Asset Based Lending in Canada

By: Kris Koonar

Asset based lending in a layman's language refers to securing a loan against pledging an asset engaged in the business. It is a straightforward process of correlating the borrowing firm's assets to its liquidity requirements. Revenue generation via asset based lending made its foray into the Canadian markets roughly 18 to 19 years ago in order to meet the growing capital requirements of Canadian industries to keep the business running in a smooth fashion.

This form of asset based financing is slowly and gradually gaining momentum in the Canadian markets since its introduction. The usual operating loans offered to business units by the banks required the cumbersome task of providing cash flow projections, balance sheet and equity ratios etc, to procure loans. The capital offered by the traditional banks also was just between 50% and 75% of the total value of the asset. This is comparatively much lower than what asset based lending firms offer to the borrowing firm. Thus, operating loans based on utilizing the assets as collaterals is increasing in popularity among Canadian industries in the recent times.

Asset based lending firms provide finance loans and credit lines ranging from $ 1 million to $ 1 billion, in order to cater to the different types of borrowing requirements, like cross- border financing, debt restructuring, strategic acquisitions, special situations funding, funds for buyouts (leveraged and management) etc. Another reason for the growing popularity of the funding provided by asset based lenders is the relaxed eligibility standards for borrowing firms. A firm that is not reaping profits currently or even a firm that has a low net worth can also create cash flow through this form of commercial financing.

The basic requirements of an asset based lending firm to extend working capital are tangible assets that can be used as collaterals and a competent management that can capitalize on its assets for revenue generation. The assets usually used as collaterals against which a loan is secured may include the accounts receivables, letters of credit inventories, purchase orders and fixed assets like real estate, machinery, equipments furniture, vehicles etc. Most types of industries like import export firms, service providers, retailers, wholesalers, distributors and manufacturing units etc all kinds of business units have the potential eligibility of securing an asset based loan.

Asset based lending may prove to be an advantageous financing solution for firms having low operating margins and for firms having a seasonal or cyclical business. It also allows the firm to bring in additional cash flow in order to capitalize on the potential growth opportunities. It also enables a firm to increase liquidity without the advent of an equity partner. Firms that have greater collaterals certainly have greater flexibility by adopting the asset based financing model as compared to the cash flow credit model. Due to the additional revenue, it helps in increasing the focus of the firms towards business development activities.

In spite of the required daily or weekly reports of the collaterals and difficult modes of collection by the asset based lending firms, this form of financing is enjoying high ratings in the operating loans business. Due to the many advantages, asset based lending offers funding solutions to the growing Canadian industry.

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