There is one question we always seem to get from clients – ‘what are some business financing methods we might not be aware of?’ ; and our answer is always the same : asset based financing lending is one of those alternatives that we can almost bet you have not heard of – and if you have heard the term we will bet a nickel that you aren’t fully aware of what it is or how it works.
Let’s examine asset based financing from the viewpoint of it being an alternative to a bank line of credit facility. Another way of describing this type of facility is to view it as the full service offering that is directly comparable to a Canadian chartered bank facility, commonly called an operating line of credit.
These types of facilities are of course not long term debt of term loan type scenarios. Can we put it any more simply than its your day to day business credit facility that facilitates payment to suppliers, employees, etc.
What we could call the ‘ full service ‘ asset based financing lending model is a facility that is usually a non bank financing arrangement with an independent finance firm that specializes in this type of facility .
It monetizes your current assets, which are typically receivables and inventory. However , there is often what we could describe as an upside kicker to the asset based line of credit because it can also easily margin, from a working capital perspective any unencumbered equipment and real estate that you have . Did you ever thing you could get working capital and cash flow financing and margining on equipment and real estate – we are pretty sure you didn’t.
In discussing this financing alternative with clients we point out that the alternative to the full service type of facility (which is typically for larger firms) is an asset based financing lending facility that we call a working capital line of credit. It is generally under 250k and typically just finances receivables. Our favorite and in fact preferred type of facility is one in which your receivables are financed directly but you retain billing and collection control. More about that on another day!
So let’s get back to our asset based line of credit. What does it cost and how does it work, and, as business financing methods go, is it appropriate for your firm
Depending on the size of your facility pricing for asset based lines of credit can be very competitive to bank rates. Larger facilities take 30-45 days to fully set up properly. It should be no secret to the reader that a typical application would include a business credit application, financial statements, and aged asset lists of receivables and inventory.
How much can we get? Is our next most popular question from clients? The answer is lots. Asset based lending relies on the asset values, so typically receivables are margined at 90% and inventory, depending on your industry , can be margined from anywhere from 25-70% in our experience . Most firms could never get that financing on inventory from a bank.
So whats all the hoopla about this method of business financing. We can summarize it by saying its simply an alternative to bank financing when you cant meet bank criteria , its competitive if you have a solid asset base and business prospects , and it provides you with unlimited cash flow and working capital funding as your business grows . The size of the facility grows with your firm.
Confused? Hopefully not. Interested – hopefully so . Speak to a trusted , credible and experienced Canadian business financing advisor as to what business financing methods might alter your firms success and investigate asset based financing lending as a solid choice or alternative .