Traditional lending has long been the way most Canadian company owners have financed their business growth. They’ve gone to banks or other lending institutions, applied for loans and paid them off over time.
Things, however, are changing, as a portion of business owners are now pursuing asset-based lending, an alternative form of financing.
“The Canadian asset-based lending market has been growing in recent years due to several factors,” notes Eric Inspektor of CORFinancial Corp., a boutique investment bank based in Toronto. “These include the banks ever-tightening credit criterea which has led to an increased awareness of the alternative financing products that are available from asset-based lenders and the ability of these lenders to provide a more efficient process.”
As it turns out, asset-based lending makes sense for a range of companies, especially companies experiencing strong growth for, but by any means not limited to, newer or smaller ones.
“One of the key differences between asset-based lending and bank financing is that banks are balance sheet and cash flow lenders while asset-based lenders rely primarily on the company’s assets (buildings, equipment, vehicles). Another key difference is that, while both seek a clear understanding as to the viability of the business, asset-based lenders understand that, given their higher rates, they are a relatively short-term solution so they look to the impact of their loan for ability to repay rather than the company’s historical performance,” adds Eric Inspektor.
The reasons a company might pursue an asset-based loan are many.
Inspektor notes that, for smaller companies, this funding is often used to improve a company’s cash flow by factoring accounts receivable, especially if a business’ clients take extended time to pay pay their invoices (30 to 60 days).
“Asset-based loans can also be used to finance inventory or existing purchase orders, manage turnarounds or buy new assets. Each company has its own reasons for needing the financing, and in many cases, asset-based financing can be a solution.”
Asset-based loans can be particularly helpful to young, quickly growing businesses that need funds to keep up with increased demand.
“But it can be tough for new businesses to secure most types of small business loans, which often require a few years in business, and strong revenue across all those years, to be considered for loan eligibility,” writes Meredith Wood, a vice president at Fundera, a small business financial resource.
“Instead of digging into the past, as a traditional lender would,” she writes, “asset-based lenders focus more toward the future of your business. They’ll look at things like your sales and cash flow projections, and they’ll work to build a personal relationship with you to decide whether they think you’ll be a successful business owner or not.”
Assets used to secure loans can vary by company.
For example, if a company is service-based, with payments provided after clients are invoiced, a business would need to compile an accounts receivables aging statement that clearly lists which invoices have yet to be paid, along with due dates and any past-due invoices.
It should also be noted that a successfully obtained and paid-off financing arrangement can have other benefits. “One important — but often overlooked — advantage of asset based loans is that they can be used as a stepping stone to other financing products,” writes Marco Terry, managing director of Commercial Capital. LLC on canadaone.com. “Companies that implement these solutions effectively can often reach the point where they can qualify for lower-cost conventional financing.”
In either event, it appears that asset-based lending is here to stay as an alternative to traditional lending arrangements.
So how do you find the right lender?
Plan carefully, notes Eric Inspektor.
“It’s extremely important to ask a potential lender if they’re familiar with your industry and if they have an understanding of the assets you own and their value. In other words, interview potential lenders,” Inspektor says.
He adds that the lending process will be more successful for both you and your lender if there’s a good level of understanding between the two parties.
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