Reasons Why Asset Based Lending Works For Business Financing Needs

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HOW DOES ASSET BASED LENDING WORK?

Asset-based lending is a financing option for small and medium-sized businesses - by the way some of the largest corporations in Canada also use this form of flexible financing. Loans are based on the business's assets, rather than its credit history or other financial factors that might concern more traditional financial institutions.

Asset-backed financial financing solutions offer maximum flexibility for businesses looking to maximize growth opportunities, refinance, or manage a successful turnaround.
Firms experiencing rapid growth, restructuring or turnaround, and acquisition, merger or buyout are candidates for ABL loans!

A common loan structure in Asset-based lending is a revolving loan, or business line of credit, which means it’s available when you need it, and you can pay it down as cash inflows occur in your business. Asset-based lending is perfect for businesses that have irregular income or expenses and can provide the capital needed to take advantage of opportunities.

HOW ASSET BASED FINANCING WORKS

Asset-based financing assesses the value of your assets as collateral. This means businesses with less than perfect credit histories or external collateral often required by banks can still get what they need in terms of day to day funding for cash flow and working capital needs such as payroll expenses - The bottom line is that Asset-based financing is a good option for businesses that have sales and assets - it's as simple as that ..

THE ABL APPLICATION PROCESS IS QUICKER AND SIMPLE

Asset-based loans are a much simpler alternative to traditional debt because they don’t require many of the requirements of traditional bank financing, including extensive covenants, focus on personal guarantees and personal net worth, etc.

The process of getting approved for an asset-based loan can take 30 to 90 days, depending on the complexity of your business. During those 30 to 45 days, an asset-based lender conducts reviews, and potentially , appraisals on any collateral they deem needs an examination in order to determine its value.

Asset-based lending is a type of loan that is based on the value of the business' assets, rather than its credit history. Financing is easier to qualify for if your business owns assets and has sales revenue.

A business can get an asset-based loan by pledging its highly-liquid marketable securities that are typically accounts receivable and inventories - but its important to note that physical assets/ equipment, and even company owned commercial real estate can be provided as collateral for your ongoing ' borrowing base'. ABL lenders determine loan amounts based on a percentage of the face value of sales and assets.

WHAT FACTORS DETERMINE LOAN AND LINES OF CREDIT AMOUNTS

There are various factors that determine a lender's advance rate and the actual cash they provide to their borrowers but the key point is that the more liquid the assets, the higher the advance rate will be. That is how ABL works, the asset value focus - with fewer covenants as one of the key takeaways.

There are also other considerations such as how long it will take for a company to turn its assets into cash.

Conversely, if those same assets were non-liquid (such as equipment or real estate), then the advance rate would be lower, but still a part of your facility , since it would take longer for that company to sell those assets in order to repay their loan.

An asset-based loan is a percentage of the combined value of your accounts receivable, inventory, equipment, and in special circumstances, real estate.

Key benefit - This allows your company to turn its assets into working capital and access flexible funding quickly. More importantly with an asset-based loan, as your company’s operations and assets grow, so does the available funding.

WHAT ARE KEY ADVANTAGES OF ASSET BASED FINANCING

An asset-based loan is a type of loan that is secured by the assets of the company.That's the main benefit of this type of loan in the flexibility that it offers to companies.This flexibility can be helpful for companies that are going through a difficult time or have credit issues.

There are other benefits to using an asset-based loan, such as less strict qualification requirements and a shorter approval process.

In an asset-based relationship, lenders will require frequent reporting in the form of weekly borrowing bases or monthly reports. The reality is thought that this often helps to maintain discipline with companies. Consistent and frequent reporting can help keep both the asset backed loan lender and borrower accountable.

Companies in an asset-based lending relationship tend to develop better practices with cash management and overall financial reporting leading to a more streamlined and efficient company.

WHAT ASSETS COMPRISE THE ASSET BACKED LOAN?

Asset-based lenders typically advance money against accounts receivable, which is a very liquid and desirable asset. However, this doesn't mean that lenders don't make aggressive advances on other collateral types including advances on inventory as well equipment and the aforementioned real estate if applicable.

