What is Asset-Based Lending: Transforming Business Assets into Capital | 7 Park Avenue Financial

YOUR COMPANY IS LOOKING FOR  ASSET BASED LENDING SOLUTIONS IN CANADA! 

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Struggling to fuel your business growth? Unlock the hidden wealth in your assets with asset-based lending!

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer 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”

THE ASSET BASED LOANS SOLUTION TO YOUR BUSINESS FUNDING NEEDS

It's true - other ways are reliable to finance your business regarding cash flow and growth needs around a line of credit model -

Traditional financing and alternative financing solutions are available to business buyers - While entrepreneurs might be familiar with some traditional ways to finance a business via a bank, we'll show you another way that provides faster access to financing, and it works! 

That solution is asset-based financing, namely Asset Based Lending - aka  ' ABL' !

WHY ABL?

Asset-based lending is a useful financing strategy and solution during market restructuring or a business reset when traditional bank financing can solve your ongoing funding needs.

Certain or all of your sales and business assets are the collateral for the loan, even if your company is challenged somehow.

Many companies look to Asset-based lending for help during difficult times because it provides breathing room for companies to restructure while still having access to the capital they need to run and grow their businesses when cash flow is challenging.

An asset-based lending structure is beneficial as it allows businesses to access liquidity more easily by financing multiple forms of sales and their asset base.

An asset-based lending structure can offer several benefits to businesses in recovery or growth mode and is a solid, viable option for maximizing access to liquidity.

WHAT IS ASSET-BASED LENDING - IT'S SIMPLE!

Asset-based lending is a specialized form of secured lending tied to your assets rather than a typical unsecured loan offered by financial institutions such as banks.

Funds are advanced based on an agreed percentage of the value of certain types of assets.

These assets typically include accounts receivable, inventory, fixed assets/equipment, and commercial real estate the company owns if the latter is applicable.

THE BOTTOM LINE?

Asset-based lending facilities may provide certain corporate borrowers with greater headroom and debt capacity. ABL lenders focus on collateral and liquidity rather than cash flows.

This may be beneficial to companies with strong assets but weaker cash flow metrics. As we have noted, Asser Based Lenders are willing to consider a wider range of assets as security, which can provide companies with more options when it comes to generating the funding they need.

HOW DOES ASSET-BASED LENDING WORK?  WHY CHOOSE ASSET BASED LENDING

The arrangements around asset-based lending facilities can be complex and mechanical but will be well understood by borrowers as soon as borrowers understand the natural simplicity of this business model -

It's all about the creation of security over assets and sales so you can maximize borrowing and ensure the ABL lender has proper rights against third parties who may have an interest in or claim over certain assets.

UNDERSTANDING YOUR BORROWING BASE!

The borrowing base is the maximum amount of funding your firm can borrow at any point in time, based on the value of the agreed asset pool, which includes the assets we outlined above—a/r, inventory, equipment, etc.

Depending on the size and structure of your transaction, it may involve extensive negotiation between parties. This borrowing base defines how much money a company can access and when it must repay its lender's loan agreement.

The borrowing base is essential to the overall mechanics of the facility.

KEY POINT!

There are standard reserves against facility availability - as an example, receivables, one of your most liquid assets,  are typically financed at 90%, providing more liquidity than a bank facility.

The loan-to-value ratio is always higher in asset-based finance as will, therefore, be the maximum loan amount achievable -  Borrowers should understand that government arrears should not exist.

UNDERSTANDING COLLATERAL AND THE BORROWING BASE AGAINST YOUR ASSETS AND SALES

In asset-based lending, the borrowing base which supports the loans is not the same as the collateral that secures them -

It's simply a formula to determine how much money your firm can draw from the business loan agreement at any time. In some cases, the collateral securing an asset-based loan will extend beyond just what's in the borrowing base.

FINANCING THE BALANCE SHEET AND YOUR SALES - THAT'S WHAT ABL IS ABOUT

In asset-based lending, the lender generally exercises more control over the borrowing base assets than lenders typically exercise over collateral on other secured loans—that's critical in understanding the bank loan vs. abl loan difference.

This leads to negotiations regarding the frequency of borrowing base reporting to lenders, typically every month, as well as the extent of other financial information the lender might ask for.

ARE APPRAISALS AND DUE DILIGENCE REQUIRED?

Borrowers can experience operational impacts from monitoring fluctuations in the asset pool. In larger transactions in the millions, the lender might incur a cost from carrying out the required diligence or appraisal if it is required to inspect some of the assets, but this may be an acceptable price to pay.

It should not inconvenience those already operating good business practices for monitoring inventory.

 IS ASSET-BASED LENDING A USEFUL TOOL FOR YOUR COMPANY?

An asset-based lending structure may work well for borrowers with greater financial leverage and marginal cash flows. That is typically the most common candidate for this type of financing.

•Businesses that are recovering will often  face a sudden spike in business sales and activity and will need access to funding that is flexible around solely their company's assets  and allows them to scale quickly

While companies that have strong balance sheets and predictable cash flows can borrow money and access traditional financing at a good interest rate via unsecured loans/term loans from a broad range of commercial banking solutions based on their credit history -

ABL solutions provide alternative sources of business capital with flexible financing on sales and physical assets.

