YOUR COMPANY IS LOOKING FOR A BUSINESS LINE OF CREDIT – WHAT WORKS
BEST - AN ABL LOAN OR A BANK FACILITY!
Asset Based Lending Solutions
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Not all business owners and financial managers in Canada are familiar with the new (relatively speaking )kid on the block in Canada, the asset based business line of credit known as the ABL, which is basically an asset-based loan, non-bank in nature.
THE DIFFERENCE IN SECURED BUSINESS LINES OF CREDIT VS UNSECURED LINES OF CREDIT
A secured business line of credit, aka 'asset-based lending' allows companies to pledge their assets as collateral to secure business credit line facilities - the most common assets secured under the facility include receivables and inventories which are the bulk of current assets of the business - as well though fixed assets/equipment and even commercial real estate can be bundled into these revolving credit lines!
When it comes to unsecured business credit facilities a general security agreement is placed on the entire business by the senior lender, which is typically a Canadian chartered bank - no specific collateral is secured but companies qualifying for these unsecured lines require strong sales, cash flows, profits, and good balance sheets.
Is asset based ABL a real ' triple threat ' when it comes to the alternative, the bank commercial credit facility? We'll let you decide but we’re quite sure you will agree there is a market for both as you will soon see.
BANKS ALSO OFFER ASSET-BASED ' ABL ' LENDING
Oh, and by the way, the banks agree with us, because many of them, unbeknownst to many, offer their clients both alternatives. Talk about a secret we have let you in on! The challenge with bank ABL loans is that they often have a minimum borrowing started in 5 Million dollars plus range, which exceeds the needs of many SME firms. To learn more about asset-based lending banks talk to the 7 Park Avenue Financial team.
ABL IS ALL ABOUT ' ASSETS ' AND SALES REVENUES
So if the ultimate goal of both the ABL and the bank facility is to provide you with revolving credit, how in fact are they different? One way is simply the focus - for the bank, it's on cash flow and profits, while the ABL facility focuses on... you guessed it, just sales and assets, such as accounts receivable! While our chartered banks view collateral as a backup to their credit decision the Asset-based lender views your assets, the collateral, as pretty well the only backup plan.
THE BANK CREDIT LINE IS VERY MUCH REGULATORY DRIVEN
The way bank revolving line of credit lines and ABL facilities behave is partly driven by regulations. That is to say that our strong Canadian banking system is driven by rules and regulations around the amount of funds they have, what they can lend, and who they can lend to. Given the fact that our banks are all pretty well public corporations on the stock market, we can further imagine all the visibility around their lending that garners!
THE ASSETS INSIDE THE ASSET BASED LENDING / LINE OF CREDIT
And the asset-based lender then? Well we are certainly not portraying them as drunken cowboys doing what they want and when they want, but the reality is they are not regulated, are more often than not private firms, and make their own risk ratings and decisions based on management experience and their opinion of your assets - typically accounts receivables, inventory, equipment, and even real estate. All of those components become part of your business credit line.
IS YOUR COMPANY IN ' SPECIAL LOANS' AT THE BANK? NO PROBLEM!
Here's another little surprise we'll share with you today. When bank loans go bad they are placed in a 'non-performing' part of the bank's books, a special place known as ... you guessed it ' SPECIAL LOANS '. Do you know who often refinances these loans and pays out the bank? Surprise! It's an asset-based lender!
So when a company is consuming too much cash, rather than generating it the asset-based business line of credit is a great business credit solution. So all of a sudden historical cash flow and profits, critical to a bank, are a non-issue when you are looking for an ABL facility. Big difference! In all circumstances, borrowers should be prepared to produce proper financial statements and asset lists, ageings, etc.
Do we criticize our banks for their behaviour? Some might, but not us because Canadian chartered bank solutions deliver the lowest cost based on the risk they are prepared to take.
WHAT ARE THE REQUIREMENTS FOR BUSINESS CREDIT LINE FACILITIES
Business line of credit requirements around business revolving lines of credit include standard financial documents about your business - generally speaking borrowers should be able to provide articles of incorporation and appropriate business licences, as well as financial statements, business bank statements, and appropriate accounts receivable and accounts payable agings - In many cases, a detailed business plan and cash flow projection will also help with approval.
Businesses that are early-stage and startup firms will often find it very difficult to obtain a credit line - As well firms experiencing several financial challenges and unable to meet current obligations will also rarely qualify for traditional bank financing - so in presenting your business it's important to focus on profit generations, sales growth and a management team in place to run and grow the business. A small business line of credit for small businesses will place heavy emphasis on credit score and personal guarantees of owners for a new business.
THE COST OF ASSET BASED LENDING / BUSINESS LINE OF CREDIT RATES
That brings us of course to pricing. In fact, certain ABL asset-based lending business lines of credit are in fact 100% competitive, even lower than bank offerings. However, the majority are in fact priced higher, with the offset being the tremendous amount of additional liquidity and working capital your firm achieves when monetizing assets via an asset based ABL loan.
CONCLUSION - THE BUSINESS OPERATING LINE OF CREDIT
A revolving credit line to meet short-term day-to-day funding needs is a very valuable tool for businesses focused on running and growing their business and meeting the challenge of fuelling growth in the business while funding specialized needs of the business.
So, asset based lenders and banks co-exist? Absolutely. Just be prepared to recognize the price, limitations and benefits that your firm is prepared to take when looking for a true business line of credit. Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business advisor who can assist you with the type of financing your business needs.
FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is a business line of credit?
Business lines of credit allow companies to borrow funds and pay interest on the money borrowed or drawn down, similar to business credit cards. This is a revolving facility, not a traditional term loan structure with lump sum amounts and monthly installments, Instead, the business bank account access a fixed credit limit used to meet day-to-day funding of operational needs such as inventory purchase, repairs, sales programs and addressing any seasonality that might create a cash flow gap that needs to be filled.
Banks offering these facilities will typically offer online banking support and business advice, and facilities with banks are typically structured as an unsecured business line with a credit limit and interest rate, Credit approval for these business loans as a business qualifies requires good business cash flow and interest rates on small business loans and lines of credit from banks are very competitive -No minimum monthly payment is associated with these facilities and interest expenses are tax-deductible as a business expense. One monthly statement will typically reflect all account activity around interest charges / borrowed funds and monthly payments of the business owner. An annual fee might be required for renewals.
What is the difference between a term loan versus a business credit line?
Traditional financial institutions such as banks as well as many commercial finance companies and asset-based lenders offer both business credit lines and term loan structures, The overall business credit rating and profile is key to term loan approval that typically comes with longer amortizations. Business credit line performance revolves around the ability of the company to generate sales and maintain good asset turnover in current assets such as accounts receivable and inventory.
Term loans come with a fixed loan amount and periodic installment payments via a variable interest rate of fixed rate, until the loan is retired - business credit line facilities come with more flexibility around fluctuations in borrowing as the facility revolves as the company draws down on the credit facility - with no minimum monthly payments. Banks will require strong activity that ensures the line fluctuates around the day-to-day needs of the business based on sales generation.
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