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Asset-based lending in Canada. What's with the 'new', 'improved formula' - Are we talking about laundry detergent? Not really, of course, we're referring to the difference between how an ABL business credit line differs from the traditional Canadian chartered bank line of credit facility.
And those ' new improved formulas ' in fact then bring substantially more liquidity to your business when it comes to cash flow and working capital needs.
Let's examine why that is, how it works, and why this form of business credit line might in fact be perfectly suited to your business.
Traditional assets that are margined for liquidity under a business credit line (bank or ABL) are receivables and inventory. If your receivables are eligible, i.e. they are earned and less than 90 days and not subject to any contra, return provisions etc. you can typically get an advance of 90% of this A/R.
That of course differs from the bank in that bank lines traditionally advance 75% of accounts receivable. The bottom line, you're up 15% already in total liquidity.
If you are working with the right firm we point out those even things like government receivables and U.S. A/R are fully eligible for borrowing. When your a/r is outside of North America you might have to arrange some sort of credit insurance - but that just makes sense anyway when the business owner and financial manager recognizes the risk, sovereign or otherwise, of a foreign receivable,.
So what inventory is in fact eligible under an ABL facility? Here we also point out to clients that in many cases a bank might not be able to, or be interested in, including an inventory component to your credit facility.
A typical due diligence process in asset-based lending will quickly determine if your inventory is eligible for borrowing. When completed that part of your facility may well margin anywhere from 30-70% of your current inventory, depending of course on the nature of your business and industry.
A major difference in the way in which asset based lending delivers higher borrowing is simply the fact that more due diligence is done upfront when it comes to assessing your overall borrowing power.
It is in this manner that the ABL business credit line delivers more new cash flow to your business. You are borrowing against a larger borrowing base of inventory and receivables, thus providing more liquidity to optimize working capital.
Naturally, there are numerous other advantages, and yes, differences between an asset based business line of credit (ABL) and a bank facility. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in maximizing advantages and determining if this type of financing works for you. It works for thousands of others in Canada.
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Stan Prokop
