7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Operating Capital Loan solutions and working capital solutions – Save time and focus on profits and business opportunities
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Operating Capital Loans for Canadian Businesses
Business credit line operating loan arrangements are often sought by companies that are new, established, or growing (that pretty well covers all the scenarios!!) their businesses.
The operating loan line of credit is often the heart of a company’s financial arrangements. Yet, many business owners/financial managers don’t understand all their options for a source of credit in this area of Canadian business financing, as well as the interest rates and costs of those facilities.
In addition to term loans and working capital financing, commercial real estate loans are a significant part of the financial products available for businesses.
And yes, there are two kinds of short-term business line of credit business loan arrangements your company can undertake, and time has proven there’s room enough in town for both of them, but which suits your firm? Let’s dig into those two arrangements.
Of course, there are traditional Canadian banks operating lines of credit. These typically have a maximum ‘ credit limit’ that you can borrow up to based on historical benchmarks of cash flow, sales levels, and quality of receivables and inventory.
Banks, of course, prefer receivables to inventory as they are more liquid and manageable - and quite frankly, they aren’t in a position to do much with inventory if something goes awry in your business arrangement with the bank.
New equipment and technology needs are typically acquired via equipment leasing or a business term loan.
KEY BENEFITS OF BANK LINES OF CREDIT
The key benefit of a bank operating loan line of credit and commercial line of credit from a traditional lender is that they are short-term in nature and provide maximum flexibility around business borrowing based on the pre-set credit limit designating the amount of funds your firm can borrow at any given time via the business loan.
Canadian chartered banks offer a revolving line of credit for business banking, allowing your company to bridge payables as receivables are collected.
Most Canadian business owners will immediately recognize that more and more clients are delaying payments in order to enhance their own cash flow.
The ability to delay payables is a method by which any firm can increase cash versus taking on a business loan. Bank facilities are priced based upon interest charges on funds used via the ‘ operating loan ‘ process.
Naturally, balances are paid down as the company receives cash inflows and may apply to reduce the balance continuously.
When borrowing from a bank for short-term facilities, a company must satisfy the terms and covenants specified in the approval.
Banks view the line of credit as ‘ short term ‘ commercial borrowing, and a bank will typically constantly revisit the approval to evaluate ongoing risk and credit limit - this is part of the regulatory and fiduciary responsibility of Chartered banks in Canada.
Bank facilities are secured, with the most common security being inventory and accounts receivable.
Banks consider these types of facilities ‘ demand loans ‘, allowing the bank to ‘ call ‘ the loan and, you guessed it .. ‘ demand ‘ payment in full.
Banks register their security on these loans via the appropriate lien filings in the business's jurisdiction. These ‘ secured loans ‘ are a large part of bank lending in the Canadian economy, for businesses of all sizes, public and private.
KEY POINT—Although Canadian banks secure the short-term operating line of credit via short-term current assets ( a/r and inventory ), it is important to understand that the bank will almost always take collateral on all the company's assets, as it would enforce security by liquidating both short-term and long-term assets.
Those long-term assets typically will be equipment and, if applicable, real estate. From an accounting point of view, the bank line is designated as a liability on the company financials, typically shown as a ‘ current liability ‘ given the bank views this as a loan that revolves within a one-year business cycle.
Bank operating loans appear under liabilities on the balance sheet. They are considered current liabilities because they must be paid within a current 12-month operating cycle.
Debt payments are also part of these current liabilities, affecting the company's liquidity and financial standing.
Term loans show up as long-term liabilities on the balance sheet. Companies look to operating lines because it’s an effective way of running a business from a financial viewpoint. It’s an add-on financing to your ‘ cash on hand ‘.
Having a line of credit for a firm allows you to consider ongoing growth opportunities, as well as cover deficiencies in day-to-day working capital.
Those ‘ day to day ‘ financing needs includes supplier payments, wages, purchasing products from suppliers, equipment repairs and maintenance, and investments in r&d and sales and marketing and place pressure on available credit to the business.
Many businesses in the Canadian economy operate with heavy seasonality being a part of their revenue recognition model.
Business lines of credit are a great ‘ gap bridging ‘ when seasonality occurs in your company. As a company’s CASH CONVERSION CYCLE increases more dependence will be placed on a line of credit for business.
Having that access to bank credit should best be viewed as a strategic tool in your financing of day-to-day operations. Having the credit facility in place lets you know you have access to business capital at future points in time.
