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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
CONTACT US! Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
Struggling with business financing? Explore Canadian asset based lending to unlock flexible funding solutions!
Flexible Financing Solutions: Canadian Asset Based Lending Decoded
Introduction - Exploring Asset-Based Lending Facilities in Canada
Receivables financing in Canada is somewhat the crown jewel of the asset-based lender and asset based lending facilities in Canada. We're taking you to the center of non-bank A/R financing as an asset based loan. Let's dig in.
Understanding ABL Finance
Asset-based lending, often called 'ABL finance,' is simply short term loans secured by the collateral of a business. In the case of asset based lines of credit assets such as inventories, a/r, and fixed assets are margined in one facility to create a constant source of cash flow as sales are generated.
Empowering Businesses with ABL Financing
Asset based lenders allow your business to leverage the sales and assets of your business to operate and grow the company. These facilities come with maximum flexibility and range in size from a small 250k facility to the tens of millions of dollars. ABL financing grows in tandem with your company!
Uses Of Asset Loans
Asset loans are almost always 'business to business' type lenders for working capital and cash flow financing and lending needs for almost every size of business - from startups to sizeable corporations. The financing that these firms provide allows your company to consider almost all options - That includes:
- Growing your business
- Expanding into new products/services and geographies
- Engineering a turnaround
- Refinancing
Companies that typically manage their A/R well are also more inclined to take advantage of supplier pricing/discounts and are viewed more positively by trade creditors. A solid receivable financing solution will allow your company to do that.
Why Choose Non-Bank A/R Financing?
Why do thousands of businesses seek and utilized the services of an asset based lender that specializes in receivables loan A/R solutions? One of the most common reasons is their company's inability to access traditional bank financing. Owners are typically reluctant or unable to access additional equity financing that might be used to bolster cash flow.
Benefits of Non-Bank A/R Financing
One key aspect of non-bank A/R financing solutions is the fact that a full facility will also include combining inventory and fixed assets into that same credit line!
These solutions typically do not compete with banks as they are taking on more and different assets in an entirely different manner when it comes to margin calculations and borrowing limits. The asset based lender typically advances 90% of A/R as well as higher margins on both inventory and equipment which become part of that new borrowing facility.
Faster Approvals
Non-bank lenders also have the reputation of being timelier on approval. It is critical to note that in almost all cases the typical asset based borrower has a goal to migrate back to traditional banking.
Bridging Financing Gaps
Companies that cannot access traditional capital will often turn to asset financing solutions to solve their working capital needs. Having said that we also note that many of Canada's largest and most successful corporations also utilize this method of financing as an alternative to bank and insurance company financing.
But it's those 'SME' companies, the small and medium-sized companies in Canada that fuel the entire economy, using the ABL facility because it's flexible and customized to their particular needs when it comes to the balance sheet and their sales revenues.
Versatile Financing Solutions
While we are talking mostly about non-bank asset-based line of credit solutions, these same facilities are used to complete acquisitions, restructuring, and M&A type activities.
Due Diligence and Assessment
The ABL lender will take time in due diligence to properly evaluate the true value of company assets - that's the flexibility that might not always come with a bank solution, as banks are reluctant to fund hyper-growth companies, as well as occasionally having the inability to understand different types of inventory.
Maximizing Borrowing Power
That additional time spent in truly evaluating your asset mix allows for more margining of your assets, thereby increasing borrowing power. And, as we noted, your facility can usually grow with a phone call as long as sales are increasing commensurately. It is very normal for a/r to have a 90% funding margin.
Unlike traditional bank credit lines the value of your real estate, if applicable, as well as your fixed assets are combined into one operating facility. ABL loan credit facilities revolve and fluctuate as you generate sales and collect receivables to reduce the operating line.
Optimal Working Capital Solutions
You should consider an ABL solution when you're looking for the optimal working capital/cash flow generation financing that might not be accessible via a bank for a variety of reasons
. It the funding of those liquid assets on the balance sheet, namely a/r and inventory combined with maximum borrowing power based on pre-agreed percentage of drawdown. That comes from what's known as a 'borrowing base certificate' - allowing your firm to always know what it's borrowing power is as you generate sales and replenish cash.
