Thursday, September 2, 2010

What If …. An Asset Based Line of Credit Could Save Your Company?

As a Canadian business owner and financial manager you may have heard about asset based financing. So what is an asset based line of credit and could it actually ‘ save’ your firm and if your firm doesn’t need ‘ saving’ does this method of Canadian business financing still make sense? ! We think it does.

In order to determine if asset based finance can ‘save ‘your firm it might do us well to understand what it is. Many clients we talk to get caught up and confused by the industry financial jargon which tends to complicate what they are looking for, which is adequate business financing that meets their cash flow and working capital needs.

So let’s invest a bit of time in the basics. Asset based lines of credit are revolving working capital facilities that totally focus on your asset base. When you are comparing this type of financing to a banking facility you will of course quickly realize that the Canadian chartered banking facility that provides a similar (but not exact) type of financing places a lot of focus on issues external to your assets – these include your balance sheet and income statement health, other assets as collateral, and a perquisite personal guarantee and respectable personal credit history of owners and principals.

That’s banking 101 – That is now was asset based lines of credit are. They are business financing working capital facilities that are revolving lines of credit secured specifically by receivables, inventory, and in many cases equipment and real estate if those two latter items are applicable .

You basically borrow, on a daily basis, as you need to, on the sole strength of those assets. Many of our clients are in fact able to also on occasion arrange temporary bulges which can even take them higher than their asset based borrowing capability! An example of this might be bring a purchase order financing scenario into play which would allow your firm to temporarily borrow against purchase orders and contracts you have received from your customers . This type of additional supplemental financing is best suited for manufacturers, distributors, and firms who export goods or who are wholesalers.

Let’s touch base on the concept of ‘saving ‘your company. A couple key points need to be made – first that asset based financing and asset based lines of credit used to be considered alternative financing, and financing more suited for companies that had serious challenges. The new reality is that this type of financing is being utilized by every type of corporation of all sizes and all industries in Canada, from start ups to Canada’s mega corporations. So something must be working.

The reality is though that in many cases firms who have business financing challenges indeed are the perfect candidates for asset based lines of credit – if only for the reason that they provided you with capital and cash flow when traditional source can’t.
So if your business needs to be ‘saved ‘ because of issues such as inability to achieve traditional bank financing, or you have traditional financing but it is not enough, than an ABL facility is what you should consider . ABL is the acronym for asset based line of credit.

Other issues you might be facing might include firms that are in a turnaround or workout situation. We have worked with a number of clients who in fact are in ‘special loans ‘scenarios at their bank and they require exit financing from that relationship. Alternatively your firm might be in a turnaround from either a difficult year or a difficult ‘one of ‘situation that took place. Or perhaps your firm is losing money but is on the road to rebuilding sales and profits again.

Fortunately or unfortunately for traditional business financing in Canada it’s all about the ratios and covenants. Asset based lines of credit eliminate those ratios you can’t meet because of being over leveraged (too much debt), or having dramatic seasonal cash flow changes based on your business model and your industry.

The bottom line is simply that your firm now has the ability to be ‘saved’, using our jargon, because you have maximum flexibility in borrowing on your assets, with those assets being the sole focal point of your borrowing base.

Depending on the size and challenges your firm faces pricing on asset based lines of credit vary significantly based on size of your firm, its borrowing total dollar requirements, etc. As a general rule ABL financing is more expensive than bank borrowing, which is currently at some of its lowest levels in Canadian history. But even paying a premium or significant premium on your ability to borrow in an unlimited fashion against your asset base can still 99% of the time make total sense, that’s simply because your ability to turn capital into profits takes care of a lot of the financing charges.

Speak to a trusted, credible and experienced business financing advisor and discover if the asset based line of credit is the saving grace solution for your Canadian business financing needs for growth and capital.

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Stan Prokop - founder of 7 Park Avenue Financial - http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 6 years - has completed in excess of 45 Million $$ of financing for Canadian corporations .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/asset_based_line_of_credit_3.html

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