Have You Considered Asset Based Financing For Your Business?

Asset-based Lending

Lease/loan provided by a specific lender secured by a firm’s assets (typically inventory, equipment or accounts receivable). Forms include leasing, term loans and conditional sales contracts (in which the buyer has the use of an asset, such as machinery, conditional on making regular payments on the purchase price).

In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large corporations using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment.

Asset-Based Lending

Asset-based lending is a relatively new financing option for Canadian companies that is rapidly gaining acceptance. Tailored to the Canadian marketplace, Clearlease Financial Group Asset-Based Lending combines a full range of Commercial Banking solutions with proven asset-based lending capability customized to companies like yours.

Asset-based financing can offer greater credit availability and flexibility for your business through customized loan arrangements secured by accounts receivable, inventory and fixed assets. Clearlease Financial Group Asset-Based Lending is committed to providing your company with the best overall financing solution, including limited or no financial covenants and the ability to commit to, fully underwrite and syndicate large transactions.
Asset-based financing could be right for your company if:

you are a medium to large sized business
you are involved in a cyclical industry or typically have lower operating margins
you require capital to finance sales growth, acquisition financing, debt financing, restructuring, or turnaround financing
you are looking to raise capital in a less costly way than bringing in an equity partner
you want to take advantage of growth opportunities

Key benefits of asset-based lending

Provides greater flexibility than a cash flow credit model for collateral rich companies
Requires fewer and in some circumstances, no financial covenants
Allows greater flexibility on how your company can use the proceeds
Gives you the ability to smooth out gaps in your cash flow during business cycles/seasons
Offers you the ability to take advantage of asset-rich growth opportunities and acquisitions

Over the last 10 years, asset based financing has exploded in the United States with some reports claiming annual Small and Medium Sized Business (SME) financing from asset based lenders is approximately 50% of total SME financing.

asset based financing

While Canada’s asset based lending is no where near the U.S., it is on the rise. Just like other marketing successes in the U.S., they eventually look to Canada for market expansion. And make no mistake about it, It’s already happening.

Asset based lenders are setting up shop in Canada and increasing their numbers. It will likely take 10 more years before the Canadian Market approaches the type of overall business financing penetration that Americans are now seeing.

So what is an asset based lender?

Well, like many financial terms, it can have several definitions, but like the term suggests, the focus of this lender group is on the actual physical assets of the business and the related cashflows.

The popularity of asset based financing is simple supply and demand. The primary banking system is largely focused on consumer lending, brokerage, insurance, etc., and very selective when extending business financing to SME’s.

Asset based lenders come in many shapes and sizes, but each will have a business model that is focused on specific types of assets and potentially industry application and even geography.

In each case, the asset based lender focuses on the market value of a particular asset and the liquidation process. Other business aspects are important, but the risk management is centered on the lender’s ability to understand how to get repaid in the event of default.

The more unique the lending application, the higher the cost of borrowing is likely to be. Asset based financing markets can also be broken down into segments, such as low, medium, and high risk.

If you take equipment leasing in Canada as an example, there are several lenders in the low and high segments, but few in the mid market segment, forcing mid market borrowers into the higher risk, higher cost segment. But that is slowly changing as lenders recognize the opportunity in the medium risk segment and are starting to develop brands and programs to address the need.

If there is a way to secure an asset, there is potential for an asset based financing model. Besides equipment, there are asset based lenders that focus on accounts receivable financing, inventory financing, and real estate or commerical property financing, individually or in combinations.

When inventory and accounts receivable are involved, the lender will have some control over cashflow management. There are pluses and minuses to this.

A business owner, in most cases, wants control over all aspects of their business. However, in many cases, the cashflow management requirements of an asset based financing source can provide much needed discipline to a business owner that does not have a well thought out cash management system.

The biggest advantage of asset based financing is that it allows the business owner to maximize the borrowing power of their accumulated assets and related equity.

Because the primary banking system is so broad based in terms of lending applications, its members do not place as much value on many business assets because they don’t know how to effectively liquidate the assets in the event of default. If they perceive the business risk to be medium to high, they will not likely extend financing against business assets.

The largest application of asset based financing is medium sized companies who have invested their earnings into assets and need additional capital to expand and grow, finance seasonal business cycles, and deal with downturns or lulls in the market they serve. As a result, there are more asset based lenders in the mid market where loans typically start at $1,000,000, than there are for small business applications.

But that too is changing as more and more asset based financing programs are becoming available for smaller business applications.

Outside of the larger asset based lenders that service the mid market, the smaller players, which in many cases are funded by larger finance companies, are not as widely known due to their size, scale, and advertising budgets.

The challenge is to find the sources that fit your need and to understand the differences between a financing offer you receive from a particular asset based financing source and what is available from the rest of the market.

Based on the success of asset based financing to date, all indications are that this segment will continue to grow and find different ways to service the market.

If the United States is any indication of what’s to come here in Canada, we will be seeing a continued growth in asset based financing, and asset based financing programs in the years to come.

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