YOUR COMPANY IS LOOKING FOR BUSINESS CREDIT LINE FINANCING!
ASSET BASED LOANS: A REVOLVING ABL CREDIT FACILITY LINE OF CREDIT THAT WORKS FOR YOU!
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Struggling with cash flow? Transform your assets into instant working capital with an ABL line of credit.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ABL LINES OF CREDIT 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”
"The art of managing your cash flow is not to run out of cash before you run out of month." - Chris Sacca
ASSET-BASED LINES OF CREDIT IN CANADA - THE 'ABL' SOLUTION
Bank credit facilities? Have you been to business credit line school yet?
After talking to clients about their financing challenges, it's safe to say they are hoping to attend, and one reason is the credit facility, which is known as a revolving ABL line.
Is There an Alternative to a Bank Line of Credit? Understanding ABL Line of Credit
Did you know there’s an alternative to the commercial bank business line of credit, known as an asset-based loan?
Various terms are found on this financing; the simpler is the’ ABL Facility, ‘or asset-based line. An old mentor of ours here at 7 Park Avenue Financial advises that ‘tuition is very high in the school of experience’, so let’s share some key facts and knowledge in this critical area of business credit in Canada.
TWO MAJOR DIFFERENCES IN NON-BANK CREDIT LINES VERSUS BANK FINANCING
This non-bank borrowing credit facility is a solid alternative to our Canadian banks' flexible and low-cost commercial lines of credit.
Unlike traditional credit and term loans, non-bank credit lines offer more flexibility and easier access to capital. The two significant differences :
1. More costly but easier to get given bank credit risk policy/regulation
2. In many cases, borrowing power & credit availability can be increased anywhere from 50-100%.
THE FOCUS IS ON ASSETS - NOT RATIOS AND COVENANTS AND PERSONAL GUARANTEES
Clients we talk to always focus on the basics—they are okay with an initial explanation to get them started on a business borrowing facility that, in most cases, they have never even heard of.
So, the short explanation is that the non-bank ABL lender focuses on your company's assets, such as accounts receivable and inventory, versus your cash flow coverage and equity ratios, which are of prime importance to lenders in the banking system.
THE KEY SIMILARITY BETWEEN CANADIAN BANKS AND ASSET BASED LENDING
The main similarity between Canadian banks and ABL finance lines of credit is that receivables and inventory typically secure them.
Both Canadian banks and asset-based lenders offer lines of credit secured by receivables and inventory. The asset-based credit revolver often also adds fixed assets, which are treated similarly to A/R and inventories—i.e., you can borrow against them on an ongoing basis.
ESTABLISHING THE BORROWING BASE CERTIFICATE FOR YOUR ACCOUNTS RECEIVABLE BORROWING POWER
Both banks and the ABL lender use standard borrowing base information to determine how much you can borrow at any given time.
It’s really a function of your balance sheet assets at the end of the month. Very typical ABL advances are 90% on eligible accounts receivable and 30-70% on inventories.
Under the ABL scenario, borrowing for working capital to liquidate equipment requires an agreed-upon valuation of the assets in question for your revolving credit agreement to function properly.
HOW DO NON-BANK CREDIT LINES WORK ON A DAILY BASIS FOR WORKING CAPITAL?
We forgive the business client's confusion about how ABL provides financing vis a vis how their normal daily banking fits in.
The simple answer? It’s that you keep your regular bank account set up - funds are deposited as you need them under ABL borrowing.
This process, known as receivable financing, allows businesses to leverage their outstanding invoices to secure funding. Receipts are placed into a separate account created at the bank for your business - this account with your receipts offsets your borrowing.
REVOLVING CREDIT LINES DOES NOT ADD LONG-TERM DEBT TO THE BALANCE SHEET
Remember also that neither bank borrowing nor monetizing assets via ABL credit lines adds a term loan or debt to your balance sheet.
Maintaining a strong financial performance is crucial as it assures lenders of the company's ability to repay the borrowed funds. Your firm is simply cash-flowing current assets.
It is critical to focus on the fact that both bank and ABL lending simply provide you with quick access to cash.
We can say the Abl facility, as opposed to the bank, has no real upside limit—as you grow sales and assets such as A/R, your business line of credit grows with you.
Banks, by their nature, history, and practice, tend to run these facilities on set limits with annual reviews.
WHAT DOES AN ABL LOAN / LINE OF CREDIT COST
Pricing on bank and ABL lines is always a key topic of focus for the Canadian borrower. Account receivable financing allows businesses to use their outstanding invoices as collateral to secure funding, improve cash flow, and enable better management of financial obligations.
While the majority of asset-based lines of credit are more expensive, it’s important to remember that you use this liquidity from ABL to grow. You are no longer banking your clients - you’re using your receivables to achieve a higher return on investment via better asset turnover.
