Asset based lending is a form of financing that allows a business to leverage existing company assets. The line can provide your company with funding to pay for operating expenses, handle an acquisition or make new investments.
Most asset based loans are structured to operate like either a line of credit or a term loan. The actual structure is based on the underlying assets that you choose to finance. Companies can finance four types of assets: accounts receivable, inventory and machinery.
Advantages of asset based financing
There are a number of advantages to using an asset based loan over other solutions. The most important advantages include:
- Improves cash flow by accelerating accounts receivable
- Provides funds by leveraging marketable assets
- Easier to get than loans and lines of credit
- Greater flexibility of use
- Can adapt to a growing business
- Fewer covenants
- Can be obtained quickly
How do asset based loans work?
Asset based financing facilities are designed to resemble lines of credit or term loans. Lines that are backed by accounts receivable and inventory are often structured to resemble a revolving line of credit. The client can get funding as invoices are generated or inventory is acquired.
The client gets their funds by submitting a borrowing certificate to the lender. Funds are usually deposited to your bank account within a day or two. Transactions settle once inventory is turned into product and sold, or when invoices are paid.
Lines that are backed by machinery usually resemble conventional term loans. The client gets a set amount at the time of funding. Then the loan is paid back through an amortisation schedule over a period of time. Companies that have multiple asset types can receive hybrid facilities that combine both term loan and line of credit structures.
Asset valuations are important
Asset valuation is a key component of an asset based financing line. Invoices are often financed at a percentage of gross face value but must be payable by creditworthy companies. Usually, your company gets 80% upfront and receives the remainder (net of fees) once invoices are paid.
Inventory and machinery are often financed at a percentage of a distressed sale valuation. The amount advanced for inventory and machinery ranges from 50% to 55%. Keep in mind that distressed sale value can be substantially lower than market value in most circumstances.
Who is a good candidate for this program?
This program is available to companies that meet these criteria:
- Minimum revenues of $1,000,000 per month (exceptions can be made)
- Possess assets that have a market value
- Reasonable financials statements
- Good financial reporting processes
- Well-developed credit monitoring
- Reliable inventory tracking (if financing inventory)
Businesses can use the facility to:
- Improve cash flow
- Buy assets or other businesses
- Execute leveraged buyouts
- Turn around distressed companies
Regional differences
There are some regional differences regarding how asset based lending facilities are implemented across Canada. Most of these differences are contractual and have to do with how assets are secured. Facilities that are originated in most provinces (e.g., Ontario, Alberta, British Columbia, etc.) secure assets using the Personal Property Security Act. Facilities that are created in Quebec, on the other hand, must use a hypothèque. However, these contractual differences don’t usually affect how the line operates from day to day.
Need an asset based loan?
We are a leading provider of asset based financing in Canada. For a quote, fill out this form or call us toll-free at (877) 300 3258.