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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
Struggling to fuel your business growth? Discover how your assets can become your secret weapon for securing the financing you need.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ABL ASSET BASED LENDING and working capital solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
CASH STRAPPED? HOW ASSET-BASED FINANCING SOLUTIONS CAN HELP YOUR BUSINESS GET BACK TO THRIVING!
What is ABL Asset Based Lending?
Asset-based lending in Canada is a Canadian business financing solution that provides Canadian business borrowers with a ‘ one-stop ‘ solution for their business credit needs line.
Asset-based lending allows businesses to secure loans using their tangible assets as collateral.
BDC defines ABL very simply - ‘Asset-based lending occurs when a loan is granted primarily on the value of the assets the borrower offers as security. “
Asset-backed lending, or “ ABL,” for short, is a business bank alternative to traditional unsecured loans from banks. It involves funding your company’s assets and creating greater borrowing capacity for day-to-day operating needs such as payroll expenses.
Traditional operating facility advances offer much less borrowing capability in most cases. Let’s dig in.
ABL solutions provide the borrower with financing based on the value of the business's assets. Typically, these assets include accounts receivables, inventories, fixed assets, and commercial real estate if the latter is applicable.
Appraised values for fixed assets facility limits are the benefit of proper asset valuation for more growth financing funding via greater credit availability.
These assets are pledged to secure financing and funding a business in this manner is a popular finance option for Canadian SME borrowers – as it provides access to capital and improves cash flow.
Three uncommon takes on asset-based lending:
- ABL can serve as a strategic tool for rapid expansion, allowing businesses to capitalize on market opportunities faster than competitors relying on conventional financing.
- Asset-based lending can act as a buffer against economic downturns by providing liquidity when traditional lenders tighten their lending criteria.
- ABL can be used as a temporary bridge to improve a company's financial position, potentially qualifying it for more favourable financing terms.
Understanding Asset-Based Lending
Asset-based lending is financing in which businesses use their assets as collateral to secure a loan.
Companies with a solid asset base often utilize this type of lending, such as manufacturers, distributors, and service providers. Asset-based lending can be employed for various purposes, including working capital, expansion, or refinancing.
Asset-based lending involves a lender evaluating the value of a company’s assets, such as accounts receivable, inventory, equipment, and real estate.
The lender then uses this value to determine the amount of the loan and the interest rate. Asset-based lending can allow companies to manage their cash flow and working capital needs effectively.
One key benefit of asset-based lending is that it allows companies to access capital without having to meet strict credit requirements.
This can be especially beneficial for companies with a strong asset base but a less-than-perfect credit history.
Additionally, asset-based lending can provide companies with a higher loan amount than traditional lending methods, as the loan is secured by the value of the company’s assets.
However, asset-based lending also has some drawbacks.
For example, the interest rates on asset-based loans can be higher than those on traditional loans. Additionally, the lender may require the company to provide regular financial reports and may have more control over the company’s financial decisions.
Overall, asset-based lending can be a valuable tool for companies that need access to capital and have a strong asset base.
However, companies should carefully consider the loan terms and conditions before choosing asset-based lending.
WHY CHOOSE ASSET BASED LENDING SOLUTIONS
Although business borrowing costs are at all-time lows regarding cash flow financing, the main reason business owners/financial managers consider asset-based credit lines is simply the flexibility and additional borrowing power they provide.
That helps manage the company's cash flow for specific assets in your business. The asset lender is a welcome relief for firms that can’t always access any or enough Canadian chartered bank financing via multiple forms of finance solutions such as term loans or business credit lines.
By the way, some of the most recognized and large firms also use ABL credit lines if only for the same flexibility they provide. They have chosen to replace bank borrowing with commercial finance borrowing even though they categorically qualify for bank credit.
WHAT ARE THE BENEFITS OF ASSET BASED LENDING SOLUTIONS IN CANADA?
Asset-based lending solutions provide a company with quicker access to capital compared to bank loan decisions, which can be time-consuming –
That is because loans are based solely on the value of the assets of the business – with less or no emphasis on business credit history – The vast majority of firms using asset-backed lending solutions utilize ABL based on the challenge of obtaining all the business capital they need to run and grow their business.
Accounts receivable financing is a specific form of asset-based financing that allows businesses to access funding based on their outstanding invoices.
Additionally, asset-based loan solutions are often tailored to a company's specific requirements. This improved cash flow solution allows companies to pay suppliers and meet short-term working capital needs.
Borrowers in asset-based loans should understand the typically higher cost and the need to work with asset-based lenders who can service their market and industry.
Asset-based credit lines range from 250k on the low end to tens of millions on the high end, and numerous players, both Canadian and U.S.-based, provide Canadian borrowers with these facilities.
ASSET BASED LENDING RATES
Of course, cost is always a discussion point regarding business borrowing. Although large creditworthy firms can borrow almost at the same or better prices than bank offerings, the truth is that most loan rates for Asset Credit facilities will always be more expensive.
Asset based loan depend on the type and value of the physical assets used as collateral.
