Asset Based Line Of Credit vs. Factoring in Canada

An asset based line of credit and factoring are terms that are becoming increasingly well known in Canadian business financing. These are two types of financing once considered non traditional and mis understood by Canadian business owners and financial managers are becoming more and more popular.

What is the difference between these two facilities and which one might be best for your firm?

Small and medium sized businesses in Canada continue to be challenged by working capital needs. That is simply the cash flow that’s required to run your company on a daily basis. As your current assets (receivables and inventory mostly) build up you find they cannot be liquidated as fast as they might be able to. Naturally some of that cash flow is required to service your long term debt also.

When Canadian business has too much money tied up in accounts receivable and inventory it must consider financing alternatives to address that issue. Two of those financing alternatives are asset based lines of credit (we like to also call those ‘working capital facilities ‘, as well as factoring.

Clients are always asking us which one is best for their firm. We believe that a true working capital facility is probably better than factoring, but the reality is that many firms cannot qualify for a true working capital facility.

However, both types of financing facilities will indeed have the same effect on your cash flow, namely improving it! , and at the same time reducing the need to borrow funds on a long term basis.

It is very important to note that both an asset based line of credit and a factoring facility is not ‘ debt ‘ – you are not borrowing at a fixed rate and increasing the overall debt load of your company . Both facilities simply ‘cash flow ‘or ‘monetize’ your current assets in a more efficient manner.

The reality is that when you do free up that additional cash flow by using one of these two facilities you, as we noted, reduce your dependence on external funding or equity needs. Your firm now has the flexibility to address day to day issues, and grow.

Clients ask then what the main difference is between these two financing facilities. It’s actually quite simply – a factoring facility is simply the sale of your accounts receivable for immediate cash on an ongoing basis. On the other hand an asset based line of credit provides that same level of immediate cash, but your firm hasn’t ‘sold ‘the receivables, you have simply provided them as collateral. The other main difference is that in many cases a true asset based line of credit will also cover inventory also, in many cases increases your cash flow availability by 50% or more.

We recommend that you speak to a trusted, credible and experienced business advisor in these matters to determine which facility is best for you. In many cases a smaller firm might not be able to qualify for a true asset based line of credit so factoring will be the only solution.

In summary, asset based lines of credit and factoring is coming into their own in Canada as true business financing facilities. Both facilities have different criteria for approval, and overall an asset based line of credit, or working capital facility, is probably the best facility for your firm – if you qualify. Investigate carefully and determine which type of financing might be right for your firm

==

Stan Prokop is founder of 7 Park Avenue Financial. Originating financing for Canadian companies, specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details :
http://www.7parkavenuefinancial.com/asset_based_line_of_credit_vs_factoring.html