We often speak to clients about ABL – true asset based lending , and they can definitely be forgiven for sometimes mistaking that form of financing with true cash flow finance and mezzanine lending in Canada offered by a small number of commercial lenders . Let’s explore some of those key differences in true cash flow lending.
It clear to us that part of the confusion lies in the fact that a number of different types of lenders are inter mingled in offering mezzanine lending and financing services in Canada .They might be Canadian chartered banks, in a small handful of cases those some ABL lenders that are causing us confusion differentiation are also offering cash flow loans in addition to their asset financing service . And firms not commonly known to many medium sized businesses in Canada, such as hedge funds, private equity firms etc also make up our mix.
Cash flow finance loans in Canada are true loans, unlike ABL services which are simply the monetization of current and fixed assets. Cash flow financing in Canada is about all those things we threw out the door when we spoke of ABL financing – things such as your firms total value, profitability multiples, and cash flow coverage.
Mezzanine and cash flow lending amounts are related directly to Ebitda and multiples thereof. Depending on the size of the transaction , who is doing it, and your overall credit worthiness within your firm pricing is very competitive to traditional Canadian chartered senior bank debt financing, but can also run into the ‘ teens ‘ when it comes to unsecured cash flow loans .. Mezzanine lenders register their 2nd place position but are clearly unsecured, resulting in that difference in pricing when it comes to a senior secured cash flow loan.
In ABL financing we speak of your firm’s ability to first of all have assets, and secondly your ability, together with your ABL partner to monitor and report on those assets. That isn’t the focus in cash flow finance and mezzanine lending, so you clearly should expect those periodic and sometimes expensive audits.
While many ( but certainly not all ) clients entertaining asset based lending in many cases have significant challenges , cash flow loans are truly made to firms who have profits, cash flows, and strong financial fundamentals .
We would also point out that mezzanine lenders, because they are offering a hybrid type of financing often will ask for some sort of equity ownership, usually in the form of a warrant .. ie a right to purchase some equity in your company .
How does a firm know if it qualifies for true cash flow finance? Simply put, as we have said, your firm must be generating significant cash flows. Your borrowing ability will be related very, and we repeat, very directly to the amount of historical and projected cash flow you generate.
To successfully generate a cash flow finance or mezzanine loan you need to have a strong sense of the limited Canadian market in this area of business financing .Having a solid handle on your cash flow coverage and leverage ratios is key.
We’ve therefore demonstrated some of the key differences between Asset Based Lending and Cash Flow and Mezzanine Financing and lending in Canada. When considering this type of financing speak to a trusted, credible and experienced Canadian business financing advisor who can assist you to navigate this little know sector of business finance in Canada.