Accounts receivable, product inventory, machinery, specialized equipment, buildings and real estate are all common assets used to secure asset-based loans. Accounts receivable financing for your outstanding invoices is by far the most common component of asset backed loans and factoring companies are a subset of a broad range of asset backed finance financing solutions.

In some cases a term loan structure might be implemented, where the lender loans a set amount of money that must be repaid over a fixed period of time on a specific asset.

There has been a rise in specialized asset-based lenders that focus on one particular type of collateral , and these lenders are experts in their field and have an added appetite for specific collateral after years of lending to one particular type of asset.

One additional collateral type that is less common is intellectual property. This particular asset is generally ignored by most traditional lenders.

FLEXIBLE TERMS!

Asset-based loans are typically structured over a 1 year period with renewal options.One reason for this is that asset-based lenders seek to be more of a transitional credit provider where the company they are lending money to is in the middle of a transition period.

SHOULD YOUR BUSINESS CONSIDER AN ASSET BASED LOAN

Asset-based loans are a great way for businesses to get the growth capital they need. Small and midsize businesses that are in a growth, turnaround or acquisition mode can find great value with an asset-based loan. Asset backed financing is ideal for companies with assets in their balance sheets that include accounts receivables, inventory or fixed assets.

IS YOUR COMPANY AND INDUSTRY A GOOD CANDIDATE FOR ABL LOANS?

Asset-based lenders are more likely to work with many businesses that have a capital-intensive nature - they being prime candidates for this type of funding . Distributors and manufacturers are typically good candidates for asset-based lending. The stronger the collateral pool, the more attractive a company is to an asset-based lender.

Businesses in industries with expected seasonality/ seasonal fluctuations can also benefit from the fluid aspect of an asset-based loan. Other long-standing industries that participate in asset-based lending include retail, apparel, staffing and business service companies that extend credit to their customers.

CONCLUSION

Asset-based loans can be a quick and flexible way to boost your growth.This type of Canadian business financing uses some of your company's valued assets and sales revenues as collateral for the funds, which provides your firm with flexibility with repayments while still providing working capital and cash flow access.

Asset-based lenders are less concerned with your firms past credit history, current cash flow, or overall profitability. The focus? If a borrower defaults its all about the value and liquidity of the collateral you provide .To qualify for an asset-based loan, you generally only need goof-value sales and assets to get started.

Asset-based loans are a form of financing that leverage your company's valuable assets. Unlocking the the value of those assets and providing you with the funds you need to grow or sustain your business is the ABL solution deliverable! Talk to 7 Park Avenue Financial , a trusted , credible and experienced Canadian business financing advisor who can show you that asset based financing is a great option for businesses who want to maintain control over their assets while still obtaining the capital they need to succeed.

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

WHAT IS THE DIFFERENCE BETWEEN ASSET BASED LOANS AND UNSECURED BANK LOANS?

Asset-based financing, through asset-based loans (ABL), is a way to leverage a borrower's assets in order to obtain maximum loan amount availability via a loan to value ratio that can finance growth, acquisitions, restructurings and turnarounds using liquid assets and other asset value within the business.

ABL lending is not constrained by financial ratios or covenants based on business credit score or credit history of owners, so you can typically borrow more through ABL lending than traditional unsecured loans and other unsecured lending solutions.

Asset-based financing may be an option for businesses that do not meet the qualifications for traditional bank financing. Note that asset-based loans made on the the balance sheet never total 100% of the estimated value of the asset pledged as the margin is held to cover liquidation costs in a default.

WHAT IS THE INTEREST RATE ON ABL LOANS / WHY CHOOSE ASSET BASED LENDING

Asset-based lending rates vary greatly from one transaction to the next. The rate is typically based on the type of asset available as collateral, the level of risk and the financial performance of your business- as well as the size of the transaction. Other factors for borrowers to consider when they secure funding are that asset-based loans deliver fast funding and less emphasis on the personal guarantee given that business assets are used as collateral.

The rates on a business loan via asset-based loans can vary greatly from one transaction to the next. It is important to understand these factors when seeking an asset-based loan in order to get competitive interest rates for your company when comparing a commercial banking facility . For larger credit worthy companies a lower interest rate can be achieved even in comparison to Canadian bank pricing.

' 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

Why Asset Based Lending Works | 7 Park Avenue Financial