Posts Tagged ‘asset based loans ontario’
Asset Based Loans
November 4th, 2011
“Asset Based Loans – When To Consider Them”
First of all, there can be many definitions of asset based loans.
For this discussion, we are referring to asset based loans in the context of a working capital facility that leverages the equity in accounts receivable at a minimum, but can also provide leverage on inventory, equipment, and even real estate.
The standard asset based loan or ABL type arrangement requires the borrower to open a joint account with the lender and that all funds paid to the business be deposited in this joint account.
The lender will, as they say, sweep the account every day and apply funds coming in to the balance outstanding on the loan. The borrower will request funds from the lender on a daily or weekly basis, depending on the requirements, to pay bills as they come due.
This is a highly simplified overview of how an asset based financing facility actually works from an operational stand point… each lender and financing scenario will have its own unique aspects.
Now back to the original question as to when ABL’s should be considered
There are two basic scenarios (with lots of variation within each one) where asset based loans can be considered to finance business operations.
The two scenarios include situations of growth and situations of financial distress…basically opposite ends of the lending spectrum.
In both cases, what is common is that the business requires high asset leverage to generate the cash needed to operate the business.
Under both these scenarios, conventional lending parameters may not provide sufficient leverage, causing the business to fail outright, or not be able to take advantage of growth opportunities immediately available to the business.
Most asset based loan facilities are born out of the inability of a conventional financing arrangement through a bank or institutional lender to provide the level of financing the business requires.
In highly stable companies with very strong balance sheets and cash flow, the ABL solution can be provided in house through the conventional lenders own asset based lending group. These institutional asset based lenders provide the higher leverage required at slightly higher rates than what their conventional business division would lend money out at. The large bank asset based lending programs are also only going to be available for growth and market development scenarios.
When a business cannot qualify for what we’ll call low cost institutional asset based loans, they turn to boutique lenders that provide ABL services at similar leverage, but at higher rates.
If a business is in distress, the asset based lender will provide higher leverage on assets and very tight cash management to give the business the best chance to turn things around or wind down the operations without destroying equity. Either way, this tends to be a short term solution until the business can once again qualify for a lower cost source of capital.
In situations of growth, the higher cost, traditional asset based lender will once again provide higher leverage at higher rates and serve as the senior lender until the business can qualify for a lower cost form of financing within a manageable range of leverage.
Unless a business is being funded by a low cost form of institutional ABL, the time period of business financing via an asset based loan is typically two or three years as the high cost of financing cannot be sustained over a long period of time in most cases.
Therefore, most traditional asset based loan providers are a form of bridge lender that does not expect to be financing the business into the long term.
Once again, there are many variations to these asset based loan programs, each with their own unique fit in the market place.
To better understand what type of asset based loan facility might be appropriate for your situation, you might consider utilizing the services of a business financing specialist that can help you navigate the landscape.
Business FinancingOntario Asset Based Lenders
June 6th, 2011
“There Is A Broad Cross Section Of Ontario Asset Based Lenders Available To Businesses Operating In Ontario And Other Parts Of Canada”
Ontario asset based lenders lead the Canadian market in terms of coverage of the market place.
Because of the size of the Ontario market compared to other areas of the country, asset based lending in Ontario can function in a relatively small geographic area which is very appealing to asset based lenders who typically require regular monitoring of accounts.
The term asset based lending can mean a number of different things, but for the most part its about lending against the market value of assets that a specific lender knows how to liquidate in the even of default.
Asset based financing is by definition higher risk lending because more of the lending decision is based on the security value of the asset as compared to bank or institutional lenders that require lower levels of overall balance sheet leverage in order to justify a loan request.
With an asset based lender, the lending decision is more about the difference between the immediate liquidation value of assets and the amount of financing they provide. As a result, it is much more formulaic than conventional bank lending.
That being said, a growing area of larger Ontario Asset Based Lending is in the bank’s own specialized niche for asset based loans.
In this particular space in the market, larger banks are providing higher amounts of leverage to clients that are in the lower risk range of the asset based lending world. These are typically asset based loans for $5.0 M plus, so are only available to a small percentage of the market.
For the majority of small business and medium sized businesses in Toronto and the Greater Toronto Area, there are a considerable number of different asset based financing options where either one type of asset is the focus such as a pure accounts receivable factoring house, or a number of assets can be considered collectively.
Each model typically has its own unique fit into the market and financing costs and structure.
The challenge for a business owner, especially for one that has a variety of assets that can be financed through asset based lending, is picking the right model.
In some situations, using more than one asset based lender can be preferred in order to obtain both maximum leverage and a lower cost of financing.
But more lenders involved can also lead to more deal complexity and greater administration requirements to meet the needs of all parties involved.
The best way to approach this area of the market is to work with a business financing specialist that works in the market and has direct experience with a variety of Ontario Asset Based Lenders
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business FinancingAsset Based Loans
July 25th, 2010
“Because There Are So Many Types of Asset Based Loans and Asset Based Lenders, It Can Be Hard To Determine Which One Is Best For A Given Situation At a Given Point In Time”
First of all, asset based lending is all about providing more lending against the available hard assets of a business. The more predictable the resale value of the assets pledged as security, the larger the amount of financing that can be provided by an asset based lender.
Just like all forms of business financing, there are different levels of asset based lending set up according to credit rating and business performance. At the lowest cost level, banks and institutional lenders have asset based lending divisions that focus on providing greater asset leverage to their higher end clients that have an asset intensive balance sheet and require more leverage than what the bank’s traditional corporate finance division can provide to run their business.
The more traditional form of asset based lender focuses on borrowers that do not quite fit the bank’s asset based lending requirements. Slipping into this realm of asset based loans can push the lending rate from prime plus interest into annual rates of 12% to 18%. The cornerstone of these asset based models is the businesses accounts receivable and the resulting cash flow they create.
Still higher priced asset based lending becomes more focused on individual assets , or groups of assets, such as accounts receivable, or accounts receivable and inventory, or inventory only, or equipment, or real estate, and so on.
Sometimes companies with significant assets in all major categories (accounts receivable, inventory, equipment, and real estate) will work with a combination of different asset based lenders to get the best overall leverage and repayment terms.
The challenge with all of this is to locate the most suitable asset based lenders that are relevant to your situation, assets, and needs at a given point of time. In certain cases, the variability among lenders providing asset based loans on certain types of assets can be considerable resulting in borrowers paying higher costs of financing than they need to.
But when time and money are short, its easy to take the first thing that’s available in order to keep the business going and then hope that there is going to continue to be sufficient margin available from sales to pay the higher interest costs and to get the business to a position of profitability that will allow it to return to a cheaper form of debt financing.
The best way to determine what you’re preferred options are at a given point of time is to work with a business financing specialist who understands the current market and lender underwriting.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business Financing