Is it really that bad to be #2 in anything? In business and in particular business lending it could actually be an advantage sometimes don’t you think? With apologies to Vince Lombardi (… ‘winning is the only thing …’) we’re talking specifically about ABL asset based financing.
While even we admit ABL lending might be # 2 today behind Canadian chartered bank commercial financing there is doubt that asset based financing, or abl commercial lending facilities are fast becoming the financing mechanism of choice for thousands of Canadian businesses . Let’s examine why ABL trys harder!
Revolving commercial credit lines via asset finance are essential secured credit lines collateralized by your assets. Could it be any more simply? You use the ‘ value ‘ of your working capital assets to generate borrowing capability on a daily basis. By the way, in some cases your fixed assets can be part of that daily borrowing equation also!
Let’s come back to that word ‘ value’ re those assets. That is the true power of asset finance and probably why ABL business lending is so fast growing in popularity. As compared to a bank facility which relies heavily on many other formulas and ratios to determine your borrowing base on a monthly basis ABL finance focuses solely on the maximum amount of real true liquidity in your receivables, inventory, etc .
The hard truth is that ABL lenders actually want you to borrow to the maximum of your facility, because as independent finance firms their only source of income is the finance charges on your facility. It is as simple as that. While Canadian chartered banks (we still love them by the way!) can be on occasion criticized for fluctuating on where they stand on commercial borrowing in a number of industries ABL business lending tends to always be there, in good times and bad.
And speaking of those good times , the risk profile that ABL lenders look at is clearly all over the map – by that we simply mean that your company can be doing great and in ‘ hyper growth’ mode, or you can actually be seriously challenged financially and still be a prime candidate for ABL finance.
In business it’s as much about the people, and in asset based lending the management of these firms are typically ultra experienced in asset valuation of your receivables, industry, and your industry as a whole .That is partially why we have seen numerous cases where a commercial credit facility has been tripled when it converted to an ABL facility from a bank facility.
And here’s a little secret about ABL finance in Canada , some of the chartered banks actually have small boutique ABL divisions within the bank that compete with regular commercial divisions within that same entity . How ironic!
So getting back to our # 2 and trying harder scenario, why does this form of business lending seem to work better. It’s just that your assets are converted into a higher level of borrowing for liquidity and working capital. Typical rations for this type of facility are 90% of your A/R and 40-50%, or more of your inventory and fixed assets. Now that’s a true borrowing base!
We’ll never know why, but the cost of asset based credit lines is always a top of mind priority for our clients understanding of this method of finance. To be honest, the range of cost in asset based financing is wide.
Facilities are available at even better rates than your chartered bank, but in many cases they are equal to or more costly. But don’t forget that it’s about access to capital, not borrowing cost, since you can take that capital and convert it to more sales and profits. It’s all about leveraging your assets for growth!
For your higher borrowing power you attain with this type of business lending you must have the ability to report on your assets, so regular financials and constant updating of inventory and A/R is an essential requirement. The collateral for ABL lenders is those assets, not ratios and covenants!
So, in summary, ABL is clearly #2 today in asset finance. Will it be number one, we’re not sure we know or care care !… but we are sure that if Canadian business owners and financial managers check out this form of commercial financing they will clearly see the financial benefits of more liquidity and working capital .