Revolving Line of Credit: Essential Strategies for Business Owners | 7 Park Avenue Financial

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UPDATED 05/06/25

Financing & Cash flow are the  biggest issues facing business today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS  FINANCING OPTIONS?

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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

"A line of credit is not just about having money available—it's about having the freedom to make optimal business decisions without the constraint of cash flow timing." - Warren Buffett

WHAT IS A REVOLVING CREDIT LINE

Business credit facilities in Canada increase your firm’s ability to access the cash flow and working capital you need to run and grow your business.

At the same time, the challenge of accessing these revolving account loans has many firms feeling as if they are temporarily ' off the grid ' when it comes to business financing needs. Let's dig in.

The Cash Flow Balancing Act

Running a Canadian business means facing unpredictable cash flow challenges that can derail growth plans or create operational emergencies.

When unexpected expenses arise or opportunities demand quick action, traditional financing options often move too slowly.

Let the 7 Park Avenue Financial team show you how a revolving business line of credit offers the flexible, on-demand funding solution that growing businesses need to navigate financial ebbs and flows with confidence.

SHORT-TERM FINANCING SOLUTIONS - THE REVOLVING CREDIT LINE  LOAN FACILITY  

Properly structured revolving credit account loans allow your business to access credit for day-to-day operating facilities.

In some ways, they are the ultimate in flexible financing, given how they are repaid, and ' revolve ', allowing you to constantly ' re-borrow ' to meet cash flow needs.

It is critical not to confuse an operating line of credit with term loans, which have fixed repayment, typically every month for anywhere from two to 5 years most often.

Interest rates are a key consideration in a revolving credit facility, and rates are typically not fixed when a bank facility is in place.

Alternative lenders who offer non-bank business lines of credit typically do not utilize variable rates for their facilities.

Ultimately, Canadian banks and Non-Bank lenders provide solutions that allow you to fund and replenish working capital for ongoing operations and growth.

The non-bank lender will charge more for their facilities, but in most cases, the amount of credit they provide to your firm would typically not be available from a bank.

WHAT TYPE OF BUSINESS CREDIT LINE IS BEST FOR YOUR FIRM?    

It is important to distinguish between secured Business credit facilities as opposed to unsecured lines of credit.

Typically, banks and Asset Based lenders will offer a facility that is secured by the business's assets, as well as a focus on the firm's ability to generate sales.

The current assets of the firm, typically cash on hand, accounts receivable, and inventory, is the main security for the majority of facilities.

External collateral will often be secured under the same facility, and that will be fixed assets and real estate if applicable.

Typically, the 'ABL ' ( Asset Based Lender) will offer a larger facility as their ability to understand and work with your asset-based is a key differentiator in non-bank lending. They will almost always margin receivables and inventory to a larger extent than Canadian chartered banks.

Their focus on the value of the assets is very different from bank lending, which has a larger focus on operating cash flows, profits, balance sheet ratios, external guarantees of owners, etc. Many facilities these days are offered under the term ' Working Capital Loans '.

These facilities are, in effect short-term loans based almost solely on the sales of your firm. They are not tied to margin formulas around a/r and inventory, instead, loans are made based on the annual sales revenue of the business.

Loans typically are based on a formula of 15-20 percent of your annual sales and are paid back on a daily, weekly, or monthly basis, specifically geared to your cash inflows.

These loans are quite expensive, and around out of the MERCHANT ADVANCE industry that provides installment account credit to retailers who don't sell in the B2B/Business to Business marketplace. No collateral is taken on these loans, and they often rank behind any of your other secured creditors or senior lenders.

 Repayment formulas are based on a sales revenue formula so if a company experiences slower sales, it affects the monthly installment payment. These facilities have higher interest rates by are quickly accessible and they do revolve to a certain extent.

The personal credit history of the owner is a key discussion point in the approval process. These ' unsecured' facilities are not a line of credit for businesses in the true sense of the word. A revolving loan vs overdraft requires business owner consideration.

TERM LOAN OR BUSINESS LINE OF CREDIT? WHAT TYPE OF BUSINESS CREDIT SOLUTION SUITS YOUR FIRM? 

We've shown the differentiation of a business revolving credit facility versus short-term working capital loans.

The other item to consider is whether a term loan of a revolver facility is best for your firm. Term loans are typically cash loans based on the historical cash flow of the business. Loans are typically 2-5 years in length and provide a permanent cash flow injection into the business.

Qualifying for a term loan is significantly different than a business credit line, given the credit line is focused more on the assets of the business, both current and fixed, while term loans are repaid typically monthly, over a defined period, based on cash flow.

It would not be unusual for a business line of credit would be repaid and used many times over during the time that a term loan is in place.