Business owners and financial managers should view the ‘ operating line ‘ financing of their firm as a part of their overall financing structure, as the company will typically require long term debt in some form, whether that be term loans or equipment financing in the credit application process.
UNSECURED LINE OF CREDIT FOR BUSINESS
In certain cases, a bank will consider unsecured business lines of credit. Here the focus will be on the quality of the personal guarantee of owner/owners, and often a blanket lien of some sort will be in place by the bank on the company.
Overall the company would typically be a higher quality credit, and interest cost might be slightly higher than secured facilities.
Under this type of credit line, receivables and inventory would not be ‘ margined ‘ based on the borrowing base of month-end a/r and inventory, but a credit limit is still in place.
There is an important distinction between ‘ term loans ‘ and ‘ credit lines ‘. Term loans place major emphasis on the borrower's overall credit profile—the focus will be on good balance sheets, profits, and reasonable owner equity compared to the debt load.
The ‘credit line, ‘ on the other hand, focuses on ongoing financial performance and asset turnover. We can argue that the credit decisions and the amount of time it takes to get approvals in each case differ, as does the final interest rate.
Also, those term loans or cash flow loans ( also called ‘ mezzanine loans’ ) come with monthly installments and a one-time receipt of funds.
The obligation to make those monthly installments is different from the flexibility of the revolving facility that has no fixed payments—although it should be understood that the bank best views lines of credit when they ‘ revolve ‘.
In a perfect world, the revolver facility should eventually be paid down in full and then borrowed on an ongoing basis.
A merchant cash advance can be an alternative financing option for businesses that process a high volume of credit card transactions. This allows borrowers to access funds against future sales, offering flexibility and a quicker funding process than traditional loans.
SMALL BUSINESS CREDIT LINE? CREDIT LINE FOR BUSINESS NEEDS?
For small businesses, credit lines can begin at 10k and should almost be viewed in the context of a credit card, as both operate in the same manner.
There is no upper limit on business credit lines in the Canadian marketplace, although approval and documentation on larger facilities take a significant amount of time. In many cases, a business financing advisor is highly recommended.
Online banking can even provide small business facilities for smaller facilities.
Most Canadian banks operate commercial loans in commercial banking centres outside the typical bank branch network, where experienced business lenders are most likely to be found. They are prepared to offer the best interest rates for qualifying companies.
HOW TO GET A BUSINESS CREDIT LINE INFORMATION REQUIRED FOR BANK CREDIT LINE APPROVAL
At 7 Park Avenue Financial, we focus on a complete package for clients looking for traditional bank financing or a business loan.
What are the requirements for additional documentation to access the maximum available funds? Information will vary depending on the size and type of facility, your overall credit history, and the amount you borrow.
A typical package would include:
Articles of Incorporation
Financial Statements
Bank Statements
Aged payables/receivables
Inventory List
Cash flow projection
Business Plan or Executive Summary
Business Accounts / Taxes
Owner info / Minimum Credit Score requirement
Generally, companies in early-stage/pre-revenue situations will have difficulty in establishing lines of credit. Companies not showing a profit or having inexperienced management teams will also be challenged in accessing revolving credit.
KEY POINT - Understanding qualification criteria, timelines, loan costs, interest rates, and miscellaneous fees is crucial to successfully obtaining bank credit.
Understanding bank requirements around loan covenants, debt-to-equity ratios, and the proper amount of owner-equity contribution in the business is key to successful bank negotiations if an advisor is not used.
A bank typically desires a debt-to-equity ratio in the 2 to 1 or 3 to 1 range, implying that it wants to see owners' proverbial ‘ skin in the game ‘.
We advise clients always to have a backup plan for alternative financing solutions when time is of the essence and financing is critical. SBL loans, backed by the Canadian Government, are a specific type of financing designed to assist small business owners. They feature a range of programs tailored to different business needs.
THE ABL NON-BANK BUSINESS CREDIT CARDS REVOLVING FACILITY
The other alternative, which is gaining more daily traction in Canada, is the Asset-Based Credit Line. “ ABL “ )
These facilities are offered by commercial finance companies and mirror bank arrangements really only when it comes to how you access funds and how the facility revolves. In almost all other cases, the differences are a bit more dramatic. Asset-based operating loans are new in Canada.
They are a vital part of the alternative financing universe, which has grown significantly over recent years. A specialty loan product provides an operating line based on assets that are the focus of the facility's collateral.
