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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
The business credit line in Canada has gone through a bit of transition over the last number of years - That transition comes via the Asset Based Lending (‘ ABL ' ) facility via the Asset Based lender. Let's examine why this ' rebirth ' of a traditional revolving credit facility (most commonly offered by banks) has taken Canada by somewhat of a storm. Let's dig in.
When it comes to spotting warning signs in a business's financial situation, many circumstances involve the business credit line. It quite simple, really - your business either has no credit lines in place and needs working capital, or you have traditional bank financing in some cases. Still, it cannot satisfy the needs for growth and operations. A final common scenario is the profile of firms that have had bank financing but for some reason are now self-financing or, even worse, in ' special loans ' with an exit needed as quickly as possible to save the company.
When you're in a position to access Canadian chartered bank financing, you're clearly part of the ' cash flow crowd.' ABL, the alternative borrowing scenario turns all that upside down - the total focus is on ... Assets. Almost always, these are receivables, inventory, equipment, and real estate if that’s part of the mix.
That's the real trade-off here - when you consider an asset-based revolving facility, you're no longer dependant in any big way on leverage, ratios, and covenants. Those almost always disappear in a true ABL facility.
The trade-offs between bank financing and a non-bank asset-based line of credit are obvious. The extremes in focus between the two don't make the decision process all that difficult. Bank credit facilities are monitored much less, so while you can almost expect a major increase in borrowing power when it comes to an asset-based lender, the one thing you can also expect is more reporting requirements.
Concerning that increased borrowing power, it's achieved simply through more generous margining on A/R and inventory. AR is typically 90%, and inventory ranges from 25-75% - dependent on the liquidation value and turnover history of your firm's inventory.
Also, for huge corporations, an ABL credit line's actual cost is equal to or even better than bank rates. However, for the thousands of small to mid-size borrowers, the increased borrowing power that comes with an asset-based credit line will almost always mean higher borrowing costs.
Top experts in corporate finance are quickly realizing the true value of the asset-based credit line. It is also used in a number of scenarios to facilitate purchase and takeover of a business.
Is the business credit line challenge ‘a brewing ' problem for your business? If you're looking for the know-how, experience and knowledge of your cash flow needs, seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can ensure proper financing is put in place to accommodate your needs.
Stan Prokop
