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Financing & Cash flow are the biggest issues facing business today
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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
Office = 905 829 2653
Email = sprokop@7parkavenuefinancial.com
Business credit line alternatives basically boil down to two choices. These two fundamental solutions around a revolving credit facility 'revolve ' around participation with a Canadian chartered bank or a non-bank facility. While non bank facilities have more flexibility and liquidity for your business they come at a higher cost. How can the business owner/financial manager recognize and ' engineer' the right solution for their business? Let's dig n.
Asset based lending has become the ' new ' alternative to bank credit lines? We highlight the word ' new' only because this solution is not new; it was either misunderstood in the past, or generally simply not known to owners/financial managers. Circumstances such as the world wide 2008-2009 global recession put a lot more emphasis on alternative lending practices such as ‘ASSET BASED FINANCE '.... aka ' ABL '.
ABL is all about 2 things, collateral and constant monitoring by the lender. That monitoring typically revolves around reporting weekly or monthly on your business's key assets- i.e. aged receivables, payables, inventory lists, and fixed asset summaries. These assets (excluding payables!) are rolled up into one borrowing facility that gives you maximum borrowing power.
Because your sales are constantly changing (i.e. going up, but not always) your liquid current assets such as A/R and inventory make up the bulk of your borrowing power. Simply speaking, the more sales, the more access to borrowing power. That's contrasted with bank solutions which typically are fixed credit limits with annual renewals, not always recognizing that your business grows or has bulges in borrowing needs. On occasion, banks might require a periodic third-party audit, but this typically pertains to larger facilities in the millions.
It's therefore easy to understand the main difference in bank credit lines- as we have pointed out that the reporting and admin controls that ABL lenders place on your business is simply much less rigorous in a banking environment. Let's also not forget that the flexibility around bank credit comes with the lowest borrowing costs.
Although we have referenced two types of main credit line solutions there are subsets of asset based lending. These include simple A/R financing, as well as inventory loans/finance. Inventory loans tend to be suited to retailers who have no commercial receivables. As far as the best way to finance your A/R outside the bank we recommend CONFIDENTIAL RECEIVABLE FINANCING which allows you to bill and collect your own receivables without notification to others.
It's important to recognize that credit lines are simply the monetization of your existing assets; this is not permanent debt, although in some cases both in bank and ABL financing a working capital term loan might make sense, but that’s a rarity.
If you're focused on re-engineering your business credit line borrowing seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with solutions that make sense for your firm’s credit profile and size.
Stan Prokop
