YOUR COMPANY IS LOOKING FOR BUSINESS CREDIT LINES!
BUSINESS LINE OF CREDIT SOLUTIONS IN CANADA
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Is a business revolving line of credit the only one of its kind in Canada, or the universe for that matter? The answer is a resounding ' no '! - Apparently, it’s really a ' multiverse '! where asset lending has created a unique version of business borrowing for line of credit revolving credit facilities. Let's dig in on how to get a business line of credit.
COMPARING BUSINESS REVOLVING CREDIT LINES - ASSET BASED LENDING VERSUS CANADIAN BANK FINANCING
Asset lending is somewhat of a ' stealth ' borrowing in Canada - unbeknownst to many, it has become trendy. So in our parallel universe, we have the Canadian chartered bank line of credit and the 'ABL' (Asset Based Lending ‘) facility. While our banks choose to focus on a combination of cash flow, balance sheet proportions, and evidence of good profits, the ABL credit line chooses to keep it simple - it's all about your assets - namely accounts receivable, inventory, and fixed assets; any single or combination thereof. Real estate equity that your business holds can also be bundled into your credit line.
These facilities are short term in nature, and not to be confused with a term loan and bringing additional debt to the balance sheet and ensure you are never unable to payday to day operating expenses as you grow your business for the products or services you sell. Working capital problem solved! That's the key difference in loan and line of credit solutions.
You use your normal/regular business bank account in ABL facilities - funds are deposited as you need them so these are lines of credit similar to bank financing.
OTHER USES OF ASSET BASED LENDING
The asset-based line of credit also distinguishes itself. It can also be used as the base financing for purchasing a business, merging with one, or reviving one via a turnaround. Larger retailers, who typically only carry inventory as their financeable asset, are excellent candidates for asset lending, as one can imagine. The majority of these types of financing are asset monetization strategies versus term loans.
THE POPULARITY OF THE ASSET FINANCING LINE OF CREDIT IN CANADA CAME FROM THE UNITED STATES
In the U.S., for example, some of the largest and most successful well-known corporations have turned to asset-based lending as their ' credit line of choice. ‘ It should be mentioned that there is almost no negligible difference in rates/financing costs for larger successful companies when benchmarked against bank lending.
THE COST OF ASSET BASED FINANCING
However, in Canada's SME COMMERCIAL FINANCE area, these facilities, while providing more liquidity, come at a higher cost. For the business owner/financial manager, it's all about balancing liquidity needs and access to capital versus the cost of financing. Interest rates, in general, are always higher in ABL financing, but for the business owner, it becomes a question of access to capital versus cost of capital. And of course, as in all facilities, your only pay interest on what you are using at any given time.
The type of credit a business requires will always have a cost factor attached to it. Small business lines are no exception - whether it be traditional financing or alternative finance. Your firm's overall credit profile and the ability to produce proper financing statements are also key to funding success. Small business owners, on approval, can draw funds as they need them.
In some cases, maintenance fees are in place on facilities and add additional business expenses to consider in revolver lines.
RENEWING CREDIT LINES
Similar to bank facilities, the ABL credit line is typically renewed every year. However, some companies prefer (or are asked) to enter into multi-year commitments for the financing.
NO MORE RATIOS AND COVENANTS!
How do commercial asset-based lenders justify this borrowing regarding their own returns and risk? The answer is quite simple - as one top expert put it, they are ' fanatical' about asset quality and turnover, as well as putting in more disciplined reporting. This offsets the need for covenants, ratios, and outside collateral, which is the staple of commercial bank lending in Canada.
In most small businesses in Canada, when it comes to traditional financing, the business owner's personal credit score is an important factor, but that is less so and even non-existent emphasis when it comes to asset-based financing. Those personal credit scores and credit ratings in traditional financing when it comes to a small business line of credit also dramatically impact the interest rate on small business borrowing as they take into account your ability to pay back business loans.
ABL = MORE BORROWING POWER
When it comes to the question of what is a revolving line of credit and the key benefits it's important to know that typical asset lending provides a borrowing margin of 90% on receivables and a much higher borrowing power on inventories and fixed assets. ABL facilities are not focused on a credit limit per see, as they are easily increased as your sales grow. This is not a lump sump term loan structure, but a revolving drawdown as you need funds and then repay as your clients pay.
CONCLUSION
So, if you haven’t figured it out, small businesses can access different solutions in business lines of credit and revolving credit line needs. Whether it's traditional bank financing or credit line achieved via asset lending, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can help you navigate the financing universe, or should we say ' multiverse.'
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Stan Prokop
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