You’ve been watching them and it’s quite disturbing. Every business keeps an eye on its competitors – that’s what business is about. So why does the competition seem to enjoy what seems like unlimited cash flow for their sales and growth and expansion.
We think we know the reason why, and its called asset based lending. This type of business financing, relatively speaking is new to Canada and supercharges cash flow and liquidity.
Naturally our clients , being the conservative types they are wonder aloud about several key issues – what are the qualifications for this type of financing, what is the min and max deal size, and what are some of the costs of this type of financing .
Let’s cover those issues off in an effort to ensure you understand the power of asset based lending and why this type of operating line of credit could be your savior in business financing.
Qualifications? There is basically one! You need assets – otherwise asset based lending doesn’t work. The asset based line of credit competes with the operating line of credit offered by Canadian chartered banks . It is provided by non bank institutions that are specialized in asset based lending. Banks, on the other hand are specialized in financial statements we can add facetiously. What we mean by that of course is simply that charted bank business lines of credit in Canada focus on overall financial statement quality – the key underpinnings are solid financial statements reflecting profit, equity, liquidity, and overall solid cash flow.
On the other hand the asset based lender only wants to know one thing – well two actually, do you have assets and are they managed well. What are those assets – they tend to be receivables, inventory, and in some cases equipment and real estate.
These assets mentioned above secured an operating line of credit which is margined on a regular basis. What interests our clients is of course the margining of those assets, and asset based lending does that very well. Typical structures are 90% of receivables, 50-75% advances on inventory (yes you heard us correctly) and working capital financing provided on the appraised value of hard assets that are unencumbered – i.e. the real estate and equipment if you have them and need financing for them.
The ABL (that’s the acronym for this type of financing) gives you cash flow to meet payroll, build inventory, and basically grow your company.
Facility sizes for asset based lending tend to start at 250k and above – otherwise the facility , if under that amount, tends to be a receivable financing facility , which by the way works quite nicely also .
Circling back to our final client question – cost. We can make a general statement that if your deal size is significant, i.e. over 5m you can generally achieve rates that are comparable with the bank. Facilities under that amount are more expensive than bank financing – but , guess what ,you get all the liquidity you need, which has its benefits re growing your business, turning your assets faster, enhancing relationships with suppliers, and taking on more business than you ever could before .
Looking for an operating line of credit ? – ABL could be your solution – Speak to a trusted, credible and experienced Canadian business financing advisor today on this new form of financing your working capital.