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BUSINESS LINE OF CREDIT INFORMATION & SOLUTIONS
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Financing & Cash flow are the biggest issues facing business today
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A Canadian business bank credit facility. For the majority of Canadian firms chartered bank loans and credit lines are the optimal solutions for operating and growth needs. Not every firm qualifies or has access to these ' preferred ' facilities, and for those that don't other financing alternatives, traditional and alternative are certainly available. From interest rate to approval qualifications - let's dig in !
THERE ARE 2 TYPES OF CREDIT FACILITIES WHEN IT COMES TO LINES OF CREDIT
But let's focus on the two types of typical credit facilities that are most sought after by firms needed credit. They are essential term loans and operating lines, also commonly known as ' revolvers '. There are different characteristics and qualities of each one.
THE REVOLVING LINE OF CREDIT - AKA ' REVOLVER '
Let's explore that ' revolver ' first, aka the ‘operating line of credit '. A bank credit line will almost always have a capped limit. But while they have a defined limit they actually fluctuate, sometimes wildly depending upon the asset levels of your firm. The two most common asset categories within the revolvers ' borrowing base' are accounts receivable and inventory. That of course is why there are those fluctuations - typically your A/R and inventories change, pretty well every day. You purchase product, you move out product, you invoice clients, clients pay... and on it goes.
HOW ARE CREDIT LIMITS SET FOR CREDIT LINES
So how is that overall credit limit set for the operating line? Two general guidelines for Canadian chartered banks are 75% of receivables up to 90 days old, and a defined percentage of inventories. Here is where things get a bit tricky with the bank as they typically prefer A/R to inventory as collateral.
BUSINESS OWNERS MUTST ANALYZE THE QUALITY OF THEIR RECEIVABLES
So far things seem simple, but what you need to address prior to discussing and applying for such a facility are the makeup of your a/r. ... by that, we mean the credit quality of your clients, are they out of country companies or are you a victim of account concentration. If the majority of all or your A/R is focused around one or two major clients this typically becomes a concern to the bank.
Even government accounts, as solid as they are from a creditworthy respective (we can only hope!) might actually pose a problem when it comes to borrowing against them, as the government typically doesn't acknowledge receivable assignments. More so they have the right of set-off if you have government arrears, known in finance as ' priority payables’. Understanding your a/r mix will help you finance the optimal working capital solution.
THE BANK FACILITY 'LOC'
Let's recap the other type of bank facility you might be looking for - it’s the ' TERM LOAN '. It's a fixed loan with typically a fixed rate, and it’s typically a bit higher than a revolver rate. Amortizations tend to be 3-5 years and of course, banks prefer that the assets covered in the term loan are typically assets that generate cash or are critical to your business. Banks love cash flow! Memorize that! No need to mention, but we will, that Canadian banks have the best and lowest interest rates for business owners.
THE FIXED ASSET FINANCING ALTERNATIVE STRATEGY ASSET LOANS / BUSINESS LOANS
Alternatives to term loans for fixed assets come from the Canadian lease financing industry. They are often sought after as the alternative because they don’t usually interfere with your bank borrowings - it’s a common fact that borrowers like to spread the risk around and not have all borrowings with one institution. It's critical to remember that if you borrow for assets within your bank facility that those dollars become a part of your overall credit line and might limit your access to more operating lines of credit.
CONCLUSION
If you're looking for loans or business lines of credit in Canada ensure you understand terms, conditions, and ramifications, it’s as simple as that. Speak to a trusted, credible and experienced Canadian business financing advisor for your business credit and borrowing needs.
