Asset based lending in Canada is a previously non traditional ( but becoming more traditional every year!) form of financing that significantly increases cash flow and working capital for Canadian business .
The two main drivers of an asset based line of credit facility in Canada represent the majority of every firm’s current assets or working capital assets – they are receivables and inventory.
Asset based Lending for Canadian firms differs from traditional chartered bank type financing in that lines of credit are made available against inventory and receivables on their own merit so to speak . What do we mean by that? Simply that these type of facilities are very non covenant based. Unlike bank operating facilities which have a lower cost of financing asset based lines of credit do not have covenants, rations, and significant external other collateral attached to them .
This type of business financing is very much formula driven, to the point where the Canadian business owner or financial manager always knows his or her working capital availability subject to current and projected sales growth . This type of financing works best because asset based lenders are experts in quality of receivables and value of inventory. In an asset based lending facility you are not taking on debt, you are simply liquidating receivables and inventory at a fast pace, and as you grow your working capital and cash grow commensurately with your sales and revenue growth!
Security for the facility is imply a charge on the assets being financing- as we have stated those assets include a/r and inventory, but in many cases equipment and real estate can be added on also . A general security agreement, commonly known to financiers as a ‘GSA ‘is taken as collateral for the facility, in exactly the same manner as a Canadian bank might take. This collateral is in effect the ‘underpinning’ of the facility.
A simple way to understand this new type of financing in Canada is to simply think of the assets being the collateral, not your overall balance sheet and financial strength and operating metrics.
Because you receive a higher margining or borrowing base in asset based lending there is more reporting required. As a business owner you can view that as a bad thing or a good think – many clients have told us the additional monthly reporting they do for their asset based lines of credit helps them understand their business better
In the case of the receivables component 90% of available a/r is financing, and depending on the overall quality and liquidation value of your inventory margins on the inventory component tend to be anywhere between 40-75% in our experience.
So whats the bottom line – is simply that there is a working capital and cash flow alternative to traditional charted bank financing of operating facilities. This alternative is called asset based lending. It has significant benefits to your firm, the predominant ones being increased borrowing and working capital generation for your Canadian business. Speak to a trusted and credible and experience advisor to discuss if it’s right for your firm.