Asset Based Loans: The Smart Alternative to Traditional Banking

Beyond Banks: Asset Based Financing for Canadian Businesses

YOUR COMPANY IS LOOKING FOR  BUSINESS FINANCE SOLUTIONS!

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing business today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS  FINANCING OPTIONS?

CONTACT:

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

"Assets are not risks; they are opportunities waiting to be leveraged." - Warren Buffett

ASSET BASED LOANS

What are asset-based loans?

Asset-based lending (ABL) is a type of financing that allows businesses to secure loans using their assets as collateral.

An asset-based lender not only provides the necessary funds but also acts as a strategic partner, aiding businesses in achieving growth.

These lenders evaluate sales, receivables, inventory, and equipment while focusing on understanding customers' creditworthiness and the saleability of assets in the event of a default.

This approach ensures businesses can leverage their assets effectively to secure the financing they need.

Transform Your Business Assets into Working Capital

Canadian businesses often struggle to access traditional bank financing despite having valuable assets. This lack of funding stunts growth delays expansion and creates cash flow challenges.

Let the 7  Park Avenue Financial team show you how Asset Based Loan Companies unlock the value of your existing business assets, providing flexible financing solutions that grow with your business.

Case Study: 

A Manufacturer faced seasonal cash flow challenges despite strong assets. Through asset-based lending, they secured a $5M facility against receivables and inventory. Results included:

• Revenue growth
• Improved supplier terms
• Enhanced operational flexibility
• Eliminated cash flow gaps

Categories of Business Borrowers in Canada

When it comes to commercial finance in Canada, our banks tend to classify businesses into a few basic categories:

1. Investment Grade and Middle Market Businesses

2. SME Commercial and Early-Stage Companies

Startups and early-stage revenue companies often find themselves at the lower end of credit quality when seeking SME commercial finance solutions.

The Role of Assets in Business Borrowing

The reason your firm might qualify for more business credit than you initially think boils down to one word: the company's assets. These assets become the true collateral in business borrowing, often offering more significant financing potential than what financial statements might suggest.

Typical Types of Collateral: Accounts Receivable

• Inventory
• Receivables
• Fixed Assets
• Commercial Real Estate ( if applicable )

Businesses can use their physical assets, such as equipment and real estate, as collateral for loans, enabling them to access substantial funding based on their value.

Other assets like patents, rights, or contracts might also be considered in today's high-tech world.

How Asset-Based Financing Solutions Work

Asset-based financing solutions use a company’s assets as collateral to secure a loan. The lender advances a percentage of the asset’s value, typically 60% to 90%, depending on the type of asset and the lender’s risk assessment.

For example, accounts receivable might be financed at a higher percentage than inventory.

Once the loan is approved, the borrower can use the asset based line of credit proceeds to meet their working capital needs, such as paying off debts, investing in new equipment, or expanding their operations via flexible financing.

This approach allows businesses to unlock the value of their assets and convert them into cash flow, providing a steady source of additional working capital.

Simplifying Asset Financing

Asset financing isn’t as complex as it might seem. The industry operates on a few basic formulas:

Given banks ' conservative stance on asset valuation, these formulas often compare favourably to traditional unsecured loan bank financing. In asset-based lending (ABL), the net orderly liquidation value (NOLV) is crucial for appraising inventory.

This value, often used by financing firms, can differ significantly and may be much lower than the original purchase price of the inventory.

Key Asset Financing Formulas For Advances

• Receivables: 90% Financing
• Inventory: Percentage of cost
• Fixed Assets: Current sale/market values (typically determined via third-party appraisal)

These formulas often compare favourably to traditional bank financing, given banks' conservative stance on asset valuation.

The Advantage of Commercial Finance Firms

Unlike banks, commercial finance firms invest more expertise and time in understanding the true worth of your assets, making them a viable alternative for businesses.

Benefits of Asset-Based Loans

A Strong Alternative to Bank Credit

Business credit lines achieved through asset-based loans are a robust alternative to traditional bank revolving credit facilities.

These loans operate similarly to a revolving line, allowing businesses to draw funds based on the value of their assets, such as accounts receivable or inventory, and providing flexibility in borrowing and repayment as the assets generate liquidity.

Immediate Liquidity for Growth

While asset-based loans may cost more, they often provide immediate liquidity, a lifesaver for growth and daily operations.

The loan approval process for asset-based loans focuses on the value of collateral and the borrower's management experience. This offers a more flexible funding solution compared to traditional loans, which heavily weigh the borrower's creditworthiness and financial history.

Simply put, they help alleviate the cash flow crunch!

Key Takeaways

• Collateral Valuation - Understanding how lenders value different asset classes
• Advance Rates - Knowing typical lending percentages against various assets
• Monitoring Requirements - Managing ongoing reporting obligations
• Covenant Structure - Understanding key financial requirements
• Cost Components - Breaking down fees, interest, and monitoring charges

Industries That Can Benefit from Asset-Based Lending

Asset-based lines of credit can benefit a wide range of industries, each with unique financing needs:

• Manufacturing: Companies that produce goods can use ABL to finance their inventory, equipment, and accounts receivable, ensuring they have the working capital to maintain production and meet customer demand.
• Wholesale: Wholesalers can leverage ABL to finance their inventory and accounts receivable, allowing them to manage cash flow and invest in bulk purchases.
• Retail: Retailers can utilize ABL to finance their inventory, equipment, and accounts receivable, helping them manage seasonal fluctuations and expand their product lines.
• Construction: Construction companies can use ABL to finance their equipment, materials, and accounts receivable, providing the necessary funds to take on new projects and manage ongoing operations.
• Government Contracting: Government contractors can benefit from ABL by financing their accounts receivable and equipment, ensuring they have the liquidity to fulfill contracts and manage cash flow.

