Asset Based Lines of Credit: Transform Your Business Assets into Working Capita | 7 Park Avenue Financial

 

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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

 

 

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Asset-based lending and working capital solutions  – Save time, and focus on profits and business opportunities

 

7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”

 

 

Asset-Based Line of Credit: A Business Borrower's Guide 

 

 

Introduction to Asset-Based Lending

 

 

Regarding a line of credit, business loans provide owners/financial managers with the challenge of financing working capital needs.

 

While most SME sectors want to rely on Canadian chartered banks for these needs, Asset Lending has emerged as an alternative — and often more straightforward. We’re ‘unboxing’ ABL (asset-based lending) for your consideration. Let’s dig in.

 

 

Asset-based lending offers a strategic financing solution for small businesses. It enables them to use their assets as collateral to secure necessary capital.

 

Transform Your Business Assets into Working Capital

 

Cash flow constraints can strangle business growth and limit operational flexibility. The pressure of managing seasonal fluctuations and unexpected opportunities while maintaining adequate working capital creates constant stress.

 

Let the 7 Park Avenue Financial team show you how an asset-based line of Credit converts your existing business assets into accessible funding, providing the financial breathing room your business needs.

 

3 Uncommon Takes:

 

1. Asset Based Lines of Credit can actually improve supplier relationships by enabling faster payment terms, leading to better pricing negotiations.
2. The monitoring requirements of these credit lines often result in improved internal controls and accounting practices.
3. They can serve as an effective hedge against interest rate fluctuations compared to traditional term loans.

 

 

 

What is Asset-Based Lending?

Understanding Asset-Based Credit Lines

 

 

The easiest way to think of an asset-based credit line is to look at your balance sheet. Your total assets in receivables, inventory, and equipment are essentially your ‘box’ of assets margined under a new separate non-bank line of credit facility.

 

Businesses can draw funds up to a specified limit, facilitating better cash flow management.

While banks also offer this type of lending, it's more often than not for transactions in the 5-10 million dollar range and up. This eliminates many firms in the SME sector, which typically have revenues in that range, not assets!

 

 This type of financing is often preferred by businesses with a strong asset base but may not have impeccable credit histories.

 

By leveraging valuable assets, companies can secure the funding they need to support their growth and operational needs.

 

 

Banks vs. Asset-Based Lending: Key Differences

 

 

So while our banks focus on what they do best — addressing cash flow and risk with outside collateral and guarantees, the asset lending model looks to the primary source of fluctuating repayment — your sales and your assets. (Sales create receivables)

 

Small and mid-sized companies with valuable physical assets are common borrowers in asset-based lending.

 

Most asset loans tend to reflect a higher risk as companies in the SME sector (most define this as firms with under 25 million $ in sales) typically present a higher risk rating for overall credit quality.

 

 

Benefits of Asset-Based Lending

Addressing Growth and Financial Distress

 

 

While asset-based lending solves problems such as high growth, erratic profits, and imbalanced balance sheet structures, it can also address financial distress.

 

Notably, it is also used in many acquisition financing situations, allowing you to monetize the target firm’s assets. Additionally, businesses can secure lines of credit against their company's accounts receivable, providing flexible financing based on the value of their assets.

 

 

Risk Management in Asset-Based Lending

 

How does the asset lender offering these types of business lines of credit manage the overall risk — allowing them at the same time to provide higher levels of financing than you typically could achieve from a bank?

 

The answer: specialized knowledge of your assets’ true value and placing a higher value on more regular reporting of asset categories such as A/R, inventory, and equipment values.

 

Asset-based loans provide a financing solution that relies on the value of a borrower's assets as collateral, offering benefits such as higher financing levels and flexibility. However, they also come with limitations like more stringent reporting requirements and potentially higher costs compared to traditional bank loans.

 

These loans suit companies with significant assets but potentially limited credit ratings.

 

The Role of Equipment and Accounts Receivable in Your Credit Facility

 

Equipment becomes a component of your credit facility and is almost always subject to an appraisal. Rarely will a bank lend against fixed assets as a part of your revolving credit line — the asset-based lender will.

 

Unlike unsecured loans, which do not require collateral and often have higher interest rates, asset-based loans focus on the value of the collateral provided.

 

Who Should Consider an Asset-Based Line of Credit?

 

An asset-based line of credit is a flexible financing solution that provides a revolving line of credit secured by a company’s accounts receivable, inventory, or other assets.

 

This type of financing is particularly well-suited for small and middle-market companies that need more flexibility than traditional bank financing can offer. Here are some scenarios where an asset-based line of credit might be the right choice:

 

• Need for Flexibility: Companies that require more flexible borrowing limits and terms than those typically offered by banks.

• Strong Asset Base: Businesses with substantial accounts receivable, inventory, or other valuable assets that can be used as collateral.

• Revolving Credit Needs: Firms looking for a revolving line of credit to manage cash flow challenges and support ongoing operational expenses.

• Financing Growth: Companies must finance accounts receivable or inventory to fuel growth and expansion.