So think of the credit revolver as your short-term operating needs, accessing funds based on sales and asset turnover. When firms are ' off the grid ', they are financing themselves successfully - they are business finance ' self-sufficient '.

What then are the qualifications your company needs to access business credit lines, and are there choices?

Revolving loans always come down to borrower's assets. This type of loan is offered by either a Canadian chartered bank as well an independent commercial finance company.

BANK LOANS FOR BUSINESSES 

Canadian banks offering a revolving facility are focused on a credit limit that will fluctuate according to the borrowing limit.

Paying that facility down regularly as you generate sales and collect receivables is key to a bank-type facility. For a commercial line of credit, you are only paying for what you have drawn down on the facility and interest costs decrease with less use of the facility.

This allows your business to capitalize on sales opportunities.

Bank credit lines usually are margined against only inventory and receivables, and margins are more conservative than asset-based lending facilities.

Banks will focus on key aspects of your income statement, balance sheet and operating cash flows.

Banks structure lines of credit as 'demand' loans, callable at any time.

Normally the bank facility is shown under current liabilities as typical credit lines are reviewed annually with the current liability limit of 12 months.

A bank line of credit approval has requirements that are very clearly defined, as businesses must demonstrate shareholder financial commitment and growing sales and profits, as well as the ability to produce properly qualified financials and more often than not, a business plan or cash flow projection.

The two asset categories primarily driving your ability to access a business credit line are accounts receivable and inventories. While these two ' current assets' on your balance sheet can be financed separately, they are best combined in either a bank credit line or a commercial asset based line of credit.

Understanding the approval process is key to success in business credit lines.

Factors that a bank or commercial lender will consider will be the size of your facility, the overall credit profile of the business and your ability to generate cash flow from sales to ensure the facility revolves properly.

While banks might emphasize personal credit scores, this is less so when dealing with a non-bank asset based lender.

How Does The Revolving Line Of Credit Facility Work?    

The use of the business line of credit is tied to your need for funding your daily operations as they relate to working capital and cash flow. In any business, sales fluctuate for a variety of reasons and expenses will not always match incoming and outgoing cash flows.

The ability to draw on your line of credit facility and then replenish it as receivables are collected is the key to credit availability.

Typically, banks will review the facility annually, sometimes more often and ongoing credit will be based on sales and the circumstances around your financial performance as they relate to profits and cash flow generation.

Companies can in a way almost pre-determine their qualified credit line borrowing amount. That's because both banks and commercial finance firms lend between 75% -  90% against receivables and specific percentages against inventory.

While not all companies carry inventory these days, it's important to note that for those that the actual quality and marketability of the inventory play a key role in assigning a borrowing percentage.

Companies that do best in accessing business credit lines from banks or finance companies typically demonstrate that they can ' turn over' assets - specifically, collect their receivables and generate inventory turns. This ensures competitive rates under bank lending options.

That type of positive operating performance distinguishes many firms that can successfully access revolving business credit facilities.

Rates and financing costs associated with revolving loans vary. While the lowest cost and flexibility are associated with banks, the non-bank commercial asset based financing industry almost always addresses the needs of borrowers with assets, albeit at a higher cost.

In today’s competitive financing market, many ' niche ' subsets of business credit facilities exist.

These potential alternate solutions include: P O Financing Tax Credit Finance Letters of Credit Royalty Financing Business owners and financial managers should review the need for a credit line facility as the requirement to bridge the cash flow gap in your cash conversion cycle - helping you fund the working capital needed as a dollar flows through your business in different timelines.

 KEY TAKEAWAYS ON REVOLVING LOANS      

Revolving loans allow businesses to draw on credit facilities and repay

The revolving loan is typically used for day-to-day operating expenses and the repayment and management of current liabilities and current asset turnover

Business and personal credit scores and financial statement history determine revolving loan approvals

Revolvers offer flexibility to the borrower - ie pay for what you use

Rates are commensurate with credit quality and the current fixed and variable rate environment

 Case Study: Benefits of a Revolving Line of Credit    

A specialty food producer in Burlington, Ontario, faced significant seasonal fluctuations with 70% of annual revenue generated during holiday seasons. This created ongoing challenges with inventory management and consistent operations.

After securing a $350,000 revolving line of credit, the company implemented a strategic approach:

• Used the credit line to purchase bulk ingredients during off-peak pricing

• Maintained consistent production levels year-round

• Retained key staff instead of seasonal layoffs

• Invested in new product development during slow periods 

CONCLUSION    

Does your firm want to get ' back on the grid ' when it comes to commercial borrowing needs

Stop letting cash flow gaps dictate your business decisions when a revolving line of credit can transform financial emergencies into strategic advantages.

Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can help your firm identify other loans and the best financing solutions for the revolving credit agreement your business needs.

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