There is one overriding reason why asset based lending could be your best choice for business financing in Canada. What is that reason? Simply that it works when other types of financing are not available or don’t fit your current financial status.
The reality is that asset based lending works for all firms in all types of industries, and is not dependent on your overall financial performance that might be the focus of a more traditional based financing. That’s a powerful statement, so let’s examine what the financing is, how it works, and answer some key questions that might help business owners and financial managers determine if this financing is the solution to many, or all of their financing challenges.
So let’s back step a bit. What is asset based financing. Focus on one key word in that phrase – assets! This method of financing simply allows you to monetize and draw on the market value of the assets of your firm. Those assets are in very predictable categories, they are receivables, inventory, equipment and real estate. If you have one or all of those your firm is a prime candidate!
In some cases this method of financing is confused with factoring. Factoring is the sale of one of those asset categories – your receivables. An asset based line of credit lends against receivables, but also includes, inventory, equipment, etc. That is the difference!
The prime difference in qualifying for such a facility is really the difference that exists when you compare this type of financing to a Canadian chartered banking relationship. That banking relationship comes with a number of requirements that are often not needed when an asset based line of credit is in fact your real and best solution. Some of those traditional requirements might be profitability, years in business, the type of industry you are in, guarantees of shareholders and owners, etc. Those qualifications are not the focus of asset based lending. However the assets are.
On a day to day basis how does this type of business financing work. It’s quite simply. You and your asset based lender determine on a regular basis, i.e. weekly, monthly, etc what your asset categories total – a borrowing based is then developed on those categories and funds are depositing into your bank account for use as working capital by your firm. In Canada a 250k facility is more or less the bottom level of this type of financing, and facilities can be arranged into the many millions of dollars.
So if you want an easy way to remember the difference between this type of financing and a bank revolving line of credit simply remember that the bank focuses on overall financial strength and cash flow, our facility focuses on assets!
Because your assets are being financing as the primary focus of this type of facility you will have to report on those assets probably on a much more regular basis, so your firm should be in a position to prepare regular reports on receivables, inventory turnover, etc. When fixed assets are being financing, i.e. unencumbered equipment you own, etc then in many cases an initial appraisal will be required. This small dollar investment though can generate thousands or hundreds of thousands of dollars in working capital.
For “asset rich” companies, an asset-based loan may make more funds available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers.
So why is this then in many ways the best method of financing your business? Does it actually add cash to your firm? That is where some confusion comes in, but simply think of it as no adding new cash per se to your firm, it simply accelerates or quickens the cash flow that is traveling through your business. By financing your receivables and inventories to the maximum possible you turn over new sales and generate increased profits, and that’s what business financing is all about.
You may not even have heard of asset based lines of credit, perhaps you have but didn’t understand how it works or how it compares with other types of business financing. Investigate how this facility can become potentially your best choice in the overall financing of your business. Speak to a trusted, credible and experienced advisor who can work you through the Canadian landscape of asset based lines of credit.