Asset Based Lending Solutions in Canada - the New Financing Alternative

Asset Based Lending in Canada - what's all the excitement about? As we are well into our 2010 business year in Canada the financial markets continue to provide challenges to Canadian firms in the small to medium enterprise sector. We personally define small to Medium as say, Sales revenues fewer than 50 Million dollars, but you will find a number of people with different size definitions. Suffice to say our numbers are smaller than those in the U.S, as usual!

Working capital and cash flow financing challenges seem to be a constant source of challenge for the Canadian business owner and financial manager. When we combine that challenge with the fact that many companies have debt and debt service problems, and in many cases are coming off a ' bad year ( the worst year ever? ) you can see how any new financing solution very quickly becomes top of mind .

If the Canadian business owner is confident that his liquid and fixed assets as a whole can support the financing need careful thought should be given to an ABL arrangement. ABL is the term most people refer to when discussing Asset based lending if they have a financial background.

So what are those liquid and fixed assets - well they are of course the company's liquid current assets, receivables and inventory. That is also balanced with the firms fixed assets and real estate might be included in that.

Whether on the U.S. or the Canadian side of the border the asset based lending lines of credit continue to increase - some of the largest corporations in Canada and the U.S. have either completed such financings, or are contemplating them.

As large as the market and market potential are in asset based financing it is interesting to note that the actual market participants can really be brought down to a handful or two of key players . There are some large tier one type firms that are primarily offshoots of major U.S. corporations who dominate the market in asset based lending, and then there are a very small handful of Canadian well heel players. That is finally balance by a similar handful of Canadian tier 2 and tier three players who play in niche markets and geographies.

Asset based lending works only when there are... guess what... 'Assets '! As such industries that are very capital intensive in nature - think manufacturing, etc... Are perfect candidates for ABL type arrangements?

There has been a major stigma in the asset based lending marketplace that this type of financing - i.e. leveraging your current and fixed assets to the max , is a form of alternative financing that was previously embraced by only firms who were in some sort of financial trouble or distress . While a firm can have financial losses, a poor balance sheet capital structure, or cash flows that are very volatile or seasonal and still be a great candidate for an asset based line of credit /loan , it should be pointed out that major successful well known corporations have added ABL financing to their financing toolkit so to speak .

When CFO's and business owners meet with chartered banks to structure operating and term financings the discussions revolve around balance sheet ratios, debt covenants, cash flow coverage, and personal collateral . When all of those issues are generally positive in nature the Canadian chartered banks are providing line of credit and term facilities in the 5-6% range in early 2010. When there are major challenges in satisfying bank requirements those ratios and loan covenants are not on the discussion table with your asset based lender, only the liquidation value of all your assets is. Receivables and inventory in most firms is of higher quality, and can be margined in the 90% range, while appraisals are performed on other fixed type assets. That gets your company maximum asset financing, and that is what ABL is all about. Is it more expensive than traditional bank financing - we would say 95% of the time it is. But as a business owner does you want no or a small credit facility at a great rate, or all the financing you need at a more expensive rate? We hope you are now at least aware of the financing alternative - now its your turn to decide , talk to an expert in the area, and investigate asset based lending as a fit for your Canadian company !