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For every complaint, you hear about Canadian business to business financing and our chartered banks (trust us, we hear a few!) there are still some great things happening in commercial business banking in Canada. Let's examine bank lines of credit, and your need for such a facility to grow your sales and profits.
Canadian businesses use operating lines of credit to finance current assets. Typically those asset categories are predominantly accounts receivable and inventory.
So how do banks facilitate this borrowing arrangement? The typical manner in which this is done is to simply have a document executed that provides the bank with a conditional assignment of accounts receivable, your inventories, and any other current assets.
Canadian bank operating facilities are also called demand loans because they are typically secured by another document called a GSA, which stands for General Security Agreement. This document, as you can imagine, allows the bank to 'call' your firm's loan at any time. It's just common sense that Canadian banks do never with to 'call' those loans, it's simply their protection if and when things go awry.
Clients are sometimes under the mistaken impression that bank lines of credit are good for an indefinite amount of time. Typically however they are renewed annually - which requires a review by your account manager.
If there is one other very common question asked by clients it revolves around how exactly the banks calculate lines of credit. The formula is not as complicated as you think! A typical business to business financing on a Canadian chartered bank line of credit margins your accounts receivable at 75% or their value. It's critical here to note that the bank uses 90 days as a measurement tool - no receivables over 90d days can be margined, or in effect 'borrowed against'. Why is that? Again, common sense prevails, in that the bank, (and us too by the way!) makes an assumption that the receivables over 90 days are uncollectible to a certain extent. Your firm might think differently, but that’s how it’s done.
Inventory. Wow! What a different kettle of fish this is! If we had to generalize, but be as specific as we can be for info purposes we can say that in general banks really wrestle with inventory financing. Margining and inventory percentages are very different based on your industry, as well as the composition of your inventory. (Inventory typically comes in three categories: raw materials, work in process, and finished goods).
Typical bank financing of inventory usually never exceeds 50% and at the same time usually has a cap on the facility, meaning that even if your inventory is growing it still might be subject to a maximum of financeability.
The take away here is that banks aren’t in the inventory business, these assets are much harder to liquidate than receivables, and rarely does a lender ' win ' in an inventory liquidation!
So let’s get back to the security the bank takes on bank lines of credit. Do your clients find out about this? In Canada, they would normally never be notified unless there is a default by your firm on the line of credit facility. In that case, your clients would receive a notification of the assignment, in which the bank would direct your clients to pay them directly, reducing the loan of course.
Banks register their security with the appropriate provincial and federal authorities, further protecting their position.
There is a great tendency in Canada to ' blame ' our conservative banks for limiting lending possibilities for commercial business to business financing. (We love our banks by the way).
Consider the reality though, that we entrust them to protect our savings and deposits, and its Canadian business owners and financial managers that run their businesses into problems.
Clients are encouraged to maintain solid relations and seek out great commercial business bankers. (Not all are great, unfortunately). If you're looking for a banking facility that works, for both you and the bank seek to speak to a trusted, credible and experienced Canadian business financing advisor who will assist you in managing your bank as a partner, not an adversary, thereby maximizing your bank line of credit for your firm's sales and profit growth.