It’s a case of balancing costs against the benefits of all the financing you need for working capital and cash flow based on your revenues and assets.
As with any type of business financing, you have to balance costs with access to capital, flexibility, and the time it takes to get approved. (ABL financing can happen in a matter of a few weeks if the borrower has all the proper up-to-date financials and asset lists)
Interest rates for asset-based lending solutions in Canada will typically range from 8% per annum to 1.5% per month, and several different factors influence final pricing, such as:
Transaction size,
Overall credit quality
Whether the ABL lender is a traditional or an alternative financial institution.
BRIDGING THE GAP – HOW ASSET BASED LENDING SERVICES WORK FOR SMALL AND MEDIUM-SIZED BUSINESSES IN CANADA
FORMULAS FOR ASSET BASED LOANS CREATE A BORROWING BASE
Asset-based lending rates are based on the types of assets that are used as collateral for the loan or line of credit. More liquid assets on the balance sheet provide a higher loan-to-value ratio.
A key use of ABL is using accounts receivable as collateral for asset-based loans. In this scenario, a pledged asset is used as collateral to secure loans.
Account receivables are often the largest current asset on the balance sheet, and receivables typically represent the largest cash flow need.
Receivables are typically financed at 90% loan to value, while inventory financing through asset-based lending is also widely used; inventories are funded also based on the overall marketability of the inventory –
Most companies have inventory in different stages, such as raw materials, work in process, or finished goods.
The uniqueness of an asset-based credit facility is that it can include the unencumbered value of equipment and vehicles owned by the company.
Also, when it comes to asset-based lending for real estate that is company property, commercial real estate, if owned by the business, can also be a component of the credit lien facility or financed separately as a short-term bridge loan.
DIFFERENT USES OF ASSET BASED FINANCE
In some cases, firms also use asset-based credit to acquire a competitor or re-arrange existing debt. In other cases, ABL is simply a temporary bridge loan to get your company to where it needs to be without taking on more debt.
Business owners/managers quickly realize that if sales are growing and receivables and other assets are available to back them up, they have just discovered that they now have all the financing they need.
Asset-based lending contrasts with an unsecured loan, which relies solely on the borrower's creditworthiness rather than collateral.
Unsecured loans often have strict limitations based on credit scores and financial ratios, whereas asset-based financing provides larger loan amounts and more flexible terms.
Many companies are in a cyclical or seasonal industry, placing even more pressure on predictable cash flow.
Canadians are always recognized as conservative—if only for that reason. Some firms never consider asset-based lending a good choice for their business, for whatever reason, they associate not having bank financing with a stigma.
This is not the case these days, as many forms of alternative finance via asset-based lenders are, in fact, the new mainstream. This includes the ability to refinance existing debt around asset lending values based on the true value of business assets.
Even some traditional financial institutions have become asset-based lending banks – although ABL bank lenders have a higher credit bar and a much higher minimum borrowing requirement – often starting at 5-10 Million dollars.
Let us not forget ratios and covenants. ABL lending is either covenant or ratio light or non-existent. It’s your assets that back up the facility - not ratios. Banks love ratios in case you haven’t noticed!
Reporting requirements regarding ABL borrowing for asset-based loans are often more stringent.
So be prepared to provide updated A/R, inventory, and payable agings on an ongoing basis. Monthly reporting is an absolute minimum, but weekly reporting might also be required.
The trade-off you make for the non-bank alternative via asset-based financing and getting a ‘ covenant light structure ‘appeals to many business owners.
KEY TAKEAWAYS
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Collateral valuation: Understanding how lenders assess asset value determines borrowing capacity
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Borrowing base calculation: Mastering this concept helps maximize available funding
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Loan-to-value ratios: Recognizing these percentages aids in estimating potential loan amounts
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Reporting requirements: Grasping ongoing obligations ensures compliance and continued access to funds
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Flexibility of funds: Appreciating the versatility of ABL enables strategic financial planning
DID YOU KNOW?
- The global asset-based lending market size was valued at USD 523.84 billion in 2021 and is expected to grow at a CAGR of 7.5% from 2022 to 2030.
- In Canada, asset-based lending transactions totalled approximately CAD 32 billion in 2020.
- Small and medium-sized enterprises (SMEs) account for about 60% of asset-based lending clients in North America.
- Mid-market companies' average asset-based loan size ranges from $5 million to $50 million.
- Accounts receivable typically make up 70-80% of the borrowing base in most asset-based lending arrangements.
CONCLUSION - ASSET BASED LENDING WORKS
"Finance is not the only thing that matters in business, but it is by far the most important." - Peter Drucker
Consider asset-based lending for more business credit availability via a flexible financing solution customized to your business and industry – Reap the benefit of no restrictive financial covenants and access to more capital when executing abl transactions.
If your business is a Canadian SME and you need to finance sales growth or focus on a financial turnaround let asset-based lending solutions help you avoid raising additional equity and diluting your business ownership.
Are you looking for someone who understands cash flow lending and asset-based lenders and your business borrowing needs when you finally want to choose a non-business bank alternative?
