ABL Lending Versus Bank Financing - What is Right For Your Business

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UNDERSTANDING THE ASSET BASED LENDING SOLUTION – WHAT IS IT / HOW DOES IT WORK?

We can't even imagine some of the answers to that question, although we have certainly heard a lot of the stories! Let's examine why a new breath of fresh air – Asset based lending, aka ‘ABL lending ‘ has become a favourite and very unique banking and asset financing strategy in Canada.

WHAT IS ABL LENDING?

ABL lending is also commonly known as asset-based lending / asset-based financing - This form of funding a business via an asset based loan utilizes the technique of collateralized loans by financing business physical assets such as accounts receivable, inventory, and fixed assets - as well as in some cases commercial real estate if held by the business. ABL, although commonly used as an alternative to bank financing, is focused on the assets of the business, versus the typical bank credit profile - Banks focus on strong business credit scores, as well as in many cases requiring personal guarantees and external collateral - ABL, on the other hand, focuses solely on business assets.

COMPARING ASSET-BASED LENDING VERSUS BANK CASH FLOW LENDING – PROS AND CONS

One of our favourite expressions these days is that the old ways don’t work anymore.

As it relates to today’s subject of business financing we're talking of course about commercial banking facilities in Canada, and focusing primarily on firms that have challenges raising working capital and cash flow facilities that work - thereby qualifying for an unsecured loan.

It often comes down to a comparison of the two types of financing, traditional Canadian commercial banking, and our favourite new kid on the block, ABL lending and banking. We use the term new but quite honestly it’s simply a Canadian business financing facility that hasn’t been heard of by many Canadian business owners and financial managers for a variety of reasons. Maybe some people prefer to hide a good thing and keep it secret.

COMPARING INTEREST RATES AND FINANCING COSTS IN BANK FINANCE VS ABL LENDING SOLUTIONS

THE ADVANTAGES OF ASSET BASED LENDING – FLEXIBLE, FAST, AND FINANCING BASED ON YOUR SALES AND ASSETS!

So what's better, a 'regular' commercial banking facility via a Canadian chartered bank, or ABL lending and financing via a true abl lending? Regular commercial facilities are extremely focused on criteria for mutual success - we say mutual because we hope everyone agrees that your firm and the lender both have to win. (By the way, we are on our client's side in that battle).

Borrowers, however, must understand that financing costs in asset-based lending solutions are commonly higher and companies must be able to report properly on the company's assets via financial statement updates, as well as provide information on sales, receivables, payables, etc.

In certain cases, other assets such as intellectual property or ' brand ' might qualify for additional financing within the credit facility.

THE ROLE OF CREDITWORTHINESS IN A BANK FINANCING SOLUTION

Got what it takes for a Canadian commercial banking facility? You know the drill - you need reasonable leverage, no significant events that are negative in nature, covenants that are a combo of income statement and balance sheet based - for example, fixed charge coverage, etc.!

Canadian banking loan approvals place a heavy emphasis on business credit score history and rations, personal guarantees, and liens and borrowing covenants related to the credit facility. Businesses should also expect to have best practices for inventory management.

Traditional lending is of course alive and well in Canada – banks provide commercial loans/business loans for an unlimited amount for financing that meets bank creditworthiness criteria.

Lines of credit and unsecured loans come at competitive interest rates from banking financial institutions. Companies must ensure they met business credit score criteria and must be in a position to provide personal guarantees as well as adhere to loan covenants and financial ratios as set out by bank underwriters

ABL LENDING ELIGIBILITY

But hey, what about ABL banking and asset financing - what's required there? Are you ready? Just assets!

That’s the appeal of asset-based banking and financing - it focuses almost solely on current assets, key categories being, of course, receivables and inventory. Where our commercial banking friends focus in a dramatically different manner in analyzing and funding your business, the ABL focus is simply on asset monitoring and ensuring you can borrow on a daily basis at the highest of advance rates based on real-world values of your assets.

Oh, and by the way, 'strange events' are fully allowed - so you have a challenge, an acquisition, a special loan situation, a year of bad luck... You will still be forgiven by ABL lending and banking.

CONCLUSION – THE RIGHT FINANCING OPTION FOR YOUR BUSINESS

ABL loan solutions provide a business with access to working capital and enhanced cash flow that otherwise might not be available from traditional bank lending. ABL facilities are flexible and often custom-tailored to a particular business or industry - that flexibility in the type of repayment provides access to capital that otherwise might not be available.

Want to ensure you have maximum availability on borrowing against your assets on a daily basis - speak to a trusted, credible and experienced Canadian business financing advisor about an asset based line of credit that makes perfect sense for your company.

Speak to the 7 Park Avenue Financial team about our expertise in working capital loans and accounts receivable financing solutions that combine inventory financing and equipment financing in a secured lending non-bank lending solution. Debt financing via alternative financing solutions can be the growth capital you are looking for to grow your business.

FAQ FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

What is asset-based lending?

Asset-based lending /ABL is a type of financing that uses the assets of a business as loan collateral. Typical balance sheet assets that are financed include accounts receivables, inventories, and fixed assets. Widely used as an alternative to traditional financing institutions such as banks many companies in the SME sector utilize ABL credit lines and term loans as a senior lender solution to the company's funding needs.

How does ABL lending differ from traditional bank financing? Why choose asset based lending?

The difference in ABL lending, when compared to traditional bank finance solutions, is that banks focus on financial fundamentals around strong balance sheets, cash flow, and profit generation. Cash flow financing is a cornerstone of bank unsecured lending. The emphasis in bank financing solutions is also on the personal guarantee of the owners and the potential need to provide external collateral.

Secured lending can assist businesses in obtaining financing when traditional finance cannot be accessed. Additionally, ABL loans are often used in business turnaround and the restructuring efforts of a company.

Asset based lenders focus on the sales revenue and business assets, deemphasizing limited personal credit history, low personal credit scores, etc.

How can a company determine whether ABL lending is right for them?

Companies considering ABL lending should consider their cash flow needs in day-to-day funding of operations, and the ability to provide asset coverage around key business-specific assets. Multiple forms of collateral can make up an ABL financing line of credit or term loan- and the ' covenant light structure ' of ABL is a key benefit of this method of financing.

Businesses that cannot achieve some or all of the bank financing they need to run and grow their business are solid candidates for asset-backed lending solutions. Business owners should also be prepared to understand the interest rates and cost of financing in accessing ABL capital. A broad range of industries and businesses in the Canadian economy utilizes asset backed loans.

Companies using ABL products for security-based lending such as financing for receivables can receive up to 90% of the face value of the receivables - allowing the company to pursue growth opportunities via more financing and liquidity around the borrowing base investment in A/R - The positive impact of financing invoices / accounts receivable financing on cash flow and working capital should not be underestimated when considering the investment companies make in carrying trade receivables.

What does collateral mean in finance?

What is a borrowing base certificate?

What are cash flow loans?

' 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

ABL Lending Asset Financing Versus A Banking Loan Solution | 7 Park Avenue Financial

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