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The Business credit line in Canada. Most clients we initially meet tend to say 'what are our chances ' when in fact we maintain they should be asking ' what are our choices ‘! Let's dig in.
The essence of what we're talking about is the type of borrowing that's associated with the monetization of assets via line of credit. That's current assets by the way, which typically are essentially your A/R and inventory.
Business credit lines should be focused on short term borrowing. Longer terms are associated with term loans for equipment, mortgages on the business property, etc. Naturally while a term loan expires when you make that final payment business credit facilities are there and available to your firm based on your ongoing level of receivables and inventory.
You will of course want to match the amortization of term loan with the useful life of the asset. Let's use computers as an example - A typical lease term might be 3 years, and you would want to retire the lease or loan by that time as it is typically time to upgrade technology. But we digress..!
And what about those ' CHOICES ' we talked about. It comes down to essentially two solutions for the business revolving line of credit:
1. The Canadian chartered bank solution
2. The non-bank asset based business credit line - it’s typically called an ' ABL ' by the industry
Years ago any non bank financing was viewed as ' alternative ‘, in some cases there was a perception it was financing of last resort. Absolutely not the case today as the world of business credit changed dramatically, moreso after the 2008 world wide recession, where many firms, including banks , went under . That new form of financing, the ABL business credit line all of a sudden seems available and cost effective in most cases.
Bank business credit agreements tend to be what is known as ' covenant based '. Even if the business owner and financial managers considers the company to be in growth mode it might in many cases not be able to meet some basic debt to equity and cash flow rations that are required by Canadian chartered banks.
Bank credit lines typically margin just A/R and receivables. In the case of an Asset based business credit facility the borrowing allows you to borrow the market value of the lump sum of all your assets - so that might be a/r, inventory, tax credits , and equipment . Any unpledged asset becomes financeable.
Recently we were at a clients and the CEO asked a very basic question - ' What then is the downside of ABL ‘. The answer? Other than a typically higher cost the benefits are no outside collateral, higher borrowing power, and unlimited growth - it’s not a capped credit line per se. In truth if we had to state one ' downside ' it might be the fact that you are required to report more regularly on your asset lists. In many cases that made most of our clients better managers of their business.
Bank business credit is always going to be low cost and flexible if your firm meets traditional criteria. When it doesn’t know that you have another choices, the ABL line. And by the way, many clients often try ABL for a year or so and then are faced with the decision that they are eligible to be ' bankable ' in the traditional sense.
Bottom line. They had a choice, so seek out and speak to a trusted, credible, experienced Canadian business financing advisor with a credible track record who can help you facilitate the business credit line you need.
business credit line