not only differs significantly from what you thought it was but more so, might be the solution you didn’t know existed for your financing needs.
Key Takeaways
ASSET BASED LENDING - a type of business financing where loans are secured by company assets. This differs from traditional unsecured loans, which rely heavily on credit scores and financial history.
Types of Collateral: Typically, assets like inventory, accounts receivable, equipment, and sometimes real estate serve as collateral. The loan amount is based on a percentage of these assets value.
Flexibility and Accessibility: ABL is more accessible to businesses that might not qualify for traditional loans due to less stringent credit requirements. It's particularly beneficial for companies experiencing rapid growth or with fluctuating cash flow needs and who have good sales growth and receivables which are viewed as highly liquid collateral.
Risk and Interest Rates: Since the loan is secured, it generally carries a lower risk for lenders. The interest rates for ABL can vary widely, depending on the lender and the business's qualifications. Additionally, businesses should be aware of fees such as commitment fees
Repayment Structure: ABL is usually a revolving line of credit, meaning businesses can draw from and repay as needed, based on their current asset values.
Conclusion - Get Started with ABL & Get the Advantage
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does an Asset-Based Lending Line of Credit benefit my business?
This type of credit offers flexible financing by using your business assets as collateral, which can be especially useful for companies with significant inventory or accounts receivable.
Compared to traditional bank lines of credit which are cash flow lending focused, ABLs have less stringent qualification requirements and more flexible covenants, making them accessible to a wider range of businesses
ABL financing includes financing for inventory, receivables and fixed assets/equipment, as well as commercial real estate - This reduces the risk for lenders and helps companies with slow collections, or firms who are experiencing rapid growth and who require short-term capital - Understand the differences between asset-based lines of credit lines and term loans is crucial for business owners.
Can Asset Based Lending help businesses with poor credit?
Yes, because the focus for the asset based loan is more on the value of your assets rather than your credit score, making it a viable option for businesses with less-than-perfect credit histories.
What types of assets are typically used for this kind of lending?
Common assets for asset based loans include inventory, accounts receivable, equipment, and sometimes real estate. The loan amount is based on a percentage of the pledged asset values
How quickly can I access funds with an Asset Based Line of Credit?
One of the key advantages of an asset based lender is quicker access to funds compared to traditional loans, which is crucial for businesses needing prompt financial support for working capital funding.
What is the difference between Asset Based Financing and Factoring?
Asset Based Lending involves borrowing against a range of assets, while factoring specifically involves selling your accounts receivable at a discount for immediate cash.
Do I lose control of my assets with Asset-Based Lending?
No, you retain control and use of your assets; they simply serve as collateral for the line of credit.
How does the repayment work for an Asset Based Lending Line of Credit?
Repayment terms for asset based lenders are typically flexible, revolving around the value of your collateralized assets and business performance.
Can startups or new businesses apply for Asset Based Lending?
Yes, startups can apply, especially if they have significant sales, current assets or physical assets, although lenders might still consider the business potential and track record if there are not good sales and substantial assets. Equipment financing or factoring might be suitable options for early stage companies.
Are there any industries particularly well-suited for Asset Based Lending?
Industries with high-value assets like manufacturing, wholesale, and distribution often find Asset Based Lending especially beneficial.
What happens if the value of my collateralized assets decreases?
If asset values decrease, you might have to adjust your borrowing base or provide additional collateral to maintain the line of credit.
How is the borrowing limit determined in Asset Based Lending?
The limit is typically a percentage of your assets' appraised value, which can vary depending on the type of asset and lender's policies.
Can Asset Based Lending improve my company's credit rating?
Responsibly managing an Asset Based Lending Line of Credit can positively impact your credit rating over time, as it demonstrates financial reliability and sound asset management.
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' Canadian Business Financing With The Intelligent Use Of Experience '
STAN PROKOP
7 Park Avenue Financial/Copyright/2024
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