Asset-Based Lending Versus Traditional Lending

Asset-based lending differs from traditional lending in several key ways:

• Collateral: ABL uses a company’s assets as collateral, whereas traditional lending relies more heavily on the borrower’s creditworthiness.
• Loan Amount: ABL loan amounts are typically higher than traditional loans because they are based on the value of the assets, allowing businesses to access more capital.
• Interest Rates: ABL interest rates are often lower than those of traditional loans, as the collateral mitigates the lender’s risk.
• Repayment Terms: ABL offers more flexible repayment terms, allowing borrowers to repay the loan as their assets are sold or collected, which can be particularly beneficial for businesses with fluctuating cash flows.

Real-world applications of Asset-Based Lending

Asset-based lending has numerous real-world applications that can significantly benefit businesses:

• Working Capital: ABL can provide businesses with the necessary working capital to meet day-to-day expenses, such as payroll, rent, and utilities, ensuring smooth operations.
• Expansion: Businesses can use ABL to fund expansion efforts, such as purchasing new equipment or hiring additional staff, enabling growth without straining cash flow.
• Debt Consolidation: ABL can help businesses consolidate their debts into a single, lower-interest loan, simplifying financial management and reducing overall interest costs.
• Acquisition: Companies can leverage ABL to acquire another business or assets, providing the necessary funds to seize growth opportunities without depleting cash reserves.

In summary, asset-based lending is a flexible and effective financing solution providing businesses with the necessary working capital to support their growth and expansion.

Using a company’s assets as collateral, ABL can offer higher loan amounts, lower interest rates, and more flexible repayment terms than traditional lending, making it an attractive option for many businesses.

Conclusion

Are you looking to understand more about "genetically modified" business finance and commercial financing? !!

Your business assets hold untapped potential that could fuel your company's next phase of growth.

Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing adviser.

FAQ

What collateral can I use for an asset-based loan?

Business inventory, accounts receivable, equipment, real estate, and intellectual property often qualify as collateral. Lenders evaluate each asset class differently based on liquidity and value stability.

How quickly can I access funding?

Initial funding typically occurs within 2-4 weeks of application, and ongoing advances are available within 24-48 hours once the facility is established.

What size loans are available?

Asset Based Loan Companies typically provide facilities ranging from $250,000 to $50 million, based on the value of qualifying assets.

How does asset based lending provide greater flexibility?

Asset-based lending grows with your business, offering:

• Automatic credit line increases as assets grow
• Seasonal flexibility
• No fixed monthly payments
• Usage-based costs

What advantages do asset based loans offer versus traditional financing?

• Less emphasis on credit scores
• Higher advance rates
• Faster approval process
• More flexible terms
• Focus on asset value versus financial statements

What assets qualify for financing?

Qualifying assets include:

• Accounts receivable
• Inventory
• Equipment
• Real estate
• Purchase orders
• Intellectual property

How quickly can businesses access funding?

• Initial funding: 2-4 weeks
• Subsequent draws: 24-48 hours
• Online monitoring available
• Regular availability updates

What makes asset based lending ideal for growth?

• Funding grows with sales
• No dilution of ownership
• Predictable costs
• Scalable structure

How do asset based lenders monitor collateral?

• Monthly reporting requirements
• Regular asset updates
• Field examinations
• Inventory counts
• Financial statement review

What documentation is typically required?

• Financial statements
• Asset listings
• Customer information
• Insurance certificates
• Corporate documents

Are personal guarantees required?

• Case-by-case evaluation
• Depends on asset quality
• Limited guarantees common
• Corporate guarantees preferred
• Asset strength determines structure

How are advance rates determined?

• Asset type considerations
• Historical performance
• Industry factors
• Seasonality analysis
• Customer concentration

What happens if business performance declines?

• Collaborative approach
• Focus on solutions
• Asset preservation
• Workout options
• Restructuring support

How do asset based loans differ from traditional bank loans?

• Focus on asset value
• More flexible structure
• Higher advance rates
• Less emphasis on ratios
• Performance-based pricing

What industries commonly use asset based lending?

• Manufacturing
• Distribution
• Wholesale
• Transportation
• Construction
• Service companies

What are typical monitoring requirements?

• Monthly borrowing base
• Regular asset updates
• Financial reporting
• Customer information
• Compliance certificates

What is Purchase  Order Financing ?

It is a business funding solution where lenders advance funds against confirmed purchase orders from creditworthy customers. The lender pays suppliers directly, allowing businesses to fulfill large orders without upfront capital.

Key Features Of PO Finance

• Advances up to 80% of PO value
• Based on the customer's creditworthiness
• Quick funding (typically 3-5 days)
• Best for wholesalers and manufacturers
• Solves cash flow gaps between orders and payment

' Canadian Business Financing With The Intelligent Use Of Experience '

 STAN PROKOP 7 Park Avenue Financial/Copyright/2024

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