As traditional lenders keep their purse strings tightly tied in the face of continuing economic uncertainty, Calgary businesses are increasingly turning to asset-based lending as a practical way of accessing capital and staying on target with growth plans.
Industry observers say demand for this kind of alternative financing – where the loans are secured by tangible assets such as equipment, inventory, property or accounts receivable – is gaining traction among business owners in need of financing, but unable to access traditional credit because it is too restrictive or unavailable to them.
Lisa Christensen, Calgary-based vice president of financing for BDC, says complementary lending has a vital place, especially for businesses seeking to grow and diversify. While interest rates have affected all lenders, she points to economic uncertainty as a more significant factor driving businesses to consider alternatives.
“Right now, in the market that we’re in, given the uncertainty, given the openness of entrepreneurs to want to talk about options and where to go, I think it’s even more prevalent that we have other lenders and other resources for businesses,” she says.
Christensen notes that complementary lending is particularly well-suited for companies experiencing high growth or pursuing new market opportunities. This includes international expansion, where entrepreneurs may be navigating unfamiliar territory and looking for advice in addition to capital.
She adds the benefit of working with alternative financers is they are often able to offer higher lending values on assets and take on more collateral risk, which can free up working capital for growth-oriented activities such as market expansion.
Dave Gens, founder and CEO of Merchant Growth, says asset-based lending is particularly relevant for the “truly small owner-operated businesses” his company serves, which primarily includes consumer-facing businesses such as retail, food service, auto repair, hair salons and spas.
Many of these businesses fall outside the scope that traditional banks are willing or able to support, prompting them to explore alternative financing as a way to bridge the gap.
“If you’re pretty small, then the banks don’t do much for you,” says Gens, noting Merchant Growth’s typical client brings in upward of $5 million in annual revenue, and that nearly 20 per cent of its client base is based in Alberta – second to only Ontario.
Like Christensen, Gens believes the appetite for options such as asset-backed lending is being driven by a combination of high interest rates and ongoing economic uncertainty. He points to a recent Merchant Growth survey of 150 small businesses that revealed most believe we’re already in a recession, or expect one to arrive in the next 12 months.
“Whenever you have a disruption, banks tighten up,” says Gens.
It’s an observation similarly seen by Kyle Kreppenhofer, Calgary-based managing broker with capital advisory firm Ashdown Capital.
“The banks have been restricted by capital policies, which has pushed a lot of credit demand into the private market,” he says, noting businesses also turn to it because time is short.
Kreppenhofer explains that there are many different types of ABL lenders in today’s market. Some have a pure equipment lending focus. Others act as bridge lenders by providing short-term financing to cover immediate capital needs while a business waits for longer-term funding or a transaction to close.
He notes that bridge lenders usually require a defined exit, meaning the borrower needs a clear plan to pay back the loan rather than an undefined “I’ll get out of it” approach. This is different from equipment-focused lenders, who are typically more concerned with the value and usefulness of the asset being financed than with a short-term repayment strategy.
Mark Reynolds, managing director of corporate finance for the Capital Advisory group at MNP in Calgary, believes there will always be a strong market for asset-based lending in Alberta, particularly for asset-heavy businesses.
He also anticipates that all capital solutions, including asset-based lending, will become more relevant and utilized in the coming years due to the continued conservative approach of traditional lenders
“Some things to think about are that debt has gone up, so traditional senior lenders have become a bit more conservative,” says Reynolds. “There are a number of alternative debt providers that are out there that can provide creative solutions.”
He notes these solutions often come at a higher cost of capital or interest rate. However, businesses are increasingly willing to accept that trade-off in exchange for increased flexibility, faster access to capital or simply the willingness of a lender to say yes.
Reynolds says the best fit for asset-based lending tends to be more established businesses with significant and transparent asset bases, including real estate, buildings or inventory – particularly when those assets are not being fully valued by senior lenders.
“That includes more mature businesses where perhaps the assets have been in the business for a while and aren’t necessarily being valued appropriately by equity or traditional senior lenders,” he says.
He also sees asset-based lending as a strong option for businesses with short-term financial weakness but a clear path to recovery. Because the loan is backed by assets, lenders can often overlook temporary declines in performance.
“They’re now becoming an option that is being considered out of necessity sometimes,” says Reynolds.
For business owners weighing their options, Gens encourages them to match their financing with their intended use.
“What are you using the money for and for how long do you need it?” he asks.
For example, long-term purchases such as equipment should be paired with longer amortization periods.
“If the long-term revenue matches the loan period, the math probably all shakes out pretty nicely,” says Gens.
For short-term needs, such as buying seasonal inventory or expanding a patio for the summer, Gens says a loan based on cash flows may be more appropriate, especially when there isn’t a “big kind of like serial numbered asset underneath the investment.”
Kreppenhofer, meanwhile, says business owners shouldn’t just focus on getting the lowest interest rate. He notes that flexibility should be a consideration when assessing the value of alternative financing such as asset-based lending.
“Flexibility is really important, but understated,” he says. “Many business owners tend to be laser-focused on rate, but there’s something to be said for a deal with zero financial covenants. The only default is not making the payment. That’s worth something, right?”
Gens cautions, however, that early repayment flexibility is not guaranteed.
“One significant misconception business owners might have about asset-based lending, particularly equipment leases, is that they can pay off loans anytime,” he says. “That is not the case specifically, especially in commercial lending where flexibility for early payoff is often absent or very punitive if you do.”
Gens advises businesses to be careful with the fine print. Like Kreppenhofer, he adds that having optionality, such as the flexibility to pay off a loan early, adds value – even if that option isn’t ultimately exercised.
Reynolds’s final advice to business owners considering asset-based financing: Don’t wait until the last minute.
“It’s not going to be as fast as business owners think it will be,” he says, suggesting that there’s value in working with professionals who understand the lending universe and can present opportunities in a way that generates competitive attention.
“So, make sure that you have an understanding of where you’re currently at. And if things are starting to go in a direction where you’re going to need capital, you should start thinking about solutions early.”
