Benefits of Asset Based Lending: Maximizing Business Potential | 7 Park Avenue Financial

 

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Struggling to secure financing for your business? Discover how asset based lending can revolutionize your financial strategy.

 

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Asset Based Lending solutions that solve the issue of business work capital and cash flow  – Save time, and focus on profits and business opportunities

 

 

Introduction 

 

Clients who listen to us tout the positive aspects of business revolving credit via abl asset lending and financing sometimes have an excellent question for us: 'How can we compare this type of Canadian business financing to other forms of lending, i.e., the traditional chartered bank line of credit?'

 

Good question! Right? So an excellent way to do that is to set up 6 standard benchmarks that allow you as a Canadian business owner or financial manager to do a proper analysis or comparison.

 

Asset based lending stands out as a dynamic type of financing, , providing businesses with the flexibility and liquidity needed to survive today's competitive landscape.

 

The benefits of asset-based lending become increasingly apparent, offering a lifeline for those seeking efficient and adaptable solutions to their funding needs.

 

Borrowing Capability

 

First, we can start with borrowing capability. Generally, we can make the following statement: Under a bank facility, you have a pre-set credit limit typically reviewed annually. Borrowers must demonstrate reasonable financial controls and financial stability around business financial statements, asset control, financial reporting, etc.

 

However, with an ABL facility, your borrowing is always tied to the asset base of your firm, which typically is a total sum or receivables, inventory, unencumbered equipment, and even real estate. While bank A/R facilities are often capped at 75% of A/R, the asset-based revolver typically comes in at 90%. On top of that, you will also receive more generous inventory margining 99% of the time, in our opinion.

 

Overall Structure

 

 

Let’s move on to the overall structure, our second comparable. Larger, more high-quality asset-based facilities typically have a multi-year length, while your bank facility is renewed (hopefully!) annually based on historical financial performance.

 

  

Follow-Up and Monitoring  

 

Point # 3, which we will call follow-up or monitoring via your lender. Here is where a dramatic difference occurs. Your bank will assess, provide, and renew the credit facility based on operating ratios, loan covenants, external collateral perhaps, and quality of owner guarantees.

 

Asset-based lending takes a different approach. It counts your assets, both at the start of the facility and periodically during it. So, in the same manner that you provide what bankers call ' borrowing certificates, ‘the ABL lender only focuses on the same assets within those certificates. Are we making ourselves clear? It’s always about the assets!

 

  

Sources of Financing  

 

Point # 4. Bank lines of credit are available from... you guessed it... Canadian chartered banks. While not huge, Canada's ABL revolving credit universe is non-bank. It comprises 'unregulated' (banks are regulated) independent finance firms, small and large, that offer revolving credit financing to Canadian businesses. Faculties are available from 250k to hundreds of millions of dollars in size. As such, all types of firms that might not qualify for traditional bank financing are immediately eligible for ABL finance, even if they have financial challenges, including bankruptcy filing!

 

  

Pricing  

 

Let’s move on to point # 5 - pricing. While bank pricing is generally perceived as the best financial cost on Canadian business borrowing, clients of the same credit quality can achieve the same or better pricing via an asset based line of credit. Firms that can't obtain bank lines of credit still qualify but pay more for these facilities.

 

 Covenants 

 

Last, but not least, covenants. While banks focus on cash flow coverage (typically 1.25:1), balance sheet ratios, and leverage, ABL lending draws on appraisals of assets, reporting, and operational-type audits.

 

 

Key Takeaways

 

1. Increased Liquidity: Asset-based lending enhances liquidity by leveraging a company's assets to secure financing and provide immediate access to cash when needed.

2. Flexible Financing Solutions: ABL offers flexible financing solutions tailored to businesses' needs, allowing customized funding structures and repayment terms.

3. Enhanced Borrowing Capability: Unlike traditional lending, ABL bases borrowing capacity on the value of a company's assets rather than solely on its creditworthiness, enabling businesses to access greater funding.

4. Improved Cash Flow Management: By converting assets into cash, ABL helps optimize cash flow, ensuring smoother operations and mitigating financial challenges.

5. Diversification of Funding Sources: ABL diversifies funding sources beyond traditional bank loans, reducing reliance on a single financing avenue and enhancing financial resilience.

 

  

Conclusion  

 

What's better for your firm, a traditional bank business line of credit or ABL financing? You're now in a better position to decide.

 

Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, today to proceed with your selection.

 

  

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

 

 

What is asset-based lending and how does it work?

Asset-based lending is a type of financing where a loan is provided to a borrower, secured by the borrower's assets. The lender considers the value of the collateral (such as inventory, accounts receivable, and other assets) to determine the loan amount. The application and underwriting process in ABL financing is often much quicker than dealing with banks and other traditional financial institutions,

 

 

How does asset-based lending differ from traditional lending?

Unlike traditional lending, which may rely heavily on the borrower's creditworthiness, asset-based lending primarily focuses on the value of the assets being used as collateral. This can make it easier for businesses with less-than-stellar credit to secure financing.

 

 

What types of assets can be used as collateral in asset-based lending?

Typically, assets such as inventory, equipment, accounts receivable, and sometimes real estate can be used as collateral. The acceptable assets may vary by lender.

 

 

Can asset-based lending improve my company’s cash flow?

Yes, asset-based lending can improve your company's cash flow by providing a flexible financing option based on your assets' value. This allows for smoother operation and growth opportunities.

 

 

Is asset-based lending suitable for all types of businesses?

Asset-based lending can be a great option for many businesses, especially those with significant physical assets or receivables. However, evaluating if this type of financing aligns with your business's needs and financial situation is essential.

 

How quickly can I obtain financing through asset-based lending?

The timeline can vary depending on the lender and your company’s situation, but many businesses can secure asset-based financing more quickly than traditional loans, sometimes within a few weeks.

 

 

What happens if the value of the collateral decreases?

If the collateral's value decreases, the lender may require additional collateral or reduce the loan amount to maintain the loan-to-value ratio.

 

 

Are there any industries that particularly benefit from asset-based lending?

Industries with high inventory or receivables, such as manufacturing, wholesale, and distribution, often benefit most from asset-based lending.

 

 

How does asset-based lending impact my business’s balance sheet?

Asset-based lending can be structured in balance sheet friendly ways, such as not significantly increasing your company's long-term debt. However, the specifics depend on the loan terms and financing structure.

 

 

What are the typical interest rates for asset-based loans?

Interest rates for asset-based loans can vary widely based on the lender, the borrower's creditworthiness, and the quality of the collateral. Generally, rates may be higher than traditional bank loans but competitive within the broader spectrum of business financing options. Banks will offer unsecured loans but have a higher credit bar for approval around requirements, external collateral, full personal guarantees, etc.

 

What are the main risks associated with asset-based lending?

The primary risk is the potential for losing the assets used as collateral if the loan cannot be repaid and the borrower defaults. It's crucial to consider this when deciding on asset-based lending carefully.

 

 

How do lenders determine the value of the assets used as collateral?

Lenders typically appraise or assess the assets to determine their current market value. This process can vary by lender and asset type. Finance companies prefer more liquid assets such as receivable and inventory, but fixed assets and commercial real estate can also be financed.

 

 

Can asset-based lending be combined with other forms of financing?

Businesses often use asset based loan financing  with other financing options to meet their needs. It's essential to ensure that the different financing forms do not conflict with each other’s terms and conditions. Most asset based loans from asset based lenders are often combined with other forms of business funding.

 

What is accounts receivable financing?