When we ask clients if they will consider an asset based lender for a working capital refinancing many business owners will come back with a surprise questions for us – namely ‘ What is an Asset Based Lender, and what do they do?’
Asset based lending in Canada is still relatively speaking a fairly new for of business financing. Business owners and financial managers are moving to this form of financing for several reasons which we will discuss.
As the name implies the financing it focuses on your business assets. All sizes of companies in Canada can utilize asset financing – even start ups. Practices vary within the industry as to how the financing works on a day to day basis – frankly this is one of the biggest challenges that owners face, i.e. understanding the offering in the Canadian marketplace. (Asset based lending, or ‘ABL ‘is very commonplace in the U.S. )
Rates in Canada vary all over the place for these types of financing. The size of your financing as well as the overall perceived ‘ quality ‘ of the transaction ( as perceived by the lender, not yourself!) dictate financing rates – In Canada Abl financing cost vary from 9%/annum to, on many occasions 2% per month. Although the financing is generally more costly it has repositioned many firms for survival and growth – simply because it brings more working capital and cash flow into your business.
The asset based lender only has one focus (your bank has two focuses). That focus is on the ‘true’ value and size of your underlying assets.
Let’s use a quick example to demonstrate the true power of asset based lines of credit. Let’s pick a sample company with say 4 Million in revenue, with the following asset size categories:
Receivables – 300k
Inventory – 250k
Equipment (unencumbered) – 400k
It is extremely common, using the asset sizes above that the firm’s bank might offer up a 225k line of credit for the receivables. For discussion purposes lets say they provided another 75k based on the personal guarantees of the owners. That’s a total of 300k. We can assure readers this would be a very common formula for a Canadian chartered bank, i.e. 75% on receivables, with no financing provided against inventory, etc.
So how an asset would based lender look at this transaction. Remarkable the line of credit provided could be in the 500k range, as an ABL lender would advance against receivables, 40% against inventory, as an example, and would also assess some value in the equipment and provide working capital financing against that.
So while the company’s asset size stayed the same the firm came close to doubling working capital and cash flow under the asset based lender. That is true working capital power.
Although the majority of asset based loans are used for straight working capital and operating facilities, many times they can be structured to allow for a major restructuring or merger and / or acquisition. Again, assets are leveraged to produce cash.
Investigate an asset based lender solution. Although sometimes more costly they provide a source of capital and do not directly affect your overall balance sheet – you are simply leveraged operating capital to the max.
Talk to a credible, trusted, and experienced advisor in this area of Canadian business – that is a solid Canadian business financing strategy for future profits and growth.