We’re the first to admit ‘ change ‘ is one of the most difficult things to cope with sometime, both in our personal lives and in business. Hindsight becomes a great friend, and that’s why we use this analogy in talking today about ABL financing in Canada. When business owners and financial managers discover the true power of asset based lines of credit finance and lending in Canada their first reaction is ‘ where has this been all my ( business ) life!’
Let’s examine some of the key differences, and benefits of asset-based loan financing in Canada, specifically the asset based line of credit revolving working capital facility. It seems simple… and also difficult to realize why this is different than traditional Canadian chartered bank financing. Because it’s simply a business line of credit financing facility secured by inventory and receivables. In many cases both equipment and real estate are added into our ‘ mix ‘, leveraging even more assets for working capital purposes.
So why do thousands of business owners utilize ABL loans (they are not loans per se …more about that later)? The basic answer is that they cannot access this amount and type of credit elsewhere, predominantly at their bank.
So service firms, distribution companies, and companies that manufacture gravitate to this type of cash flow financing for the obvious reason – they can’t get financing elsewhere. In some cases clients have been asked to exit the bank and find themselves in ‘ Special Loan’ facilities – essentially a holding tank or purgatory for firms that have violated or cant meet bank ratios and covenants.
What size of facilities is available for asset based lines of credit in Canada? Small facilities start in the 250k range based on the overall size of your current assets, predominantly, as we said A/R and inventory. And from there? ABL financing loan facilities go up to the tens of millions of dollars, and some of the largest corporations in Canada have ‘ forgotten’ about traditional bank lending and financing for credit lines, adopting the ABL model instead.
Oh yes… we had mentioned the term ‘ loans ‘. A true ABL facility is not new debt on our balance sheet; it’s not a term loan, its simply monetizing the current assets in to a revolving line of credit facility, that’s important to understand!
Start up firms in Canada can be financed by ABL lending, as can firms that have significant current operating and financial challenges… the one thing they do have, and need, is ‘ Assets ‘ to facilitate the type of lending we are talking about . That’s our other key take away point for clients, that the actual approval of such facilities is not, we repeat ‘ not ‘ dependent on balance sheet strength, profitability, or ratios and covenants. Even personal guarantees play a very small part in the approval of ABL facilities, or some of the subsets of this type of finance.
Naturally it helps when you are moving back to profitability via a plan that will work!
Our final point today on ABL loans is simply that it’s all about liquidity. Receivables are typically margined at 90% of your portfolio, and inventory is assessed on an individual basis, often ranging up to 70% in financing leverage.
So should you forgot everything you know about traditional finance business credit lines… maybe not a great idea, but we can assure you that you are missing out if you don’t consider the alternative ! Speak to a trusted, credible and experienced Canadian business financing advisor on the benefits of such a business financing in Canada.