A Canadian Business Financing Epiphany ! ABL Asset Based lending Is The Quiet Revolution In A Business Line Of Credit Facility

And that’s when it hits you. We’re talking about a Canadian business financing ‘ epiphany’ – that being the term used for a ‘ sudden, intuitive perception or insight ‘. And what exactly is that ‘ insight’. It’s imply that an ABL facility, which is the asset based lending term for business line of credit is different, and in many ways a lot better than traditional term loans or Canadian chartered bank facilities.

So, that’s a fairly dramatic statement, so let’s set out to provide some facts and valuable information on these business revolving credit facilities.

Canadian businesses use ABL financing to leverage their assets, typically receivables, inventory and equipment into liquidity for working capital and cash flow. The most common question we get around this type of business financing is ‘ Why is an ABL facility different than a bank line of credit? Fair question, right?

The answer is simply as follows – it’s your asset values that determine the amount of business credit line you are eligible for. Banks view business lines of credit in Canada in an entirely different manner. It’s just a different way of looking at things. Asset based lending looks at the assets themselves as the ‘ prime ‘ collateral. In the cases of banks they look at whats important to their criteria, which are typically historical cash flow, profitability, a balance sheet that has reasonable debt, outside collateral, etc.

It’s this difference then that is what becomes almost shocking to a degree on Canadian borrowing for business. Just imagine, no rations, covenants, reliance on personal guarantees, just a focus on the assets themselves. And the more verifiable assets you have the more you can borrow.

Therefore the key advantage to this type of borrowing and financing is that the ABL facility accelerates that cash flow and allows your company to access all its working capital needs as you grow. Naturally it goes without saying that your company now has an alternative to taking on additional debt or having to dilute some or a large part of your equity ownership. Remember, almost always equity is much more expensive than debt in the long run.

Is every one eligible for an asset based lending abl facility? The general answer is yes. Junior type asset based lending and financing facilities for inventory and A/R can start as low as 250k and quite frankly there is really no upper limit for facility size. Unbeknownst to many some of the largest corporations in Canada utilize this type of financing, having forsaken bank lines of credit in the traditional sense.

Eligibility always is a key question from clients. Whats required? is really their question. First of all you have to have proper financials and be able to maintain solid reporting records on key assets such as receivables, inventory, etc. We don’t necessarily consider it a downside, but it is safe to say there is a bit more monthly reporting in an ABL facility , if only for the reason that its all about the assets, not the ratios and covenants you might be used to now .

The advance rates (how much you can borrow!) are significant in asset based lending. A/R is typically margined at 90%, and inventory (yes, inventory!) is anywhere from 30-70% depending on the type of product you produce/sell.

So, that’s the epiphany! Just that sudden insight that threes a quiet revolution going on in business financing that you might want to check out. Speak to a trusted, credible and experienced Canadian business financing advisor on the merits of ABL financing.