Asset Based Credit Line? Working Capital Lines Turn Problems Into Solutions!
Is A Business Credit Line Mission Critical To Your Business? 3 Critical Things You Need to Know
YOUR COMPANY IS LOOKING FOR CANADIAN ASSET-BASED LINE OF CREDIT
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ASSET BASED FINANCING
Can an asset based credit line turn a business problem into a solution? We think it can, so when working capital lines are a need in your firm it's important to understand that revolving asset facilities can be a 'mission-critical' part of your firm's success in growth, profits, and cash flow. Let's dig in.
UNDERSTANDING ASSET BASED LENDING SOLUTIONS
When working capital starts to become a critical day-to-day challenge Canadian business owners and financial managers must consider all business financing options.
Asset based credit lines / working capital lines are increasingly popular, and...guess what?....often misunderstood! This type of financing comes under the broad category of asset-based lending and the simple definition of such a facility is the ability of your firm to maintain an operating line of credit, outside of a bank relationship.
BANK FINANCING VS ALTERNATIVE FINANCE
The small handful of banks in Canada must accommodate everyone, which is a challenge for rapidly growing businesses - With only 5 or 6 major banks that provide financing to businesses it can be difficult for a company to attract the financing it needs to grow - and more so if things aren't going to plan! The financing requirements and covenants of banks are strict due to bank regulation and the size and stability of a firm are important factors for bank lending.
The common belief is that fast-growing businesses are a positive factor - but not necessarily the case in bank lending - So growth financing becomes somewhat of a catch-22. A startup firm faces enough tougher challenges as very little financial assistance is provided to these firms without prerequisite personal guarantees, outside collateral, focus on maintaining certain financial ratios, etc. That is the attraction of alternative finance and asset-based financing versus unsecured loans from banks.
With an emphasis on a company's assets/physical assets and sales the loan to value ratio in business lending becomes very attractive for key liquid assets such as eligible accounts receivable - allowing a business to achieve a maximum loan otherwise not obtainable from a bank via an ongoing borrowing base certificate that grows commensurate with sales growth and asset growth.
Any business that has substantial assets and cannot obtain commercial banking support is a clearly eligible firm for term loans and lines of credit solutions
There are multiple forms of asset financing including asset based lending terms/solutions such as factoring, tax credit financing, bridge financing, and asset based lending for real estate via commercial real estate bridge loans, etc! Other assets can also be funded on a sale-leaseback basis.
KEY USED OF ASSET BASED LOANS
Businesses can use asset-based loans for a number of financing solutions around revolving credit lines with a ' covenant light' structure -
Is your business looking for :
Business acquisitions /mergers
' Bulge Financing ' for seasonal/cyclical needs
Financing without reliance on leverage issues
Turnaround/restructuring / Refinancing
3 CRITICAL FACTORS FOR UNDERSTANDING THE BENEFITS OF ASSET FINANCE CREDIT LINES
Here are 3 critical factors that you need to know and understand the true benefits of 'asset finance credit lines‘:
1. What assets are financed under this facility and how does this differ from a bank facility?
2. How does the facility work on a day to day basis?
3. What are the fees involved and how much can we get from a total working capital perspective?
Let's start with our first critical factor - exactly what is this type of facility. An asset-based line of credit in its true sense, and in the context we are discussing is a working capital revolving credit. The assets that are secured under this facility are accounts receivable, inventory, and in many cases equipment and actually sometimes real estate.
We posed the question - how does this facility work when we compare it to a charted bank line of credit? In actuality, it is quite similar, with the main difference being that 99% of the time you can extract additional borrowing power out of the assets we mentioned.
Banks are the low-cost and most flexible and common business credit line - but they focus on:
Personal owner’s credit
Guarantees/Outside collateral availability
Asset-based lines of credit in fact tend to eliminate many of those considerations, and focus only on one key point - the assets! Because that is the case receivables and inventory are margined up, via traditional borrowing-based certificates, to a much higher level than might otherwise be maintained with traditional financing. When you factor in working capital that is secured by equipment, you can quickly see that your borrowing capacity has increased significantly.
Point # 2 - How does it work?!
Similar to a bank revolving line of credit your borrowing capacity in an asset based line of credit is simply the drawing down, on a weekly, monthly, or in fact anytime basis, of your total borrowing capacity based on your reporting of current A/R, inventory and equipment levels.
Asset-based lines of credit typically cost more than the bank- In Canada these facilities are priced from 7-9% per annum to 1-2% a month.
What determines this huge spread in pricing? It is the overall asset quality and size of the transaction, as well as the ability of many asset-based lenders to do transactions that would normally not be anywhere near to be considered by a bank, and as such, the risk is higher, so pricing is higher. It is as simple as that. In terms of what amounts you can borrow, you can assume 90% of A/R, a 40-60%+ range on inventory, and a similar amount for equipment. (Equipment would often be subject to a market value appraisal).
CONCLUSION - ASSET BASED LENDING IN CANADA IS GROWTH FINANCING!
Why choose Asset-based lending? Talk to the 7 Park Avenue Financial team about the numerous benefits of an asset-based loan - it's less restrictive and gives your firm the flexibility you need to run and grow your business. We'll provide info on a broad range of ' ABL ' solutions that provide more financing on a broad range of eligible collateral at asset based lending interest rates commensurate with your firm's situation and credit quality.
Does your firm need more working capital? Are you self-financing now? Are you unable to access traditional financing, or, more commonly, does traditional financing seem unable to meet your growth or unique situation needs? If so, speak to 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor with asset based lending expertise.
FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION / PEOPLE ALSO ASK
What is meant by asset-based lending?
Asset based loans are business financing solutions structured as term loans or business lines of credit - These loans are secured by the sales and collateral of the business - Typical assets secured under these faclities include accounts receivable, inventories, commercial real estate owned by the business, tax credits, and other key balance sheet assets such as fixed assets/equipment and rolling stock.
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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil