Beyond Traditional Lending: The ABL Advantage for Canadian Companies

Maximizing Cash Flow with Asset-Based Lending

YOUR COMPANY IS LOOKING FOR? BUSINESS FINANCE SOLUTIONS!

HOW TO GET A BUSINESS LINE OF CREDIT IN CANADA You've arrived at the right address! Welcome to 7 Park Avenue Financial Financing & Cash flow are the? biggest issues facing business today ARE YOU UNAWARE OR?? DISSATISFIED WITH YOUR CURRENT? BUSINESS? FINANCING OPTIONS? CONTACT: 7 Park Avenue Financial South Sheridan Executive Centre 2910 South Sheridan Way Oakville, Ontario L6J 7J8 Direct Line = 416 319 5769 Email = [email protected] ?

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"The art of managing an ABL revolving line of credit lies in balancing the power of leverage with the responsibility of stewardship over your business's assets." - Unknown financial strategist

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Unlock your business's hidden potential with an ABL revolving line of credit.

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7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer the ABL Revolving Line Of Credit solution and working capital solutions ?– Save time and focus on profits and business opportunities

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7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”

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ABL Revolving Line of Credit in Canada

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Business line of credit needs may often require the business owner/financial mgr look beyond the ‘ norm’ associated with revolving credit lines.

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That’s where ABL asset-based lending and revolving loans come in. They are part of a range of asset-based financing solutions that serve as viable alternatives to major banks in Canada.

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Let’s not forget, though, that business lines via bank facilities offer low cost and flexibility if they can be accessed via a defined credit limit with an unsecured business line from a bank. Let’s dig in.

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BUSINESS LINE OF CREDIT REQUIREMENTS - WHAT ARE THE REQUIREMENTS TO GET A BUSINESS LINE OF CREDIT

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An ‘ ABL ‘ is the acronym for the non-bank business credit line via the asset based lending solution, which leverages a company's assets as collateral.

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With the focus on using your assets as collateral, the facility's true ‘ borrowing power’ provides your firm with a flexible cash flow solution based solely on the balance sheet assets.

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The facility suits every type of company but is often most successful for firms with uneven financial statement ratios, fluctuating profits, and cash flows that might not resemble true operating cash flow performance.

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As we've mentioned, many companies, but not all, have used the facility to facilitate a turnaround or restructuring of their overall capital structure when owners or lenders mandate that!

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Business acquisition financing can be supplemented with this type of business financing.

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Many firms financed by Canadian banks might find themselves on the wrong side of covenants and ratios that can often only be solved by a new third-party solution to mend their business credit rating.

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Solutions around asset-based revolving lines demand that your firm has a good handle on your overall cash conversion/business cycle.

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That knowledge and the ability to borrow more on your overall collateral will deliver the proper turnaround in your business finances. In some cases, true asset-based lenders will also consider term debt if it is appropriate and feasible.

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WHY CONSIDER AN ASSET-BASED LENDING (ABL) BUSINESS CREDIT LINE / REVOLVING CREDIT FACILITY?

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Many new clients at 7 PARK AVENUE FINANCIAL aren’t fully aware of the differences between ABL loans and bank credit or other facilities.

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This is why they often choose asset-based lending when traditional options fail. They have found, through experience, that bank credit is difficult to get given the personal guarantees, covenants, and other obligations Canadian chartered banks might impose.

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Accessing all the bank credit you require can quickly become a full-time job! As one of our mentors used to say, ‘ tuition is costly in the school of experience ‘!

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HOW CAN YOU BENEFIT FROM A BUSINESS LINE OF CREDIT

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There are several reasons why your firm might consider an ABL revolving line, including the ability to access significant capital quickly.

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Some of these reasons might include: ABL Finance will provide significantly more, and immediate liquidity to the business. Firms that might be under a cash flow crunch or constantly facing bulge financing needs due to issues around seasonality, etc, will find themselves fully financed.

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Asset-based credit lines tend almost automatically to grow as revenues rise. Growing sales require constant replenishment of working capital due to the build-up of investments in receivables and inventory, consistent with any company with increasing sales.

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ABL financing is ‘covenant friendly’, with asset-based lending companies placing much less, or even no focus on debt-to-equity ratios, financial leverage, outside collateral, etc

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ABL Lenders can do this as they constantly update your overall asset coverage around aged payables, receivables, fixed asset lists, etc. The issue of a personal guarantee requirement has much less emphasis in the asset-based lending environment.