It is the perfect facility for a business line of credit for companies with a higher debt-to-equity ratio or fluctuating profits and cash flow that is erratic at times. The ability of a company to generate working capital by being able to cash flow the assets they have in the business.
At 7 Park Avenue Financial, we have found that the short-term ABL solution can assist companies in various financial health categories —those requiring restructuring and turnaround and firms requiring financing significantly more than a bank is willing to provide.
That allows firms to grow without being impeded by the covenants and other restrictions a bank might place on a borrower. Operating loans give a company the flexibility it needs to manage day-to-day operations through the business ‘ operating cycle ‘—namely, the time it takes for a dollar to flow throughout the company from the sale to cash collected.
Depending on the company's industry, this might take a significant amount of time—business experts call it the ‘ cash conversion cycle ‘.
The non-bank business credit line allows a company to ensure it has a proper revolving facility in place. This facility allows the business to draw down funds, repay them with collections, and continue the process on an ongoing basis. Asset-based lines of credit focus on short-term assets but can also provide borrowing power by margining the value of the equipment.
Appraisals of fixed assets may sometimes be required on larger transactions. Common users of non-bank business credit facilities will often include manufacturers, distributors, retailers, etc., although services-based companies can also utilize the asset-based facility.
Outstanding credit line balances will fluctuate based on sales revenues and cash needs. Operating loans via asset-based lending allows a company to borrow a much larger percentage of margin based on the value of the assets.
The collateral in the receivables, inventory, and equipment is called a ‘ borrowing base ‘ and provides ongoing funding based on sales revenues and ongoing operations. How does the ABL business credit line provide that greater flexibility?
It boils down to the controls and reporting that an asset-based lender will place on the business. At a minimum, monthly reporting is required on receivables and inventory on hand. In some instances, an asset-based lender may be willing to provide a ‘ term loan ‘ in addition to an operating line, similar to bank practices.
In Canada, the majority of banks offer an asset-based business credit line operating loan, but these boutique divisions within the bank are much smaller. Many borrowers feel that bank ABLs mirror traditional bank lending, which may or may not be the case in our experience at 7 Park Avenue Financial.
Remember also that financial institutions such as banks operate in a highly regulated capacity, while most non-bank commercial loan providers in asset-based lending are self-regulated private firms.
Some ABL lenders in Canada are subsidiaries of foreign corporations wishing to establish a commercial lending base in Canada. The solid advantage of an operating loan is that you only use credit when you need it—the facility revolves. Interest is only charged on the funds you use at any time.
Banks tend to structure these facilities as ‘ demand loans’, meaning they can be ‘ called’ at any time. Trust us, that’s not a call you will always want to take! To effectively access operating loans and business lines of credit of this type, you must ensure you have some key basics nailed down.
They include perhaps a business plan or executive summary, but always your historical and up-to-date financials and a cash flow forecast.
While asset-based line of credit lenders don’t overemphasize the business owner's personal credit, banks insist that the owner demonstrate personal creditworthiness and external assets as backup collateral.
Asset-based lenders focus on the hard and liquid assets of your business and typically lend significantly more than the bank - offering up, of course, more liquidity. Still, it’s important to note that borrowing always comes at a higher cost than borrowing from the bank.
Typical margins on asset-based credit lines tend to be 90% for receivables and a preset % for inventory, based on carefully examining your business's inventory type.
BENEFITS OF THE ASSET-BASED FINANCING FACILITIES
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Companies take comfort in the fact that they have a steady supply of cash flow based on revenues generated - as revenues grow, a company must invest more capital in receivables and inventory, which have a time component attached to their conversion to cash.
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Any company that has some level of seasonality or ‘ bulge ‘ needs can access liquidity during times of large orders and the necessity to build inventories - A business will only pay interest on funds drawn in any line of credit.
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Rapidly growing firms experiencing ‘ hyper-growth ‘ often cannot access credit approval from traditional bank finance, but ABL solutions allow the constant need to manage your cash flow.
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While banks rely significantly on covenants and operating ratios for financing approval, the asset-based lender is ‘ collateral-based ‘ and instead focuses on regularly monitoring business assets to maximize borrowing power.
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Many asset-based lenders specialize in various industries and will frequently customize a borrowing solution outside a Canadian chartered bank's ‘ credit box ‘.
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In some cases, an asset-based lender will consider an ‘over-advance ‘ of the facility, temporarily allowing the company to borrow beyond the approved limit. A firm’s cyclical nature will often be the driver in a request for an over advance—a classic example is when sales are slower but there is a need for inventory build-up due to seasonality. In other cases, a borrower might view an opportunity to acquire a large product at special pricing.
