Business is and will always be about leverage. The ability to leverage both human and capital resources is the cornerstone to being able to grow and scale profitable business operations.
Yet the challenge with leverage is that its hard to stay on top of what balance sheet structure is best for your business at a given point in time. There is definitely a need to think ahead as what makes sense today may not work tomorrow.
For instance, if the business is going through a bit of a down turn and cash flow is or will be stretched, its far better to start working out how to leverage your available leverage early on even when its not completely clear as to how things will place out versus waiting until you have a problem.
Equity based financing under distress is not only going to be harder to come by, but its going to cost more as well. The worst part is that if you do hold good quality assets and the business does have a strong plan for improving financial performance, its easy to also overpay on equity financing due to the time constraints you could be under from leaving the process too long.
Even when everything is going well, the bank or institutional lender you’re working with today may not be interested in funding future growth which may come as a surprise when you least expect it.
The point here is that optimal financial leverage needs to be an endless pursuit on the part of the business owner and/or business manager. And leverage is always going to be based on the amount of debt financing you can secure against some combination of the paid in and market value of the equity in the business.
The second point is that regardless if your in a survival mode or a growth mode, its easy to pay too much for business financing due to a lack of time available to conduct the process.
And the third point is that today’s lender is not necessarily going to be tomorrows lender so you always have to be cultivating what will be the next best fit for the business as the business changes and the overall economy changes around it.
Unless you’re a fairly large company with substantial profitability and assets, its unlikely that an asset based lending solution is going to be a long term or even a medium term funding solution.
The reasoning is fairly simple. The cost of most asset based lending will either not be affordable long term or will substantially eat away at your profits.
The focus of an asset based lender is to finance assets that either they can control directly or that they can easily set up a clear liquidation pathway to get their money back from the liquidation of the assets.
This specialized form of lending charges a premium for the lenders ability to provide funding in situations where conventional or traditional lenders will not be interested. By becoming focused on a slice of the asset lending market, the lending competition can be very minimal in many locales, creating an opportunity for pricing that reflect the underlying risk to the lender.
If you ask an asset based lender why their pricing may be substantially higher than a conventional financing source, the lender will regularly offer back that you’re renting equity due to the fact that the business does not have sufficient retained earnings from profitable operations or paid in capital to secure cheaper forms of money.
While some may feel this is a bit of a cheeky answer to the question, there is a lot of truth and merit in it as well.
First of all, the next option for financing if an asset based loan is secured will likely be an equity investor or equity injection from the current owners. Any investor will require a return on capital at or above what an asset based lender will be charging.
Second, by acquiring capital in the form of a loan, it can be acquired without diluting ownership and paid back according to an agreed upon repayment schedule.
Which leads us back to bridge financing. Outside of institutional asset based lenders that are priced off of the prime rate, the next best pricing options will need to get comfortable with how they are going to get paid back in one or two years or they won’t fund the deal.
Why? Because they know the cash flow will not be able to handle the higher cost of financing for an extended period of time and that without some realistic transition plan to cheaper money in the future, they will likely pass on the financing opportunity. This will then lead to even more expensive asset based loans that are more closely aligned with liquidation and price their financing accordingly, knowing full well that may of the borrowers will fail to turn the business around or find an exit strategy that will repay the debt.
That’s why its important to only enter into an asset based deal if you can clearly see the other side of the bridge or the probability of getting something in place is pretty high.
Otherwise you’ll on a bridge to nowhere fast when the cash flow can no longer service the debt.
If you’re seeking a Mississauga asset based loan for your local area business, you will definitely have some options to consider in this locale.
In Canada, the asset based lender world revolves around downtown Toronto, which many asset based lenders not prepared to wander beyond the boundaries of the Greater Toronto Area more or less to conduct business.
So being in Mississauga affords your business access to just about any type of asset based loan that is available in Canada from both Canadian and U.S. asset based lenders.
This is both a good and bad thing in some respects.
Its a good thing in that if you have good assets that can be pledged for security, regardless of what those assets are, you will likely find some form of Mississauga asset based loan to consider.