Uncommon takes on asset-based lending:  

1. Asset-based lending can be a strategic tool for business acquisitions, providing immediate liquidity for deal-making.
2. It can safeguard against economic downturns by offering a stable financing source based on tangible assets.
3. Asset-based lending may incentivize better inventory management and accounts receivable practices, improving overall business efficiency.

KEY TAKEAWAYS

• Collateral assessment forms the foundation of asset-based lending, determining loan amounts and terms.

• Borrowing base calculations directly impacts available credit, including accounts receivable and inventory.

• Regular monitoring ensures lender security while providing flexibility for borrowers as asset values fluctuate.

• Asset-based loans offer higher advance rates than traditional financing, improving business cash flow.

• Eligibility criteria focus on asset quality rather than company financials, opening doors for businesses with limited credit history.

CONCLUSION

An asset-based lending model may help unlock additional finance for those with more substantial assets and inventory and growing sales -

Funding availability can increase almost automatically as business growth accelerates as long as there are no borrower defaults.

Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, to learn how we can help unlock the financing your business has been looking for against your sales and business assets for your company's cash flow and working capital needs.

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

What are the types of asset based loans ?

Asset-based lending is a type of lending based on the value of certain assets. Different types of asset-based loans include accounts receivable financing, inventory financing, equipment financing, and real estate financing. Asset-based lending has become more prevalent in recent years as investors look for new opportunities outside the traditional banking system.

What are the main advantages of asset-based lending for Canadian businesses?

Asset-based lending offers higher borrowing limits, faster access to capital, and more flexibility than traditional loans. It allows enterprises to leverage their assets, potentially improving cash flow and supporting growth initiatives.

How can asset-based lending help companies with seasonal fluctuations?

By basing credit limits on current asset values, asset-based lending can accommodate seasonal ups and downs in inventory and receivables. This flexibility ensures businesses can access working capital when they need it most without being constrained by fixed loan terms. ABL will have a  positive impact on cash flow management when a business has seasonal trends.

Can asset-based lending support rapid business growth?

Yes, asset-based lending is particularly well-suited for fast-growing companies. As your inventory and accounts receivable increase with sales growth, your borrowing capacity can expand correspondingly, providing the necessary capital to fuel continued expansion.

Is asset-based lending a good option for businesses with less-than-perfect credit?

Absolutely. Since asset-based lenders focus primarily on the quality and value of your assets rather than credit scores or financial history, it can be an excellent option for businesses that may not qualify for traditional bank loans due to past credit issues or limited operating history.

How does asset-based lending impact a company's day-to-day operations?

While asset-based lending requires regular reporting and monitoring of assets, it often provides more operational flexibility than traditional loans. This can lead to improved inventory management, more efficient accounts receivable processes, and better financial discipline. Monitoring and reporting requirements differ, with typical monthly reporting being required.

What types of assets are typically used as collateral in asset-based lending?

Common assets used as collateral include accounts receivable, inventory, equipment, and sometimes real estate. The lender will assess the quality and liquidity of these assets to determine the value  of any pledged asset as collateral. One of the advantages of asset-based loans over traditional loans is that asset categories can be combined into one facility.

How does the interest rate on an asset-based loan compare to traditional financing?

Interest rates for asset-based loans can vary widely depending on the borrower's risk profile and the quality of the assets. While rates may be higher than prime-based bank loans, they are often lower than unsecured financing options if a company has sufficient assets.

Are there any industries that particularly benefit from asset-based lending?

Due to their significant inventory and accounts receivable investments, manufacturing, distribution, and retail businesses often benefit most from asset-based lending. However, any business with substantial tangible assets could potentially benefit via industry-specific asset-based solutions.

What happens if the value of the collateral decreases during the loan term?

If collateral value decreases, the borrower's credit limit may be reduced accordingly. This is why regular monitoring and reporting are crucial components of asset-based lending arrangements.  ABL lenders use different valuation methods based on size and type of asset so borrowing base calculations differ.

Can startups or new businesses qualify for asset-based lending?

While established businesses more commonly use asset-based lending, some lenders may consider working with startups or new companies if they have valuable assets to pledge as collateral. The terms may be more conservative initially based on overall financial performance.  In many cases, business owners will have to guarantee a personal loan on a startup.

How does asset-based lending differ from factoring?

Asset-based lending provides a revolving line of credit based on a company's assets, while factoring involves selling specific invoices to a third party. Asset-based lending offers more flexibility and control over which invoices to finance, and typically allows for larger credit lines based on a broader range of assets. Asset based lending works when inventory and fixed assets also need to be financed.

What is a typical loan-to-value ratio in asset-based lending?

Loan-to-value ratios in asset-based lending vary depending on the type of asset. Generally, accounts receivable can be financed at 80-90% of their value, inventory at 50-70%, and equipment at 50-80%. These ratios help lenders manage risk while providing significant capital to borrowers. Some companies prefer to access accounts receivable financing facilities.

How long does it take to set up an asset-based lending facility?

Establishing an asset-based lending facility typically takes 3 to 6 weeks. This process involves due diligence on the borrower's assets, financial analysis, and legal documentation. Once set up, ongoing access to funds is usually much faster than traditional loans. As every business/industry differs, there are different collateral types in asset-based lending.