When comparing asset-based lending to traditional bank financing, businesses can properly assess their capital needs for credit and loan terms that make sense.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with ABL industry expertise, who can assist you with your borrowing needs and help to structure flexible financial solutions.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK/MORE INFORMATION
How do asset based loans work?
In ABL financing, lenders consider the value of your business assets and your sales growth, which generates accounts receivable. Business assets typically financed by ABL lenders and asset lenders include a/r, inventory, fixed assets, and real estate—in some cases, intellectual property can be considered in the borrowing facility. Asset-based revolving credit and term loans can fund all types of business assets, not just physical assets.
Those assets collateralize the loan and the emphasis on borrowing power is based on the more liquid an asset is. Asset-based lending examples include margining of receivables in the 90% range, which is higher than unsecured bank financing for accounts receivables via traditional commercial banking. Banks focus on cash assets on hand and operating cash flows.
What are examples of asset-based lending?
Asset-based lending examples include financing accounts receivable, inventory, fixed assets /property and equipment, and rolling stock. Real estate can also be financed under asset-based guidelines. Equipment financing is often a substitute for some forms of asset-based loans.
What is the Process To Obtain An Asset-based line of credit?
The process to determine eligibility for asset-based financing will involve the appropriate due diligence around asset values, financial statement review, and any other issues that are of interest to the asset-based lender around your company or your industry. Businesses should be prepared to provide year-end and interim financial statements, as well as up-to-date agings on accounts receivable and inventory –
A review of that information will allow the ABL lender lending money to provide a term sheet/finance offer that includes advance rates, interest rates, repayment terms, and any required minimal financial covenants typical in an asset-backed loan, which greatly differ from conventional lending criteria for accessing working capital.
How does asset-based lending improve cash flow?
Asset-based lending provides immediate access to working capital by leveraging your existing assets. This influx of funds can help cover operational expenses, invest in growth opportunities, and manage seasonal fluctuations more effectively.
Can asset-based lending help my business expand?
Absolutely. ABL offers the flexibility to finance inventory purchases, equipment acquisitions, or even fund business expansion projects. By unlocking the value of your assets, you can seize growth opportunities without depleting your cash reserves.
Is asset-based lending suitable for businesses with less-than-perfect credit?
Yes. Unlike traditional loans that heavily rely on credit scores, asset-based lending focuses primarily on the value of your collateral. This makes it an excellent option for businesses with challenged credit histories or those in industries that traditional lenders may consider risky.
How does asset-based lending compare to factoring?
While both provide working capital, asset-based lending offers more flexibility. ABL allows you to borrow against multiple asset types, including inventory and equipment, whereas factoring typically only involves selling accounts receivable. ABL also often provides larger credit lines at potentially lower costs.
What makes asset-based lending a good choice for managing seasonal cash flow?
Asset-based lending adapts to your business cycles. You can borrow more during peak seasons as your inventory and receivables increase. This flexibility helps you manage cash flow gaps during slower periods, ensuring your business maintains financial stability year-round.
Are there any industries that particularly benefit from asset-based lending?
While ABL can benefit many sectors, it benefits industries with high inventory levels or long payment cycles. Manufacturing, wholesale distribution, retail, and service companies often find asset-based lending to be an effective financing solution.
How long does it take to set up an asset-based lending facility?
The timeline can vary, but generally, it takes about 4-6 weeks from application to funding. This includes due diligence, asset valuation, and documentation processes. Some lenders may offer expedited options for businesses needing quicker access to funds.
What happens if the value of my assets fluctuates?
Asset-based lending facilities are designed to accommodate fluctuations in asset values. Your borrowing base is typically calculated regularly (often monthly), adjusting your available credit line based on current asset values. This ensures your credit line remains in sync with your business cycles.
Can I use asset-based lending alongside other financing options?
In many cases, yes. Asset-based lending can complement other financing methods, such as term loans or equipment financing. However, disclosing all existing financing arrangements to potential ABL lenders is important to ensure compliance with any covenants or restrictions.
What role does due diligence play in asset-based lending?
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Due diligence is crucial in ABL to accurately assess collateral value
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Lenders typically review financial statements, asset records, and operations
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This process helps determine appropriate loan-to-value ratios and terms
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Thorough due diligence can result in higher borrowing limits and better rates
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It also establishes a foundation for ongoing monitoring and reporting
How does asset-based lending differ from cash-flow lending?
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ABL focuses on asset value, while cash flow lending emphasizes earnings
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Asset-based loans often provide higher credit limits than cash-flow-based loans
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ABL typically offers more flexibility in the use of funds and repayment terms
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Cash flow lending may have stricter covenants related to financial performance
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Asset-based lending can be more suitable for businesses with cyclical revenues
What are the typical monitoring requirements for asset-based loans?
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Regular reporting of accounts receivable aging and inventory levels
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Periodic field examinations to verify asset values and condition
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Monthly or quarterly financial statement submissions
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Borrowing base certificates detailing current eligible collateral
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Compliance certificates confirming adherence to loan covenants
