Jim Business Facts

When one of my firm’s customers has their loan called by a Canadian chartered bank recently the firm was placed into the ’special loans ‘division of the bank. When a firm goes into special loans the bank has to make a decision whether to liquidate the firm or continue supporting the company financially, albeit on a more structured ( and probably smaller! basis . Many Canadian business owners may, or may not, be surprised that my customer, who was a large commercial bakery, was profitable and had a relatively clean balance sheet. So what was the problem – well the major issue was that the firm was ‘off covenant ‘on some of the key bank ratios that supported the loan.

We migrated this customer to an ‘Asset Based Lending ‘arrangement. This type of facility is, relatively speaking, new in Canada and had its origins primarily in the U.S. asset based financing industry. More and more firms are migrating to this type of financing facility. We believe it is growing popular because of several factors, primarily two in nature.

1. Many firms are in high growth mode and can’t support traditional bank based financing which is focused on a more ‘ steady as you go ‘ approach

2. The current economic downturn of 2008-2009 has significantly restricted bank and other facilities – customer look for alternatives – Asset based lending is a popular alternative

In general some fairly standard metrics are applied to what is financed, and that is all of your receivables, a significant amount of inventory, and the liquidation value of your equipment. We can’t stress that those are general comments with respect to how much is financed in each asset category.

Asset based financing rates in Canada range from 9% per annum to sometimes 2% per month; it really depends on the size of the facility and the overall credit quality of the Canadian firm.

So again, why gaining in popularity. Well we spoke of those bank covenants, and they don’t exist in our ABL facilities, we simply finance assets. Also, asset based lenders, the good ones, are very experienced in cyclical industries, they understand seasonality, and are usually exceptionally experienced in the different asset categories we spoke of.

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