The borrowing base certificate is usually recalculated monthly, allowing you to always know the value of your remaining borrowing power on the sales and assets.
Factoring as an Alternative
We note that businesses who might not qualify for asset finance credit lines can use based a/r factoring to still generate cash from sales revenues - usually it's a situation of a facility being too small to not make sense for the lender and borrower re costs, set up fees, etc.
Managing Financing Costs
Fees associated with asset financing and factoring typically run in the 1.5-2% range every month, so a firm should have decent gross margins to absorb the cost of the financing as well as take advantage of the benefits of receivables financing.
True Finance Flexibility
While bank credit lines typically tend to have fixed credit lines and yearly renewals the true beauty of receivables finance from asset based lenders is the flexibility to grow the facility almost instantly as sales and working capital assets grow. Simply speaking these facilities fund growth!
ABL finance also helps companies refinance, restructure and provides capital for rapid growth -
Key Considerations for Approval
What do asset based lenders look at when it comes to approving and setting up such facilities. Key issues include:
- Cash flows within the business
- The ability of the company to report on financial performance - i.e. monthly financial and aged schedules of A/R and a/p
- Government sources deductions being paid (Note - in numerous cases, asset based lenders will construct financing to handle and payout CRA arrears)
- Profitability (or the road to profitability)
Asset lenders put appropriate controls in place to make sure credit facilities are properly controlled.
Conclusion
In Canadian asset based lending for receivables, understanding the benefits, requirements, process, types of assets accepted, and evaluating lenders is key. This includes grasping the advantages for SMEs and the impact on cash flow, which are crucial aspects for businesses seeking financing solutions.
The bottom line, yes it's official - Asset Based Lending is a hit with companies of all sizes and financial positions in Canada for rapid growth restructuring situations when there is a need to optimize cash flow.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can help you put asset backed finance working capital/cash flow solutions in place that match your firm's borrowing needs while achieving the benefits of Canadian asset based lending.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK MORE / INFORMATION
What are the benefits of Canadian asset based lending for receivables?
Asset based lending offers flexible financing solutions tailored to business needs, including improved cash flow and access to working capital via the funding of a company's assets and sales.
How does the process of obtaining asset based loans work?
Businesses provide collateral, such as accounts receivable, and undergo evaluation by lenders to secure loans based on the value of their assets. Types of assets accepted as collateral include a/r, inventory, fixed assets and commercial real estate. The impact of asset backed financing on cash flow is therefore significant and allows a company to achieve growth poential when traditional financing is not available.
Can SMEs benefit from asset based lending in Canada?
Yes, asset based lending provides SMEs with customized financing options, empowering them to fuel growth and navigate financial challenges effectively.
What types of assets are accepted as collateral in asset based lending?
Assets commonly accepted include accounts receivable, inventory, and fixed assets, providing businesses with a diverse range of collateral options.
How does asset based lending differ from traditional bank financing?
Asset based lending offers greater flexibility and accessibility compared to traditional bank financing, catering to businesses with varying financial needs and profiles. ABL allows a company to more effectively manage critical transitions in different stages of growth or challenge - allowing a company to maximize growth opportunities.
What industries benefit the most from asset based lending?
Industries with substantial accounts receivable and inventory, such as manufacturing and wholesale, often benefit significantly from asset based lending.
Can asset based lending be used for short-term financing needs?
Yes, asset based lending offers flexible financing solutions suitable for short-term needs, providing businesses with quick access to capital.
How does the economic climate impact the availability of asset based lending?
The economic climate can influence the availability of asset based lending, with lenders adjusting their risk assessment criteria based on market conditions.
What are the typical interest rates for asset based lending in Canada?
Interest rates for asset based lending vary depending on factors such as the borrower's creditworthiness and the perceived risk of the collateral provided.
Can asset based lending help businesses with seasonal fluctuations in cash flow?
Yes, asset based lending can provide businesses with the flexibility to manage seasonal fluctuations in cash flow by leveraging their assets as collateral for financing.
What happens if a borrower defaults on an asset based loan?
If a borrower defaults on asset based financing solutions such as business credit lines or a term loan structure, the lender may seize and liquidate the collateral provided to recover the outstanding debt.
