YOUR COMPANY IS LOOKING FOR ABL CAPITAL – THE ASSET
BASED BUSINESS CREDIT LINE!
ASSET BASED LENDING COMPANIES DELIVER ON YOUR FINANCING NEEDS
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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Asset-Based Lending (ABL) offers businesses a dynamic pathway to financing by leveraging their own assets as collateral.
Unlock your company's potential with Asset-Based Lending—where your assets bring your ambitions to life!
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ASSET BASED LENDING "ABL" solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
WHY ASSET BASED FINANCING WORKS!
INTRODUCTION:ASSET BASED LENDING " ABL "
Is ABL capital a solid or maybe your ‘best choice’ when it comes to untangling the challenges your business faces when it comes to a comprehensive business line of credit?
We think it's a solid finance solution and many industry experts agree. Here is why!
Asset-based financing solutions allow businesses to transform their inventory, equipment, and receivables into capital, offering a line of credit lifeline when traditional borrowing channels may fall short.
By utilizing ABL, companies can harness their existing assets to fund growth, manage cash flow, and navigate financial challenges- It's a solid strategy for making it an essential strategy for capitalizing on their sales and assets without the challenges of conventional bank loan structures.
What is Asset Based Lending (ABL) in Business Financing?
What is ABL? …. which of course stands for asset based lending. We ask that question only because it, and other terms such as ‘ cash flow ‘ mean different things to different people.
In our terms, asset based loans are a total solution for business lines of credit that allow you to borrow against your relatively substantial company's assets such as accounts receivable, inventory, equipment, and even real estate, all within one revolving facility.
Immediately after mentioning accounts receivable, it's crucial to highlight that accounts receivable financing is a method where these outstanding invoices can be used to secure a loan, providing working capital and enabling better cash flow management as a form of asset-based financing.
It is as simple as that - your borrowing base is established as your sales grow based on the face value of key assets in a/r, etc.
THE ABL BUSINESS FINANCE SOLUTION VERSUS BUSINESS BANKING CREDIT VIA A CONVENTIONAL LINE FROM A CHARTERED BANK / TERM LOANS
It’s a total solution that, in effect, is an ‘evolution’ in the concept of the asset-based line of credit. For the asset-based lending company, your new partner in business banking it’s all about the balance sheet and eligible collateral and liquid collateral such as receivables and inventory.
Unlike traditional banking which heavily scrutinizes a borrower's credit history, ABL offers more lenient credit requirements, focusing on the value of the assets rather than the borrower's credit history. This makes ABL an attractive option for businesses that may not have a perfect credit history but possess valuable assets.
That is of course compared to Canadian commercial business banking, where it’s all about the balance sheet when it comes to a business loan… and your cash flow statement, and your income statement… and your personal guarantees.
In ABL, it’s all about accounts receivable, inventory, physical assets/fixed assets, and commercial real estate that allows you to draw funds on your revolving credit facility. That’s different than pledging a specific asset. Additionally, ABL lenders consider a company's financial performance, including stable cash flow and debt service coverage ratio, alongside the quality of collateral to evaluate the company's overall financial health.
Purchase order finance solutions can also be combined into a total overall revolving line financing solution for those firms taking on larger orders and contracts that otherwise might not be financeable under a facility that has a defined credit limit or limited by the condition of your overall financial statements. Bank credit requires other collateral such as personal guarantees, etc.
Global markets are now accessible for many firms using this type of funding and who have a good track record. ABL solutions are known as a ‘covenant light structure’, versus covenants that might be demanded by banks.
Credit line increases are easily and quickly arranged based on your sales growth as long as there are no major material changes in your business. That’s why the ABL approach works as your business reaches certain levels of growth. ABL solutions focus on your company growing quickly versus many cases of other types of financing which deter or constrain growth.
Those of course are what drive Canadian business banking rates to be so low and so great… if you can access them! The asset-based loan solution comes with a higher cost of ns via interest rates but provides you with that much more liquidity.
IS YOUR FIRM CURRENTLY ' UNBANKABLE' FOR YOUR BUSINESS CREDIT NEEDS?
If we had to line up the different companies that access ABL capital via asset based lending it’s a diverse group - it's larger firms that are very bankable but can access more capital at better rates, all the way down to startups with a more limited financial history, at the same time having assets that can be financed.
In the context of asset-based lending, lenders are particularly mindful of the risk of borrower defaults. They manage this risk by seizing the collateral, such as equipment, if the borrower is unable to make loan payments. This approach offers a way for lenders to recoup their losses in the event of borrower defaults.
For the business owner, it’s all about credit availability via required lines of credit to grow a business. Asset based lending rates are higher than bank interest rates but provide you with the capital you need to run and grow a company.
The loan-to-value ratio is a critical factor that ABL lenders use to evaluate how much to lend against the collateral. This ratio helps in assessing the risk of the loan, determining financing options, and making ABL accessible to a wide range of businesses, including those considered 'unbankable' by traditional standards.
We are pretty sure this doesn’t exist in Canada, we certainly haven’t seen it yet, but in the U.S. there is a huge ABL capital market known as ‘ Second Lien ‘.
Under these facilities, the asset based lender sits on top of the senior bank facility, in 2nd position, and advances even more against the total assets already being financed by the bank. Surely that is one reason why our banking and lending practices are much more conservative in the world marketplace - we don’t lend twice against the same asset!!
