Every once in awhile something comes along in business that is a bit ‘ disruptive ‘ to how things are currently done. We think that ABL business collateral loans for working capital and operating financing is clearly the new ‘ disruptive’ in business financing in Canada – an asset based loan that makes sense, and works!
Inevitably we spent large amounts of time with clients reviewing the differences between ABL (asset based lending) lines of credit and bank operating facilities. There are huge differences.
In ABL finance its all about cash flow and working capital. Your current assets, primarily receivables and inventory are monetized, pretty well to the max. Clients tend to think of this as a ‘ loan ‘, and they can be forgiven for that for we often use that terminology also , but its not a loan, term debt per se, simply the cash flowing and monetization of your assets, converting those asset values into a long term daily operating line of credit .
Borrowing capacity on business collateral loans, i.e. your ABL revolving line of credit is determine primarily, with major emphasis on you r assets. Those amounts are determine up front – we can typically say that receivables are financing at 90% of your total a/r, and inventory typically comes in at the 40-70% range , depending on the nature of your product.
We can also safely say that you can increase these percentages with your asset based loan lender after some solid historical experience on the facility is in place. Surprising as it may seem in some cases you can actually achieve an over advance on assets, either on a bulge or seasonal basis, or simply on an ongoing permanent basis. When was the last time you got more that the asset was worth in any other type of Canadian business financing?!
ABL business collateral loans are managed very similarly to a bank facility in Canada. Monthly borrowing base certificates are in place, and this pertains to both inventory and receivables. It’s a question of ‘ eligibility ‘ and a lot of discussion takes place up front on the general nature and quality of the assets that underpin your facility.
In certain cases companies who do progress type billings are also in a position to have these receivables monetized under the same facility… its been our experience that many companies have had numerous challenges when they sell and bill via contract, progess payments, final acceptances scenarios, etc.
If we had to sum up why ABL asset based lines of credit as a ‘ disruptive’ form of business financing we would simply safely say that it maximizes business credit, is generally easier to obtain, and provides long term working capita growth as your asset base grows .
Picking and structuring the right facility can be a challenge for novices to ‘ ABL ‘ business collateral loans. Speak to a trusted, credible an experienced business financing advisor who can help you achieve the