The bad thing is that there are so many different types of asset based lending models out there, which can overlap across asset classification and industry, it can be hard to figure out which financing facility is going to be the best fit for your business.
A good example of this problem is when a well established business is operating very profitably, but needs a higher ratio of debt to equity business financing to fuel additional growth. Virtually any type of asset based lender would be interested in this type of scenario, provided that the assets being offered as security fall within their program structure.
The challenge comes from the fact that there can be enormous differences in rates and principal repayment options. From an interest rate perspective, you could see potential Mississauga asset based proposals ranging from prime plus two or three to an offer at two percent a month and anywhere in between.
Asset based lending has long been associated with higher interest rates due to the higher leverage position the lender is taking, resulting in the lender holding more of a quasi equity position, which drives up the rate of return.
But for the larger, well established companies, major banks have jumped into the market and are offering prime plus asset based lending to companies that traditionally would be paying 12% to 18% per annum on a similar asset based facility.
Certain asset based lenders can provide better leverage to one group of assets over another, so if you utilize them across all available assets, your weighted average cost of capital may end up being high than if you split asset type by relevant asset based lending source.
If you’re in need of a Mississauga asset base loan, I suggest that you give me a call so we can go through your requirements together and discuss different asset based financing strategies and options available to you.
Toronto asset based lenders come in a wide variety of shapes and sizes, each focused on a particular slice of the market. The bases of asset based lending is a clear understanding of the underlying assets being financed and the means to secure and take action to reclaim value in the event of default.
Because there are several different types of assets that can be deployed in a given business, there can be several different asset based lenders providing business financing solutions that can be relevant to your requirements.
The other key aspect of asset based lenders is the risk level they service. Risk levels are assigned by business financial performance and asset type. For instance, there are working capital asset based programs that are provided by major banks as a way to provide greater financial leverage to their large corporate clients that can’t fit into the leverage limits of the banks traditional corporate lending programs. These programs come at prime plus and are typically limited to financing facilities with a minimum working capital requirement of $10,000,000.
When a business does not qualify for big bank working capital asset based financing, the next level of asset based lending that provides similar levels of leverage can see the rates shoot up to between 12% and 18% requiring certain margins and cash flow turnover ratios to make the cost of financing work.
Toronto asset based lenders exist for different specific assets and asset combinations. Each lendng model is based on the lenders ability to monitor higher ratio and/or higher risk lending from a cash flow perspective and to predictably liquidate assets held as security in the event of loan default.
Like with any lending model, the greater the risk and the more unique the lending application, the higher the related interest rate you can expect. Many Toronto asset based lenders will also work within a certain loan size range with larger loan amounts being provided by fewer lenders for each type of asset based requirement.
When looking for capital for their business operations or opportunities, business owners and managers will try to determine if who they are working with to source money is a direct or indirect lender.
The basic premise is that its better to work with a direct lender than an intermediary such as some form of broker.
But while this can appear to be logical on the surface, the term direct lender can be very misleading.
The truth of the matter is that all lenders, outside of private mortgage lenders, are utilizing someone else’s money to help fund their deals.
Business financing is about leverage for all those involved and many of the wholesale financing strategies that fuel larger transactions are far beyond the scope of this discussion.
Its not uncommon for any particular debt lender to have several different funding options to consider to fund the deals they are putting out to small and medium sized business owners. But are they lending all their own money? Again, unless they are a private mortgage lender or a certain type of equity investor, not a chance.
This is where people get confused.
The goal many business owners have is to work directly with someone who is lending out all their own money, but virtually no one is doing that.
And there’s a good reason why. If you look at your own expected return on capital for the money you hold, are you prepared to give it to someone else for a three or four percent return that may be secured, but hardly guaranteed?
The answer in most cases is absolutely not.
So why would lending organizations be prepared to do that on a very large scale when they could get a better return doing something else with their money?
The answer is they don’t.
When pressed on this issue by a client, I asked them to name me someone they considered to be a direct lender. After the client provided a name of a well know international lender, I went online and accessed their balance sheet as the company was publicaly traded.
