Asset Based Lines of Credit - Canada – The ' ABL ' Solution for Business Financing
Stan Prokop
Asset based lending has been much slower than the U.S. to gravitate to this form of commercial financing, but ABL (the acronym for ' asset based lending) continues to gain traction in Canada. ABL facilities are excellent for small and medium sized firms, but some of Canada's largest corporations have moved to this type of ' asset financing '.
The ABL landscape can be somewhat confusing and difficult to find the appropriate structure for your firm. There are, in our opinion, several different, lets call them ' tiers ' of ABL lenders, and we recommend that Canadian business owners and financial managers work with someone that is experienced and trusted in this area.
It is our belief that the rise in popularity of Asset based lending is in a large part based on the current challenging financing environment for Canadian business. ABL is well over ten years old in Canada, if not older, and the recent surge in popularity is simply, we believe, based on the need of Canadian business owners to finance their assets to improve overall liquidity and competitiveness.
The term asset based lending, " ABL' is somewhat over used in a variety of categories - with some business owners thinking it is equipment financing only , etc . In the context of our discussion it is a loan, revolving, term, or usually a combination of both with respect to current and fixed assets. The ABL facility takes the senior position over the assets, and tends to lend very aggressively against these assets.
So what are those asset categories and how are they financed. The typical assets that are financed in an ABL scenario are receivables, inventory, which are financed on a ' revolving ' basis, as well as term loans for equipment and real estate. Term loans under ABL facilities, in our experience, tend to be financed at there appraised and liquidation values.
ABL ' S best deliverable, in our opinion, is the aggressive financing of A/R and inventories. ABL lenders know inventory, and lend aggressively against it - while it might never be exactly what the owner wants suffice to say that the inventory will be better ' margined ' than via a regular chartered bank facility in Canada.
The core of ABL success is that Canadian business owners often find they can't meet their full financing needs with a bank, as the bank looks at this type of facility from a viewpoint of the financials, and not the Actual assets. So business owners negotiating bank credit facilities with Canadian chartered banks will find discussions revolve around loan covenants, debt to equity ratios, and operating ratio metrics. That same discussion around the ABL facility revolves around how much your A/R, inventory, and fixed assets are worth on an ongoing basis- a big difference in discussion!
The Canadian ABL landscape is far less active than in the U.S. - The overall size of your ABL facility will dictate pricing and your best partner firm.
In summary, investigate ABL as a viable working capital option - work with an expert in the area, and you will find that if you opt for this financing solution your liquidity and overall cash flow should improve significantly !
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