YOUR COMPANY IS LOOKING FOR A BUSINESS CREDIT LINE!
The Asset-Based Line Of Credit Is A Solid ‘ Day To Day ‘ Business Financing Option
Information on the ABL revolver, the business credit line that combines asset-based lending with a working capital solution
You've arrived at the right address! Welcome to 7 Park Avenue Financial
Financing & Cash flow are the biggest issues facing businesses today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs
EMAIL - sprokop@7parkavenuefinancial.com
Fresh counts, whether we're at the grocery store or in today's example, the business credit line known as the ABL revolver, aka ' asset-based lending '.
It's never been easier to qualify for a business credit line - When it comes to approvals your basic requirements are a well-managed business, up-to-date financials, and business assets such as accounts receivable, fixed assets, and steady or growing sales. They're the ingredients for improving cash flow or effecting a business turnaround with more capital in your business.
CANADIAN BUSINESS HAS A CHOICE IN BUSINESS CREDIT LINES!
Canadian business owners and managers don't often realize that they have more of a choice in business credit lines than they think. And when it comes to choice and flexible terms all of a sudden asset-based lending facilities are getting... you guessed it... popular!
That's of course great news for companies in Canada who are looking for alternatives for day-to-day operating financing. The traditional small handful of firms that offer this type of financing is growing to the point where you might not realize it, but there are people willing to fight for the ability to provide you with business credit. That's the type of competition we like.
WHY SHOULD YOUR FIRM CONSIDER AN ASSET BASED LINE OF CREDIT
Depending on your industry and business model and considering all the aspects of your cash flow cycle it is not unusual for a business to be low on cash - the investment required to carry receivables and inventory as well as slow-playing clients can hinder a business's growth.
ABL revolving credit lines are for companies looking for a ' full service ' financing facility that mirrors the benefits of traditional financing. Any businesses with good business practices around invoicing, collection, and the ability to provide up-to-date listings of receivables, inventory, etc can benefit. Many smaller firms can simply utilize a factoring /AR financing facility that in their case might meet their needs.
HOW DOES THE ASSET-BASED LINE OF CREDIT WORK ON A DAY TO DAY BASIS?
Asset-based credit lines work in the same way unsecured bank lines of credit work - The facility revolves based on ongoing levels of your accounts receivables and other business assets which are bundled into the facility. As your firm draws down on the line of credit it fluctuates based on your cash inflows/collections.
A key benefit of ABL business credit lines is that they grow automatically as your sales grow - and an additional benefit is that borrowing margins exceed bank lines of credit - As an example, A/R is often margined at 90% - Factors that affect your drawdown ability include the general health of your receivables via your customer base and businesses pay only on the amounts that are utilized at any given time.
A typical facility will have the business submitting end-of-the-month ledgers/schedules around your a/r and inventory levels- Which becomes a borrowing base on which you can draw down in the following month. Clients of 7 Park Avenue Financial are always focused on the difference in day-to-day borrowing - the answer is quite simple - a bank facility has your business assigning your receivables to the bank while an ABL facility secures the specific assets such as a/r, inventory, equipment - Businesses are surprised to find that even the equity in company owned commercial real estate can be bundled into your borrowing capacity as well as, in some cases, intellectual property.
THE COST OF BUSINESS FINANCING
Cost is always a factor in business financing, and there is a broad spectrum of pricing in Canada that is primarily based on two factors you can pretty well guess - facility size and credit quality.
In case you haven’t heard of this method of business credit it’s simply a comprehensive credit line based on the asset of your business - those assets include inventory, receivables, fixed assets, and land and buildings if that fits into your overall capital structure.
ABL FACILITIES HAVE A WIDE VARIETY OF USES
The Canadian business owner/manager can use the ABL revolver facility for a number of reasons, and they include day-to-day operating capital, restructuring, acquiring another firm (yes, buying your competitor!) and our favourite reason - growth! That growth reason is one of the most important because the asset lending line of credit allows you to grow your business without the constraints you face sometimes with chartered bank commercial facilities.