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The software and reporting mechanisms ABL lenders use to provide them with a complete update on your firm's performance.

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In summary, asset-based lenders who feel comfortable with their asset security and your firm’s ability to provide regular updates on performance offer a significant amount of liquidity in the Canadian business financing landscape.

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ARE THERE DISADVANTAGES TO THE ABL FACILITY LINE OF CREDIT - BUSINESS LINE OF CREDIT FEES AND COSTS

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99% of the time, asset-based lending will always cost more than traditional bank financing. Unlike unsecured loans, it provides access to more significant capital amounts.

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The bottom-line interest rate and the focus on continual reporting are the tradeoffs your firm gets from its access to maximum liquidity. However, similar to bank financing, the ABL environment allows you to pay for only the credit you utilize.

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ABL lenders charge more for financing as they are typically financed privately and have higher costs related to monitoring collateral and reporting.

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Fundamentally, it’s all about the cost of financing benchmarked against the ‘ risk ‘ associated with your firm or its industry. At these times, looking at alternatives makes sense. Revolving credit facilities are primarily used for growth, and in some cases, they are a solid refinancing alternative.

HOW DOES THE ABL BUSINESS LINE OF CREDIT WORK? THE? SMALL BUSINESS LINE OF CREDIT? AGREEMENT

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The ability to constantly access and draw down working capital/cash flow needs is the key to securing the proper asset-based loan or line of credit facility when a business qualifies for funding.

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The assets that make up and drive this type of business credit are Receivables, Inventory Equipment, / Real Estate (if applicable). As these two ‘ current asset’ levels rise and fall, so does the line of credit accessibility.

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Technically speaking the bank, or the asset-based line of credit provider, determines your firm’s access by establishing what they call a ‘ borrowing base’ for the secured business line - typically monthly In the case of a bank facility, typical margins against these two assets are as follows:

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A/R = 75%

Inventory - 50% (varies)

On The Other Hand asset-based lenders who provide lines of credit typically offer higher-margin borrowing:

A/R - 90%

Inventory - 50-75% - (varies)

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With confidence and experience, we can say that asset-based non-bank credit lines, while more costly, almost always offer more borrowing power.

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True revolving facilities are the most typical credit line—your firm draws down on the facility and then pays it down as you collect receivables and generate cash.

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The facility ‘ revolves ‘—hence the name ‘revolver’. The key drivers of that ‘ revolving ‘ tend to be the turnover over inventories and collection of receivables as the company completes its sales cycle.

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Many industries find themselves perfectly suited to asset-based credit; examples might be distribution companies, manufacturers, distributors, etc. Currently, many firms are service or software-based, and these firms focus on the collection of a/r or their ability to contract clients via recurring revenue streams.

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When you set up your facility with the asset-based finance company, you will mutually agree on a ‘ borrowing base, ‘ which will identify the maximum you can draw down at any time.

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Revolving credit facilities make the most economic sense when they ‘ revolve ‘, allowing you to minimize borrowing costs while at the same time being able to access capital when you need it.

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This is why good attention to your inventory turns and DSO ( the key measurement of receivable turnover ) are so critical for the ownership/management team.

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Asset-based lenders use bank lockbox agreements to allow them to control the overall facility and ensure the funds received are used to constantly pay down the facility.

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Over time, your ability to have the facility ‘ revolve ‘ properly will be key in determining facility size, rates, collateral monitoring, etc.

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If your firm has a good relationship with your lender, you can often negotiate an ‘ over adance ‘, allowing you to temporarily ‘ over-borrow ‘ above the approved facility size.

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In these cases, we always recommend that clients prepare a realistic cash flow projection based on the business's current situation and needs.

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Those situations might arise out of the ‘ seasonality ‘ in your industry, your ability to take advantage of special vendor pricing, etc. One other possibility surrounding this type of facility is the potential for the asset-based lender to include a ‘ term loan component ‘ in the overall structure of the facilities.

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Payments can be adjusted to be made separately on the loan or utilizing the ‘ balloon repayment ‘ scenario, which allows the loan to collapse when the facility is paid out by another lender.

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Suffice it to say good asset coverage is required in these latter two scenarios.

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Although almost all Canadian banks have an ‘ ABL ‘ division, Canadian borrowers will always struggle to understand the difference between bank ABL and non-bank ABL.

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In the U.S., ‘ second liens‘ are popular, allowing lenders to be 2nd on charges of equipment already secured by another lender; this practice is very uncommon in Canada.

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When banks do provide ABL loans in Canada, their rates are often considerably better than their non-bank counterparts. However, minimum loan sizes are often in the 5-10 million range and upward.

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Banks will take a more extensive look at many factors in these larger ABL loans, such as overall credit quality, pricing, and the company’s ability to comply with the operational aspects of loans.

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It is safe to say, though, that on balance, there is more lender risk in asset-based loans given the borrowing firm's constantly changing assets, major fluctuations in cash flow, and often struggling working capital ratios. This is why various conditions will be imposed by a Canadian bank or non-bank LOC provider.

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We can (again) say with confidence (and, again experience!) that conditions imposed by asset based lenders are less onerous and more flexible. To some extent the actual limit on the line of credit can almost automatically increase without further applications, etc What then is the bottom line of your firm’s search for revolving lines of credit?

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KEY POINTS TO CONSIDER

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Be open to looking at both bank/credit unions and non-bank solutions - aka ‘traditional’ versus ‘alternative.’

Have a strong sense of your working capital and cash flow needs

Ensure you have the data to allow commercial banks or a non-bank lender to consider the credit facility - typically, that’s financials, aged receivables, inventory, payables, etc

Understand the value of your physical assets, such as machinery and equipment, as they can be leveraged to secure larger credit lines

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ALWAYS BE OPEN TO A PLAN B FOR CASH FLOW!

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Sometimes, your company may not be eligible for an asset-based credit line. Other options like credit and term loans can provide similar liquidity in such scenarios.

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Numerous other solutions can provide a similar type of liquidity, including accounts receivable credit lines, purchase order financing and inventory loans, sale-leaseback scenarios, business credit cards, factoring loans with transaction fees versus interest rates, etc.

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Each of these types of facilities has different pricing and benefits.

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Certainly, a sole accounts receivable line of credit is always more achievable and can meet the needs of many firms, particularly those with smaller facility requirements who can receive same-business-day funding for sales.

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Although there is no hard and fast rule, our experience at 7 Park Avenue Financial is that for firms requiring facilities less than 500k, these secondary solutions we have highlighted will often do the job, particularly if your firm doesn’t qualify for a true ABL through a commercial lender or the bank.

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Solutions such as the factoring line of credit are quickly put in place as an alternative to a small business line of credit, so business owners and their financial managers should always investigate types of asset-based financing for funding business needs. Learn more about factoring here

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These secondary types of offerings, versus the operating line of credit, are generally easily accessed, and credit approval is more quickly implemented.

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KEY TAKEAWAYS

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• Asset valuation forms the foundation of ABL revolving lines of credit, determining borrowing capacity.
• Borrowing base calculations directly impact available funds, including eligible accounts receivable and inventory.
• Regular financial reporting ensures lenders can monitor collateral performance and adjust credit limits accordingly.
• Understanding credit line utilization helps businesses optimize their working capital management strategies.
• Familiarity with debt covenants prevents potential defaults and maintains access to crucial financing.

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CONCLUSION

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?ABL revolving lines of credit empower businesses to transform their assets into readily available working capital.

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If you’re focused on shortening the journey on the tough road to business cash flow and working capital financing, consider all options.

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Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with funding needs and understand the business line of credit rates as a valuable tool in Canada for financing solutions for your business.

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

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What is a business line of credit?

A business line of credit gives businesses access to funding day-to-day operations and business expenses via minimum monthly payments to the facility, unlike cash flow lending, which relies on the stability of cash metrics.

Interest rates are variable and are based on the business's credit rating. To avoid taking on too much debt via term loan structures while at the same time being able to borrow funds and pay operating expenses, firms should consider unsecured credit lines or asset-based lending facilities to fund working capital needs.

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Is a business line of credit the same as a business loan?

Small business loans are typically term loans versus revolving business lines of credit, each serving as a different financing solution for business needs. Business loans are used to fund capital expenditures, while business credit lines fund the day-to-day ongoing needs of the business.

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Do you pay interest on a business line of credit?

A business line of credit is flexible financing similar in function to business credit cards. Funds are drawn from the business bank account as needed, and interest is paid only on the portion of the facility used. A business line of credit can significantly impact a company's cash flow management.

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Why should a business have a line of credit for working capital?

