Michael Herman, a lawyer at Goodman & Carr in Toronto, sees a lot of growth in asset-based lending in the mid-market — not just for distress situations but for everyday working capital. From the banks, which recently established specialty teams in this field, to aggressive U.S. firms such as Capital Finance and homegrown boutiques such as Century Services Inc., “there’s a fair amount of liquidity for people to tap into.”
With ABL, the lender’s security is tied to a specific asset, such as equipment, inventory or accounts receivable. For firms with collateral, it provides greater flexibility than lending geared toward cash flow, and lenders generally impose fewer financial conditions.
John Levac, RBC Royal Bank’s Toronto-based ABL sales manager for Ontario to B.C., says the bank’s minimum deal is $1 million. But some specialty finance companies will go lower: Toronto-based Greenfield Commercial Credit (Canada) Inc., for instance, does deals starting at $200,000.
Glenn Agro, a Mississauga, Ont.-based partner at accounting and consulting firm BDO Dunwoody LLP, says ABL used to be limited largely to big enterprises, “but now we’re seeing it in companies with revenue of $10 million to $200 million.” With the cost falling, he sees it as an increasingly viable alternative to mezzanine financing or venture capital: “It’s more competitive than it was a year ago. It used to be prime plus four [percentage points]; now it’s prime plus one or two.”
ABL financing requires more paperwork than an average bank loan, as the lender needs to monitor your sales and inventory weekly or even daily. “There’s more work for the client, in terms of reporting to an ABL lender,” says Agro, “but, after the fact, most companies say it has improved their business.”
ABL has lots of room to grow. According to a survey by the New York-based Commercial Finance Association, outstanding ABL loans totalled US$362 billion worldwide in 2004, with Canada accounting for just US$10.5 billion. Even so, the latter was up 38% from 2003. A recent report by Montreal-based law firm Ogilvy Renault LLP predicts that ABL will occupy “an ever-increasing segment of business lending in Canada.” It quotes the CEO of Chicago-based LaSalle Business Credit LLC as saying, “Our biggest opportunity is cross-border.”