MINIMUM /MAXIMUM SIZE OF ASSET-BASED CREDIT LINES
We're often asked about the ' size requirement ' in this type of business borrowing. In general, we tell clients that they qualify from a low of 250k all the way up to facilities in the many millions of dollars.
Quite frankly there isn’t really an upper limit, as long as you have the total assets to back up the facility. The reality is that ABL credit is very close to becoming ' mainstream' in Canada, and that’s a good thing we think.
SOME BASIC QUALIFICATION CRITERIA AROUND FULL-SERVICE ABL BUSINESS LINES OF CREDIT
To qualify for an asset-based lending solution businesses should be able to demonstrate good profit margins as that helps support the financing costs. A business with high leverage and low-profit margins is generally not a good candidate for ABL.
Overall asset quality is also key, so accounts receivable and inventories should be constantly revolving - when fixed assets and other equipment or real estate equity are bundled into the facility an appraisal might benefit both the owner and lender do demonstrate collateral value -
The most liquid asset in the ABL facility is typically the business receivables - so stable or growing revenues are important - ABL suits seasonal businesses that might have ' bulge requirements ' around cash flow needs based on issues such as seasonality, or larger orders and contracts.
Typical reporting requirements to the asset-based lender include monthly income statements and balance sheets as well as up-to-date schedules of current assets and current liabilities.
A BRIDGE BACK TO TRADITIONAL BANK FINANCING?
Many companies utilize the ABL solution for a period of a year or two as a bridge back to traditional bank cash flow financing - Firms consider asset-backed financing for the simple reason they don't meet bank qualifications around issues such as cash flow, profits, and stability and acceptable levels of term debt.
Asset finance is considered a covenant-light structure given that traditional financial institutions focus on very specific levels of shareholder equity, a reasonable debt to equity, and the requirement to maintain certain financial rations on the balance sheet and income statement - While some covenants might exist in a larger ABL facility they are often more flexible - Firms not meeting bank covenants often find themselves in the Special Loans section of bank credit facilities- with the word special being a bit of a misnomer as their loan has been called.
Bank financing for credit line facilities is usually focused on a maximum credit limit based on underwriting decisions made by commercial bank lenders - Abl solutions for credit lines are focused on automatic facility increases as sales and assets grow.
That's why many firms in Canada tend to use asset-based credit lines as a bridge to other financings. This often means that the facility is used for a year or two as we have mentioned - sometimes longer, as the business owners work towards the more traditional financing that is recognized in Canada, i.e. our banks. Many simply s are very comfortable with asset-based lending lines and choose to remain with ABL based on additional borrowing capability!
CONCLUSION - ABL FINANCING SOLUTIONS
What is the best financing solution for your business? Ensure you are aware of your Canadian business financing options and talk to the 7 Park Avenue Financial team who can help you with your decision process that most companies may struggle with.
As we said, the bottom line is ' ASSETS ', so if your firm has them consider Canada's newest form of business financing, the ABL REVOLVER, whether you're looking for something new, or an alternative to your current situation. In some cases, you're focused on a business turnaround and ABL facilities are a solid interim option.
Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your total financing needs when it comes to the business credit line.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is an asset-based financing line of credit?
The Asset-based loan (ABL) credit facility is an asset-based loans solution and is a catch-all term for a type of financing that allows a business with substantial assets to finance corporate assets for additional operating cash flow. These assets include accounts receivable, inventory, and equipment.
ABL's secured by accounts receivable work like a revolving line of credit, with some differences as the credit agreement is a secured facility unline bank line credit facilities or term loans. Cash flows generated from the business ensure excess cash generated by monetizing assets allows for the day-to-day funding of the business. Eligible receivables are often the largest part of the facility and financial covenants to eliminate credit risk are often more flexible than traditional bank funding.
What is the cost of asset based lending?
Banks will typically, but not always, offer the lowest interest rate for business credit lines. Alternative lenders do not have the same cost of funds and as a result, they are more expensive but provide more capital to a business that otherwise might not qualify for traditional financing. The additional risk taken on by asset-based lenders typically translates into a higher rate given the higher borrowing base and margining.
