What is Asset Based Lending?Anne MacRae2016-06-13T04:03:49+00:00
What Is Asset Based Lending?
How ABL Financing Companies Work?
Asset based lending can be used to finance the following:
Accounts Receivable (Factoring)
Accounts receivable (A/R) and inventory are the most common assets used for ABL services. They are generally the most flexible and liquid, and greatly effect changes in the working capital requirements of a company. Asset based loans are most often catered to businesses with steady high growth, and the lender is basing their credit assessment on the strength and value of the A/R and inventory; while not ignoring but not as not as concerned about the balance sheet and associated financial ratios.
For a full ABL loan, the asset-based lender will go through a full assessment of the entire list of assets of the borrower. Appraisals will be completed on larger assets to determine the Net Forced Liquidation Value (NFLV). In addition, a full analysis of the inventory will be completed. The lender is trying to determine the current market value of the inventory, as well as the Net Orderly Liquidation Value (NOLV). In most cases, a lender will finance up to 80-85% of these two items.
When dealing with Accounts Receivable, lenders may consider funding up to 85% of the gross accounts receivable, excluding customer holdbacks, credits, and A/R over 90-days. These funding percentage and possible exclusions vary depending on the borrower’s nature of business and the industry.
Asset based lending companies in Canada are playing an ever-increasing role as business owners and their financial managers search for alternate business financing. Banks are still a key part of the process, but banks may fall short in a couple of very important areas.
Why Use An Asset Based Lending Company?
First, a bank may simply decline to provide financing to a business; based on whether the business is too new, not profitable, in an industry the bank feels is risky, whatever. Or, a bank may approve a business, but do so based on last year’s financial results and not provide the capital a company needs to grow. If a company is growing at 25-30% per year, but is being funded based on an average of the last 2 year’s financial results, they likely ran out of sufficient working capital 6-months ago.
So let’s understand exactly what an Asset based lending company does. For our purposes, it is providing loans and/or credit lines based on the core collateral of your company. Typically that includes accounts receivable, inventory, and other fixed assets.
Want to know more?
Because a real asset based loan or credit line is based on borrowing against specific assets, the real benefit of ABL should be that more cash is available and significantly more flexibility is achieved as compared to Canadian chartered bank offerings. The financing is more about the asset than the balance sheet. Different forms of asset based lending are available in Canada based on the stage a company is in, including start-up, high growth, mature, distress, etc. Because it’s all about the assets and their true value (not book value!) ABL works. Most common forms of “ABL” will include combinations of the following:
Accounts Receivable Financing
Real Estate Financing
SR&ED Tax Credit Financing
Benefits of ABL Finance
One of the most interesting aspects of the offerings of Ontario asset based lending companies is the fact that these offerings appeal to firms of any credit quality. Even well managed growing and profitable businesses have the constant pressure of working within current credit facilities to run and grow their business.
Equally, companies that have much more unpredictable financial progress (variable profits and losses, cash flow bulge needs, too much term debt, etc.) are more often than not the perfect match for the Canadian asset based lender offering. If your business would like to explore the advantages that asset based lending may provide, contact Express Business Funding to learn more.
Any form of debt or alternative finance is cheaper than giving up equity ownership
Business owners still have all the flexibility of running their own company without the fear of falling offside on ratios and covenants typically associated with senior debt financing
The competitive nature of the asset finance industry allows owners to gravitate to a firm who best meets their needs
True asset based credit lines grow along with the business