 

 

An asset-based line of credit can provide the necessary liquidity to manage cash flow fluctuations, support day-to-day operations, and seize growth opportunities. By leveraging their assets, businesses can access a flexible financing solution that adapts to their evolving needs.

 

Choosing the Right Lender

 

Selecting the right lender for an asset-based loan or line of credit ensures a successful financing experience.

 

Here are some key factors to consider when choosing an asset-based lender:

• Industry Expertise: Look for a lender with experience in your specific industry. This ensures they understand the unique challenges and opportunities your business faces.

• Flexibility: Choose a lender that offers flexible loan structures and terms tailored to your business needs. Flexibility in loan terms can make a significant difference in managing cash flows effectively.

• Transparency: Opt for a lender that is transparent about their fees, interest rates, and other costs. Clear communication helps avoid unexpected expenses and ensures a smooth lending process.

• Reputation: Research the lender’s reputation by reading reviews and testimonials from other customers. A reputable lender with positive feedback is more likely to provide reliable and supportive service.

 

 

Additionally, consider the lender’s approach to asset valuation and monitoring. A thorough understanding of your business and a tailored solution can significantly improve the success of your asset-based financing.

 

 

The Application and Approval Process

 

The application and approval process for an asset-based loan or line of credit involves several key steps. Understanding these steps can help you navigate the process more efficiently:

 

1. Initial Consultation: The process begins with an initial consultation, during which the borrower discusses their financing needs and options with the lender.

2. Application Submission: The borrower submits a detailed application, including financial statements and information about the assets for collateral use.

3. Due Diligence: The lender conducts due diligence on the borrower’s business and assets. This may involve appraisals, audits, and a thorough review of financial documents.

4. Approval: Once due diligence is complete, the lender approves the loan or line of credit and disburses the funds to the borrower.

5. Ongoing Monitoring: After the loan is disbursed, the lender continues monitoring the borrower’s business and assets to ensure the loan is being used as intended and the collateral remains sufficient.

 

 

Working with a lender offering a streamlined application and approval process can provide a quicker turnaround, allowing you to access the funds you need promptly.

 

This efficiency is significant for businesses looking to swiftly manage cash flow challenges or seize growth opportunities.

 

CASE  STUDY

 

A Canadian industrial equipment manufacturer with 15 years in business faced significant seasonal fluctuations that strained their working capital.

 

Their peak production periods required substantial upfront investment in raw materials, while payment terms with major clients stretched to 60-90 days.

 

Challenge:

• Limited access to traditional bank financing due to seasonal revenue patterns
• $2M in inventory tying up capital
• $1.5M in outstanding receivables from creditworthy customers
• Inability to accept larger contracts due to working capital constraints
• Lost opportunities for bulk material purchases at better prices

Asset-Based Lending Solution: The company secured a $2.8M asset-based line of credit structured as follows:

• 80% advance rate on eligible receivables ($1.2M)
• 60% advance rate on raw materials and finished inventory ($1.6M)
• Floating interest rate at prime + 6%
• Monthly borrowing base reporting requirements

Key Benefits Realized:

1. Operational Flexibility:

• Ability to purchase raw materials in bulk during low-price opportunities
• Capacity to take on multiple large contracts simultaneously
• Improved supplier relationships through faster payment terms
• Better inventory management through regular monitoring

2. Financial Improvements:

• 40% revenue growth within first year
• 15% reduction in material costs through bulk purchasing
• Improved cash conversion cycle by 25 days
• Elimination of seasonal working capital gaps

 

Key Takeaways

 

• Understanding advance rates determines borrowing capacity and cash availability.

• Proper collateral valuation maximizes borrowing potential

• Regular borrowing base reporting ensures continuous access to capital

• Maintaining clean accounts receivable aging optimizes credit line usage

• Professional inventory management increases borrowing capacity

 

Conclusion: How Asset-Based Lending Can Help Your Business

Successful business owners and managers will always be open to exploring newer forms of financing that might assist in growth and profits.

 

Looking to 'unbox' new types of business credit alternatives?

 

Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your needs.

 

FAQ

How does an Asset Based Line of Credit differ from traditional bank loans?

• Focused on asset value rather than credit history

• More flexible borrowing limits

• Revolving credit structure

• Scalable with business growth

• The faster approval process typically

 

 

What collateral is typically required?

• Accounts receivable

• Inventory

• Equipment and machinery

• Real estate (in some cases)

• Purchase orders

 

 

What are typical advance rates?

• Up to 85% against eligible receivables

• 50-60% against inventory

• 50-75% against equipment

• Rates vary by industry and asset quality

 

 

How does the borrowing base work?

• Calculated on eligible assets

• Updated regularly through reports

• Adjusts with business cycles

• Provides borrowing flexibility

• Monitored through periodic audits

 

 

What reporting is required?

• Monthly borrowing base certificates

• Accounts receivable aging reports

• Inventory status reports

• Financial statements

• Customer concentration reports

 

What makes assets eligible for financing?

• Age of receivables matters

• Quality of inventory considered

• Equipment condition evaluated

• Clear title requirements

• Regular valuation updates