The balance sheet showed total assets of over $500 billion and equity of slightly more than $50 billion, leaving the difference of $450 billion as debt financing, clearly showing that they were lending out someone else’s money, just like most everyone else.
Private mortgage lenders provide financing at higher rates, which reflects their desired cost of capital as the money they’re lending out is their money.
For lower cost sources of capital, the lender is providing a combination of equity and debt, with the debt portion getting above 90% in some cases.
Even the largest of the large may employ several different forms of financing for the deals they do. They may have their own pre-approved lines of credit they can draw against, provided the deal to be funded fits the underwriting requirements of the lending source, they may syndicate deals with other lenders to share the overall risk, they may outsource the deal to a strategic partner who has a funding source more closely aligned with the deal requirements. There are other potential funding methods and practices as well.
The key point is that the lower the cost of financing, the less likely you’re actually going to be working with someone sticking 100% of their own money into the deal.
When a business owner or manager are under the gun trying to get financing in place for some need where there is some sort of official or self imposed time limit in place, one option to consider to get the capital you need is through bridge loan financing.
A bridge loan by definition is a loan for a specific purpose that will be repaid by a certain time or event in the future. The more predictable and verifiable the reliable the repayment plan, the more likely that a bridge loan can be arranged.
The most common use of bridge loan financing is when there is a gap between two ends of a transactional event with respect to time and capital is required to facilitate the transaction. In these cases, the capital is required to start the transaction and the completion of the transaction will pay back the bridge loan.
Regardless of how compelling or verifiable or predictable the exit strategy or repayment strategy for the bridge loan is, there is considerable risk of loss present in most of these situations.
As a result, the cost of financing can be much higher than what you would expect for traditional business financing. In fact, for some deals, the bridge financier may expect that you split the profit margin of the transaction with them as compensation for the money being advanced and the risk being taken.
While the effective financing rates in these scenarios may seem extreme as a result, the alternative may be to not do the deal at all at which point 50% of the potential profit is better than 0%.
A typical bridge financing arrangement that occurs every day is with the buying and selling of residential or commercial real estate. The borrower has purchased a new property and is trying to sell an old property at the same time, creating the need to utilize the equity in the old property to help finance the new property through a short term bridge loan. This is a very low risk transaction in most cases and as a result the relative cost is much lower than other bridge loan transactions.
The key to bridge loan financing though is the exit strategy. The more certain the repayment plan is, the more lenders will be interested in the deal and as a result, the lower the cost of borrowing will be.
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.
While the category of asset based loans and asset based lending is continually growing in terms of application and money supply, the overall financing category remains confusing and misunderstood by many business owners.
The general idea is that an asset based lender is more focused on the market value of the underlying security being offered and its liquidation pathway in the event of loan default.
While this is a strong underlying theme, this financing category is goes much farther a field in almost every direction.
There are asset based lenders that only focus on one type of asset such as inventory lenders, purchase order financiers, accounts receivable factors, equipment lenders or leasing companies, real estate lenders, and so on.
By focusing on a particular classification of asset, the lender can more accurately assess the market, set up a predictable and efficient liquidation pathway, and attract investor or lender financing to fund their asset based loan model.
But there are also asset based lenders that work across categories such as working capital models that finance against accounts receivable, inventory, and potentially equipment. Or term lenders that focus more on equipment and real estate.
And there are also different slices to the market in terms of bank and institutional lenders versus private lending sources.
The more the lending decision is based on the value of the asset alone, the higher the rate is likely going to be. Because banks also participate in asset based lending, greater scrutiny is applied to lower cost forms of asset based loans.
While there is large variation in business loan size among lenders, there are once again slices of the market that service different levels of financing. In general, asset based loans are for commercial financing requirements above $500,000 in order to justify the work that goes into assessing them and the ongoing monitoring that may be required on a monthly basis.
The more an asset based facility is based on working capital cash flow, the more monitoring that will be required and the more control the lender will have with respect to the cash inflows and out flows.
Because there are so many types of asset based lenders that tend to overlap with respect to the deals they will look at, there can be several different types of options and related pricing to consider.