Revolving credit facilities provide immediate access to short-term funding for day-to-day operating expenses such as payroll, inventory purchases, and accounts payable obligations to suppliers.

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?What are the main advantages of an ABL revolving line of credit?

ABL revolving line of credit secured loans offer flexible access to working capital, improved cash flow management, and the ability to finance existing substantial assets. It can also provide higher credit limits than traditional loans and adapt to your business's changing needs to secure funding.

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How does an ABL revolving line of credit differ from a traditional term loan?

Unlike a term loan with fixed payments, an ABL revolving line of credit allows you to borrow and repay funds up to your approved credit limit as needed. This flexibility enables you to manage seasonal fluctuations and take advantage of growth opportunities more efficiently.? Secured lenders focus on financial ratios and covenants while ABL is a? 'covenant light structure'? and if the borrower defaults lenders rely on assets secured.

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Can an ABL revolving line of credit help my business during periods of rapid growth?

Yes, an ABL revolving line of credit can be particularly beneficial during growth phases. As your liquid assets, such as accounts receivable and inventory, increase, your borrowing capacity also grows, providing the necessary capital to support expansion without diluting ownership through equity financing.

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How does an ABL revolving line of credit impact my company's balance sheet?

An ABL revolving line of credit can improve your balance sheet by converting assets into working capital. This can enhance liquidity ratios and make your business more attractive to other lenders or investors.

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Is an ABL revolving line of credit suitable for businesses in all industries?

While ABL revolving lines of credit can benefit many industries, they are particularly well-suited for businesses with significant accounts receivable or inventory. Due to their asset-heavy nature, the manufacturing, distribution, and retail sectors often find this financing option especially valuable.

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What documentation is typically required to apply for an ABL revolving line of credit?

Lenders usually require financial statements, accounts receivable aging reports, inventory lists, and business tax returns. A detailed business plan and projections may also be necessary. The specific requirements can vary by lender and the size of the credit facility.

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How quickly can a business access funds once an ABL revolving line of credit is approved?

Once approved, businesses can typically access funds within 24-48 hours of submitting a borrowing request. The speed of access is one of the critical advantages of this type of financing, allowing for rapid response to business opportunities or challenges.

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Are there any restrictions on how funds from an ABL revolving line of credit can be used?

Generally, funds can be used for various business purposes, including working capital, inventory purchases, and operating expenses. However, some lenders may restrict using the funds for certain activities, such as acquisitions or significant capital expenditures.

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How does the interest rate on an ABL revolving line of credit compare to other financing options?

Interest rates on ABL revolving lines of credit are often competitive, especially for businesses with solid assets. Rates can be variable, typically based on a benchmark like the prime rate plus a margin. The specific rate will depend on factors such as the company's financial health and the quality of its assets.

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What happens if the value of the assets securing the ABL revolving line of credit decreases?

If the value of the securing assets decreases, the available credit limit may be reduced. The borrowing base is regularly recalculated based on current asset values. In some cases, this could require the business to pay down a portion of the outstanding balance to maintain compliance with the loan terms.

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How does a lender determine the borrowing base for an ABL revolving line of credit?

Lenders typically calculate the borrowing base by applying advance rates to eligible assets. For example, they might offer 80% of eligible accounts receivable and 50% of eligible inventory. The total of these calculations becomes the maximum available credit. Lenders periodically reassess the borrowing base to ensure it accurately reflects the current value of the collateral.

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What role does financial reporting play in maintaining an ABL revolving line of credit?

Financial reporting is crucial for maintaining an ABL revolving line of credit. Borrowers must usually provide regular (often monthly) reports on their accounts receivable, inventory levels, and overall financial performance. These reports help the lender monitor the health of the securing assets and adjust the credit limit if necessary. Accurate and timely reporting can build trust with the lender and potentially lead to more favourable terms.

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How can a business optimize its use of an ABL revolving line of credit?

To optimize the use of an ABL revolving line of credit, businesses should maintain strong asset quality, efficient inventory management, and prompt collection of accounts receivable. Implementing robust financial controls and forecasting can help predict cash flow needs and inform drawdown decisions. Additionally, regularly communicating with the lender about business performance and upcoming needs can lead to a more strategic use of the credit facility.

' Canadian Business Financing With The Intelligent Use Of Experience '

?STAN PROKOP 7 Park Avenue Financial/Copyright/2024

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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil