The proverbial ‘ teachers pet ‘ – aka the new favorite. That’s a pretty good term for abl financing, which is pretty well the newest form of business line of credit financing in Canada in many years. Let’s take a look at why asset based lenders and their lending facility, the asset based loan are starting to dominate the Canadian business landscape.
ABL financing has been around for awhile, in the past it was considered a very ‘ alternative’ method of financing business lines of credit in Canada. It, as well as its subset, ‘ receivables financing facilities ‘ have not become a very popular choice for Canadian firms who cant qualify for traditional financing .
An additional comment we might make is that many clients we talk to do in fact qualify for some form of traditional financing, i.e. the Canadian chartered banks, but they typically can’t get all the financing they need. That goes for everything to start up to Major Corporation, as more and more large corporations are also gravitating to this type of financing.
Part of the misconception around an ABL financing loan is that this lending means different things to different people. In our context today we’re talking about the monetization, for maximum leverage, of receivables, inventory and in certain cases equipment and real estate, which can neatly be packaged into a revolving business credit facility.
Another old saying we like is the ‘mother in law pitch’. Whats that? It’s your ability to explain in a sentence or two, to your mother in law, why asset based lending is radically different from Canadian chartered bank facilities. Hers our version of the mother in law pitch in that regard – ‘Asset based lending relies almost solely on the amount and quality of your collateral, not your overall financial statements and general financial health ‘.
It’s as simple as that! Banks are required, by their charter and nature to focus on overall credit quality when granting business line of credit facilities. Therefore the main discussion point very quickly becomes debt to equity ratios, cash flow covenants and coverage, external collateral, personal guarantee emphasis, etc. That is somewhat thrown out the door in an abl financing and lending environment. Therefore it is very common, we repeat, very common for a Canadian firm to receive financial leverage on 90% of receivables, 50-75% of inventory, as well as appraised values of equipment and real estate, all into one convenient business line of credit.
Clients are great at coming up with simple questions. Hers a typical one – if this is a non bank facility how does my day to day banking work. Great question. The answer is that asset
based lenders use a dual account or lock box type system – your funds, as you need them, go into a regular business operating account.
Funds you collect on a daily basis from receivable and customer deposits go into another blocked account, at the same time reducing the amount you own on your business line of credit .Naturally this balance fluctuates everyday based on your firms business cycle, and the good news, similar to a bank facility, is that you are only paying for what you are borrowing.
So , in summary, while human nature often has us somewhat ‘ jealous’ of the ‘ teachers pet ‘ the reality is that Canadian business owners and financial managers owe it to themselves to check out this dynamic form of business financing , under which almost all companies qualify . Speak to a trusted, credible and experienced Canadian business financing advisor for more information on the benefits of this type of lending.