Unless the asset based financing is bank or institutionally based, its likely going to be short term in nature (one to two years) and is being used as a bridge loan to allow the borrower the capital and time to get into a better financing position which will allow refinancing into a lower cost institutional program.
And the right choice is not always the lowest cost. Some programs have very restrictive operating requirements that may not provide you with the flexibility you need to operate properly. Others may require high repayment penalties if you have the opportunity to refinance them before the term is up.
Regardless of the application, you will likely have a list of options to consider that can be hard to locate and harder to secure.
Because asset based loans will typically be one step in a multiple step financing process, you would be well advised to work with a business financing specialist who can help you map out a financing strategy that will work the best with the most relevant asset based loan sources available to you.
There is an abundance of information on the web telling you how to game the system to secure a business loan or business credit, or how if you buy this book or pay this fee in advance, even the most clueless business person, or wannabe business owner, with the worst credit can secure business financing in no time flat.
Yes, there are certainly ways to game the system. And you can get away with some sneaky credit application strategies that can get you lines of credit and term loans.
But like any loan, if you don’t have a solid plan to pay it back, you’re going to go into default on your repayment obligations and then what?
The path to financing a new or existing business starts with preparation. All businesses carry risk, and the people who lend out money want it back plus a return. So the inherent risks associated with any venture need to be understood and managed or why would anyone in their right mind issue a business loan?
For those that do issue questionable business loans, they don’t tend to do it for very long as risk catches up to the borrowers and the lenders portfolio turns to dust supporting the saying that a fool and his money are soon parted.
Preparation also helps the borrower better understand what he or she is getting into and perhaps may end up talking themselves out of getting a loan once they stand at a place where a truly informed decision is being made.
Unfortunately for many, preparation takes work and its far easier to plow ahead with an idea versus a well thought out strategy and tactical execution plan, find any source of money that can be had, and give it a go.
Good luck with that approach.
The other side of preparation is presentation. A lender or investor not only want to see that you thoroughly understand your own business or business opportunity, they also want you to convey the information in a form that they understand and can easily relate to.
Too often presentations provide excessive opportunities for lenders or investors to make assumptions or draw conclusions that may not be accurate or valid. This is a great way for an otherwise “finance-able” business loan request to get turned down.
Business loans aren’t easy to secure most of the time. There is art and science involved in the process of business financing procurement. Short cuts tend to lead to disaster more often than to success.
If you’re planning to be in business for the long haul, then its important to learn about, and constantly become better at, business loan preparation and presentation.
It seems that in about 95% of the business financing cases I work on with business owners and managers, there is no action to secure a business finance solution without a certain amount of urgency being present.
On one hand, we can say that’s just human nature, that people in general require a sense of urgency or immediate need to take action.
But in the world of business financing, this is becoming more and more of a problem as lenders continue to take a more conservative approach in 2010 out the backside of the current recession.
The result is that debt financing is not getting secured in time to close deals, shore up cash flow, finance growth, and so on. None of this is good for business owners or the economy in general.
Business owners and business managers have been conditioned to believe that getting a business loan of any size or structure can be done in matter of days or weeks. So the process for even applying for financing has typically been delayed until the 11th hour.
The need for urgency is pretty much always required in that once someone makes the decision to pursue some amount of business capital for their company, there is a need to focus in on the process and stay dialed in until its completed. Making a half hearted effort towards putting an information package together, not studying the financial metrics to demonstrate your business knowledge, and poor follow up and follow through on all requests for additional information can dramatically reduce the chances of success.
So while urgency and focus is a good thing, the timing of the action needs to be adjusted to achieve better results more often.
If we go back to the analogy of a clock and time left until money is required, business owners and managers have to reset their timing mechanism to not take action at the 11th hour, but at the 9th or 10th hour instead.
Perhaps its psychologically difficult for many to develop a sense of urgency earlier on in the process of seeking financing, but this behavioral correction needs to take place in order to avoid greater financial distress when an appropriate source of funding cannot be located and secured in the time required.
Those that start earlier, with a sense of urgency, will get rewarded more times than not.