At 7 Park Avenue Finacial, we strive to provide a balanced approach to the bank vs non-bank credit line facility debate.
So, ABL borrowers need to understand that the cost of business credit lines and the application process in the asset-based lending environment will almost always be higher and must be factored into the final borrowing decision.
Many companies feel that the need to constantly update their reporting places some level of burden on the company.
Asset-based credit lines allow the lender to control the business cash account when the borrowing base is lower than the approved operating line of credit amount. Asset credit lines also differ substantially from a bank business loan in that they will almost always lend against your fixed assets as a part of your borrowing line.
Working capital financing is another financial solution available for businesses. It offers significant loan amounts, specifically up to $2 million, to cater to various operational funding needs.
KEY TAKEAWAYS
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Liquidity: Ensuring access to quick capital for daily business needs.
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Loan Terms: Understanding interest rates, repayment schedules, and conditions.
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Cash Flow Management: Leveraging loans to balance operational costs.
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Creditworthiness: The impact of loan repayments on future financing opportunities.
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Strategic Borrowing: Using loans not only for survival but also for growth initiatives.
CONCLUSION - BUSINESS CASH FLOW SOLUTIONS INCLUDING MERCHANT CASH ADVANCE
That's a key difference, especially in capital intensive companies.
If you want to ensure your search for operating finance and a business credit line operating loan is a boom and not a bust, call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your unique operating loan and corporate loan needs for your business growth.
FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION
What is an operating loan/working capital loan/business line of credit?
A bank operating loan is a short-term, flexible loan that businesses can use to borrow up to a pre-set amount. Also called a line of credit, it is an excellent way to bridge any gaps in a business’s cash flow. These short-term loans can be used by companies that need more money than their usual set amount but don’t want an ongoing commitment or large investment from banks and other lenders.
Business credit cards via a monthly statement can also be used to supplement the business bank account borrowing requirements - but might come with an annual fee - Many small businesses use Merchant cash advances, which are readily available but expensive and are not the best working capital loans relative to costs
A true credit line does not have minimum monthly payments; the facility ‘ fluctuates’. Credit lines are a valuable tool for the business owner and manager and are an alternative to business loans, which are term loans with a ‘ lump sum ‘ borrowing structure.
How can operating capital loans help my business?
Operating capital loans provide the necessary cash to cover day-to-day expenses, ensuring your business remains operational even during slow periods. A working capital loan is a crucial financial tool for businesses needing short-term funding to cover daily operating expenses such as payroll, rent, and utilities.
What are the typical terms of an operating capital loan?
Operating capital loans often come with shorter repayment periods and competitive interest rates tailored to the business’s cash flow needs.
How do I qualify for an operating capital loan?
Qualification typically depends on your business’s financial health, creditworthiness, and ability to demonstrate stable cash flow. For small business owners, a personal credit score in the 600+ range is required
Can operating capital loans be used for business expansion?
Yes, they can be a strategic tool for expanding your business, allowing you to seize growth opportunities without draining cash reserves.
How can repaying an operating capital loan improve my business credit score?
Timely repayments build your business’s credit profile, positioning you for better loan terms in the future.
What are the risks associated with operating capital loans?
While operating capital loans provide quick access to funds, failure to repay on time can lead to higher costs and damage your credit profile.
How do seasonal businesses benefit from operating capital loans?
Seasonal businesses can use these loans to cover expenses during off-peak seasons, ensuring a steady cash flow year-round.
What types of lenders offer operating capital loans?
Operating capital loans are available through banks, credit unions, and alternative lenders, each offering different terms and conditions. Working capital loans are essential for addressing daily operational costs and seasonal fluctuations in revenue.
Are operating capital loans a long-term solution?
Operating capital loans are typically short-term solutions to bridge gaps in cash flow rather than long-term financing tools.
How can I ensure I’m using an operating capital loan effectively?
Carefully assess your business’s needs and repayment ability to ensure the loan is aligned with your financial strategy.
What is the main advantage of an operating capital loan?
Operating capital loans provide liquidity to maintain operations during cash flow gaps, keeping your business running smoothly.
How can I calculate the right amount to borrow?
Assess your business’s operational costs and cash flow to determine the ideal loan amount needed to cover gaps without overextending.
What are the common repayment structures?
Operating capital loans often offer fixed monthly payments, but some lenders offer flexible terms tied to your business’s revenue as evidenced by business bank statements
