While asset based lending models have been well entrenched in the U.S. landscape for decades, they are still evolving in the Canadian market place.
This is largely because corporate lending criteria doesn’t work in recessionary periods and post recessionary periods where the economy as a whole is operating at a lower level of performance resulting in poor or suboptimal financial statements in many industries.
Corporate finance lends off of financial statements that show strong cash flow and low debt to equity ratios. During and immediate after a recession, especially one as severe as the current one, hardly any money is being provided from these sources for businesses to operate and in many cases, the money supply is contracted due to risk and perceived risk.
Enter the world of the asset based lender where there is a stronger link between lender and borrower with more established rules for managing cash flow and risk that allows the lender to participate in situations where they would otherwise have to pass.
In the last few years in Canada, all the major banks and several U.S. entrants into the market have jumped into the asset based lending world with some being fairly aggressive with their programs for lending money.
While most of these programs are only focused on loan requirements of $5,000,000 or higher, the advancement of the industry in general is good news for small and medium sized business owners who are scratching their head trying to find a source of capital they can cash flow within the profits available in their business.
Institutional asset based lending can have considerable pricing variations off of prime, but this is still considerably cheaper than what I will all traditional asset based boutiques that start at 18% and go up from there.
The key to getting the money and making it work for you is to take on or evolve your financial discipline so you can make all the rules and regulations with this type of money work. In the end, the discipline that any asset based lending facility injects into a business is almost always a good thing that will help not only with short term survival but also long term growth and prosperity.
From a commercial lenders point of view, the evolution to asset based lending makes a great deal of sense in terms of not only managing risk but being more comfortable putting money out into the market.
I believe asset based lending will continue to evolve in all lending categories and become a more prominent form of business financing for many business owners now and in the future.