Cross-Border ABL and Cash-Flow Lending: Considerations for Canadian-U.S. Integration
Key Takeaways:
- Cross-Border Trade is Huge: $3.6B in goods/services crosses the Canada-U.S. border daily, requiring efficient financing solutions.
- Two Main Options:
- Asset-Based Lending (ABL): Loans secured by assets like inventory, receivables, or equipment; ideal for businesses with tangible assets or seasonal cash flow.
- Cash-Flow Lending: Based on projected revenue; best for companies with strong recurring income but limited assets.
- Integration Matters: Cross-border financing demands lenders with full operations in both countries, bilingual capabilities, and deep knowledge of local regulations.
- Speed and Flexibility: Providers that can fund in both currencies quickly and offer combined ABL/cash-flow solutions help businesses adapt and grow.
Every day, $3.6 billion in goods and services crosses the Canada-U.S. border, amounting to annual trade of $1.3 trillion. According to the Canadian Chamber of Commerce, this fuels more than two million Canadian jobs tied to U.S. exports, with 50% of bilateral goods trading between related companies.
The depth of integration between the economies is immense. With that comes the need for businesses in both countries to efficiently and effectively obtain financing to manage cash flow and pursue growth initiatives. Asset-based lending (ABL) and cash-flow lending are two key financing options, each with its own pros and cons.
Asset-based lending
ABL refers to loans secured by assets. The loan that a lender makes designates assets of the borrower as collateral for the loan. Those assets may be accounts receivable, inventory, equipment or real estate. In some cases, lenders may look at intangible assets such as intellectual property.
ABL comes in different forms, and may include inventory financing, equipment financing and factoring, otherwise known as accounts receivable financing.
Cash-flow lending
In contrast to ABL, cash-flow lending is a loan where a lender provides funds based on a company's ability to generate cash flow. Instead of relying on collateral like inventory or equipment, a lender evaluates a company’s projected future revenue and cash projections to determine loan eligibility and terms.
Focus on the present versus the future
ABL focuses on assets – what a business has in hand now. Secured by Canadian or U.S. collateral, these loans are often available quickly, and can promptly turn the company’s assets – particularly inventory and accounts receivables – into cash. An ABL lender can often assign more value to assets, and as a result, lend more than would be possible with cash-flow financing. Underwriting and credit structures are typically flexible.
That makes ABL particularly suitable for companies with significant tangible assets, or that have seasonal or otherwise-fluctuating cash flow. Retail, manufacturing and distribution businesses often find ABL ideal for their needs.
Cash-flow financing focuses on future performance – what a business is projected to have on hand later. Generally, this form of financing can work well for businesses that have strong, consistent revenue and earning potential, but limited physical assets. Subscription-based services, leasing and as-a-service businesses are often good candidates for cash-flow financing.
Making the decision
If you’re doing business in both the United States and Canada, the ability to effectively handle cross-border financing takes on critical importance. Cross-border finance is characterized not only by high volume but by highly integrated relationships and a complex system of regulatory frameworks. Companies may also find that they will benefit from a combination of ABL and cash-flow financing, or utilization of one or both forms at different points in time, especially taking currency risk into account.
Working with a lender that serves as a partner, invested in your business for the long run, will provide a foundation and framework to make the best financing decisions. A good lender will take the time to understand a business, and analyze its risks, strengths and weaknesses. They’ll evaluate assets and financial performance – present and projected – to offer flexible and advantageous financing options.
Lender considerations
Effective implementation of cross-border finance programs involves far more than a satellite sales office in a province or state. The ability to seamlessly incorporate inventory financing in both countries – with deep knowledge of local culture and legal systems – is key.
- Full operations and staff in both countries. One salesperson or one office in a country is generally not enough. A financing provider with full operations and staff in both countries – and in both English-speaking and French-speaking provinces in Canada – will offer the best outcomes. Full Quebec connectivity is especially important. Beyond the language are the culture, local rules and regulations, and nuances that can affect financing program implementation.
- Credit capabilities. A financing provider that offers complete credit capabilities for Canadian as well as U.S. businesses is invaluable. Serving as an external credit department for clients, they can provide detailed insight into potential customers of clients, and offer sound business input on their creditworthiness. Analysis of in-country, cross-border and international economics can affect decisions on extending credit and help lower risk for both U.S. and Canadian companies. And in some cases, a finance provider can help clients reduce exposure by advising on setting lower credit limits or stricter payment terms.
- Speed. The ability to provide funding in both U.S. and Canadian dollars quickly is important. In ABL, for instance, consider the value in a provider being able to purchase all accounts receivable funds for a company with customers across Canada and the United States – whether they come from either country, in Canadian or U.S. dollars.
A financing partner that works with a single technology system can quickly share information seamlessly between the two countries. Verifying an invoice of a U.S. company selling to a business in Canada is routine, simple and fast, for instance. It’s possible to get funds to companies on a daily basis, giving them the working capital they need to run their operations.
Financing options and opportunities
Deciding on the type of financing to use, and when, can be challenging. It can also open up opportunities for increased cross-border business and increased ease in conducting that business. Both ABL and cash-flow lending provide ways for businesses to grow, adapt to market conditions, and help in creating a diversified, resilient financial strategy.
Mitsubishi HC Capital America develops innovative, customized financing solutions that help businesses in Canada and the United States generate long-term growth and achieve sustainability goals. Our experts understand how to utilize ABL and cash-flow financing as strong financial tools. For more information, contact us.