Canadian ABL Lending vs. Bank Loans - Which Offers The Best Financing Facility?
There are many subsets of ABL lending in Canada. The two dominant factors that play a role in these subsets are size of facility, and single focus financing, such as receivables only. Additional the overall credit quality of your firm (i.e. good, bad and ugly) ultimately drives what type of facility.
Can anyone raise their hand and answer why ABL loans (by the way they are not loans per se) are deemed by many to be the savior of Canadian business financing? We sure can - it's because they have the simple ability to offer financing when traditional bank financing is not available, and, even to a stronger point, ABL loans don't discriminate when it comes to size of the facility. Generally these facilities range from 250k on the small end to tens of millions of dollars at the high end. Oh, and by the way, many of Canada's largest corporations use this type of financing, unbeknownst to the average follower of Canadian business financing.
So again, what's better for your firm? We have got nothing against traditional bank operating loans, they have served Canada well for a hundred years, however, they can be restrictive when it comes to size of facility, renewals of your facility on different terms, and, most importantly limiting on what can be financed and for how much.
Quick example based on a real world scenario. Manufacturing company 'A' has a bank financing operating facility that margins their receivables to 75% of total value, and inventory to a cap of, let's say 750k. However, manufacturing company 'A' is growing quickly, requires additional inventory, and has receivable growth commensurate with sales growth. The challenge in a traditional banking arrangement is that the company is restricted in ability to grow commensurate with their working capital needs. Would banks step in? Maybe, possibly, who knows?
However, we can almost guarantee this same type of problem or challenge our company 'A' is facing would be met head on in an ABL lending scenario. Why, simply because ABL financing is based on assets, so as the firms inventory and receivable investment grows so does the facility, pretty well automatically.
Many Canadian firms that are smaller and medium in size unfortunately don't qualify for what we call a true pure play ABL, simply based on deal economics and size of facility and asset categories. Does it end there? Definitely not, as working capital facilities, mini ABL's we could call them, are available that finance a combo of A/R and inventory, accounts receivable only (typically called factoring financing), with potential to add on purchase order financing when that makes sense. Our mini ABL''s, aka working capital facilities are priced significantly higher that true asset based lines of credit, but offer the same flexibility and access to capital.