FIXED ASSETS AND EVEN REAL ESTATE CAN BE INCLUDED IN YOUR CREDIT LINE BASED ON LOAN TO VALUE RATIO!
When we sit down and talk with clients about what can be financed and how it’s often practical to finance current asset accounts such as accounts receivables, which are key in enabling businesses to secure loans and reduce non-payment risk, and inventory via an asset based lending ‘ABL’ line of credit.
In ABL, these accounts receivables and other assets are formally pledged as collateral, known as a pledged asset, for the loan.
This setup allows businesses to make data-informed decisions about extending credit to clients, while at the same time financing the equipment and other fixed assets under a separate facility with a finance partner/lender who has an appetite for those types of assets.
That total combination of two facilities gives our client a lower ‘blended cost’ of funds and at the same time increases borrowing power - talk about a ‘double whammy’!
Asset-based lending rates are higher than bank financing, but it becomes a question of access to capital versus the cost of capital for funding and growing your business.
WHY IS THE ASSET BASED LENDING CREDIT FACILITY SO POPULAR
What made asset-based finance popular in Canada when it comes to business owners and financial managers seeking solid biz credit facilities?
A lot of it revolves around 2008/2009 when financial markets went awry and thousands of Canadian businesses started to investigate alternative methods of financing their business versus commercial banking solutions. And ABL sure was one of them. And let’s not even talk about Pandemics & Covid!!
The terms and conditions of an asset-based loan depend on the type and value of the assets offered as security, contributing to its popularity among businesses for its flexibility.
And the irony in the above? Simply that companies that even theoretically qualified for more traditional financing could not get it… enter the ABL facility! It’s a new kind of line of credit.
So is there a trend emerging in the Canadian business line of credit offerings? We think there is. In the U.S. experts confirmed that even back to 2011 and continuing in popularity today asset-based credit lines almost doubled. We think it did, perhaps somewhat less so, but clearly the emergence of a new trend via asset-based lending banks and independent non-bank commercial finance companies
KEY TAKEAWAYS
Types of Assets: Understanding which assets qualify for collateral—typically inventory, accounts receivable, and equipment—is crucial.
Loan-to-Value Ratio: The ratio determines how much lenders will loan against specific asset types, influencing borrowing capacity.
Risk Assessment: Evaluating the risks involved in lending against different types of assets is fundamental for both lenders and borrowers.
Benefits and Limitations: Knowing when and why ABL is advantageous compared to other financing forms can guide strategic financial decisions.
Operational Impact: Assessing how ABL affects a company's operations, including cash flow and asset management, is essential for effective use.
CONCLUSION - ASSET BASED LINES OF CREDIT
If your company is looking to grow (or just survive) investigate the benefits of ABL capital and asset loans for working capital and if this type of financing works for you - making you a more effective competitor.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in making the right decision with the right type of facility.
Additionally, receivable financing is a prime example of how ABL can bolster your working capital and cash flow, offering a flexible solution that leverages outstanding invoices without the constraints of traditional financial ratios or credit history.
FAQ: FREQUENTLY ASKED QUESTIONS ON ACCOUNTS RECEIVABLE FINANCING
What is asset based lending?
The business of asset-based lending is based on the security a business can provide. Collateral may be anything from inventory to accounts receivable, equipment or other property owned by the business
Asset Based Lending serves many types of businesses including small-scale entrepreneurs with high-risk profiles since most traditional banks will not loan them money.
What are the advantages of credit lines?
Asset based lending is a specialized loan product that provides fully collateralized credit lines to borrowers with high leverage, erratic earnings or marginal cash flows. ABL provides financing for organizations in turnaround situations Asset Based Lending (ABL) offers highly competitively priced unsecured loans through different types of facilities.
How does Asset-Based Lending help businesses grow?
By converting assets into capital, ABL provides businesses with the necessary funds to expand, invest, and improve cash flow.
What types of assets can be used in ABL?
Assets like inventory, accounts receivable, and equipment can all be used as collateral in ABL transactions.
What are the main benefits of ABL over traditional loans?
ABL offers more flexibility, quicker access to funds, and is often available to businesses that might not qualify for traditional loans.
Is ABL suitable for all types of businesses?
While particularly beneficial for businesses with significant physical assets, ABL can be adapted to a variety of industries and sizes.
What should businesses consider before opting for ABL?
Companies should evaluate their ability to manage the assets used as collateral and understand the terms and risks of the loan.
What is the difference between ABL and factoring?
ABL involves borrowing against assets, while factoring involves selling receivables at a discount to improve cash flow.
Can start-ups qualify for ABL?
If they have substantial assets, start-ups may qualify, although lenders typically prefer businesses with a proven track record.
What happens if the loan defaults in ABL?
The lender may seize the collateral assets to recover the borrowed amount.
How are interest rates determined in ABL?
Rates are influenced by the quality of the collateral and the overall risk assessment of the business.
What are the typical repayment terms for ABL?
Repayment terms vary but generally align normal credit line fluctuations around inflows and outflows of cash - ie no fixed monthly payments
How does ABL affect a company's balance sheet?
ABL appears as a liability but also improves liquidity, making it a double-edged sword that must be managed carefully.
Can ABL improve a company's credit rating?
If managed properly, ABL can enhance a company's credit profile by demonstrating successful debt management and operational stability.
What are common misconceptions about ABL?
Many believe ABL is only a last resort; however, it is a viable and strategic financing option for many solvent businesses needing flexibility.