And at the risk of being too obvious, you are not always going to be approved for the amount you require under a commercial Canadian chartered bank facility - your odds of approval for liquidity needs are much better in an asset-based line of credit.
KEY TAKEAWAYS
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Asset valuation forms the foundation of ABL lending, determining borrowing capacity.
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Borrowing base calculations dictate available credit, typically including accounts receivable and inventory
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The revolving nature allows businesses to draw and repay funds as needed, providing flexibility.
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Collateral monitoring ensures lender security while maintaining borrower access to working capital.
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Interest rates often prove more favourable than unsecured loans due to asset-backed structure.
CONCLUSION
An asset-based lending (ABL) line of credit empowers businesses to unlock the value of their assets and access flexible working capital.
Has the ABL credit line turned traditional bank borrowing revolving line of credit facilities on its side from a short-term financing perspective?
There's certainly a case to be made for that. Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in differentiating the differences and benefits of various business credit line options.
FAQ
How does an ABL line of credit differ from traditional bank loans?
An ABL line of credit is secured by specific assets, offering more flexible terms and potentially higher credit limits than traditional loans. It allows businesses to borrow against the value of their assets, providing greater liquidity and adaptability to changing financial needs.
What assets can be used to secure an ABL line of credit?
Common assets used to secure an ABL line of credit include accounts receivable, inventory, and equipment. The lender assesses the value of these assets to determine the borrowing base, which establishes the maximum credit limit available to the business.
How can an ABL line of credit improve cash flow management?
An ABL line of credit allows businesses to bridge gaps between accounts receivable and payable, manage seasonal fluctuations, and take advantage of growth opportunities without depleting cash reserves by providing access to funds based on asset value.
What businesses are best suited for an ABL line of credit?
ABL lines of credit are particularly beneficial for asset-rich companies with fluctuating cash flows, such as manufacturers, wholesalers, distributors, and retailers. This flexible financing option can also benefit businesses experiencing rapid growth or facing temporary financial challenges.
How does the revolving nature of an ABL line of credit benefit borrowers?
The revolving structure allows businesses to draw and repay funds as needed, providing ongoing access to working capital. This flexibility enables companies to manage short-term cash flow needs efficiently while only paying interest on the amount borrowed at any time.
What are the typical fees associated with an ABL line of credit?
ABL lines of credit may involve various fees, including origination, unused lines, and monitoring fees. The specific fee structure depends on the lender and the complexity of the borrowing arrangement. It's important to discuss all potential costs with the lender before agreeing.
How does the underwriting process for an ABL line of credit differ from that of traditional loans?
The underwriting process for an ABL line of credit focuses primarily on the value and quality of the assets being used as collateral rather than solely on the company's credit history or financial statements. Lenders will conduct thorough asset evaluations, which may require ongoing monitoring and reporting.
Can startups or companies with less-than-perfect credit qualify for an ABL line of credit?
Yes, startups and companies with challenged credit histories may still qualify for an ABL loan and a line of credit. Since assets secure the financing, lenders are often more willing to extend credit to businesses that might not meet traditional lending criteria but have sales and physical assets on the balance sheet.. However, the terms and advance rates may vary based on the overall risk assessment. Traditional accounts receivable financing solutions are also available for start ups
What happens if the value of the collateral securing the ABL line of credit decreases?
If the value of the collateral decreases, it may reduce the available credit limit. Most ABL agreements include provisions for regular collateral valuation and adjustments to the borrowing base. In some cases, the lender may require additional collateral or a reduction in the outstanding balance to maintain the agreed-upon loan-to-value ratio.
How does an ABL line of credit impact a company's balance sheet?
An ABL line of credit is typically classified as a current liability on the balance sheet. However, it can improve overall financial ratios by providing liquidity for the company's cash flow and potentially reducing the need for long-term debt. The impact on financial statements should be discussed with an accountant to understand your business situation's full implications.
What factors determine the advance rate for an ABL line of credit?
Companies will choose asset-based lending because The advance rate for an ABL line of credit is determined by several factors, including the type and quality of assets used as collateral, the borrower's financial stability, industry trends, and the lender's risk assessment. Typically, accounts receivable may have higher advance rates than inventory or equipment due to their more liquid nature - as some firms do not have sufficient assets on the balance sheet.
How does seasonal business fluctuation affect an ABL line of credit?
ABL lines of credit are well-suited for businesses with seasonal fluctuations. The credit limit can adjust based on the changing value of assets throughout the year, allowing companies to access more capital during peak seasons when inventory and receivables are higher. This flexibility helps manage cash flow during both busy and slow periods.
What are the key differences between an ABL line of credit and factoring?
While both provide asset-based financing, an ABL line of credit allows borrowers to retain control of their accounts receivable and customer relationships. Factoring involves selling receivables to a third party. ABL lines of credit typically offer lower costs and greater flexibility, making them suitable for larger, more established businesses with diverse asset bases.
