What’s The Difference Between A Bank Or ABL Revolving Credit Line And Factoring ? What’s My Limit?

Here’s Your Reality Check On Cash Flow Financing In Canada



Here’s Your Reality Check On Cash Flow Financing In Canada



When Canadian business owners and financial managers are up to their necks in running their companies, growing sales, and managing operations to effectively use assets ... the last thing they think they have time for is to understand some key differences in terminology when it comes to financing their current assets . We're talking about receivables, inventories, and tax credits they might have, etc.

So why is the terminology so important? Simply because we have found different terms have different meanings depending on who you are talking to. Let's explain why you need to know this when it comes to considering either a bank revolving credit line limit, or an ABL factoring type of arrangement.

Bank lines are typically put in place for a one time set amount. It’s pretty safe to say that they are, in general, reviewed on an annual basis. Here's where the terminology gets important. Under this type of facility your assets, primarily A/R and inventory are in effect ' collateral ' for your borrowing. You have given the bank this ongoing collateral - and in the majority of bank deals you are also required to provide personal guarantees or outside collateral.

Your current assets are then margined, again, typically on a monthly basis and you can borrow within the previously mentioned limit. Banks manage this process by a simple document called a ' borrowing base certificate ‘, essentially highlighting the aging and turnover of your current assets.

So how does this differ from an asset based line of credit through a non bank ABL firm? (A = Asset B=Based L= Lending)

Factoring, or receivable financing is the most common, let’s call it a ' sub set ' of asset based lending. So although this could include fixed assets and real estate, to keep things simple we'll focus today on just receivables and inventory.

In the case of factoring receivables the documentation somewhat differs when you set up your facility, because it specifies that any receivables you wish to finance are in effect ' sold ' at the time of financing. The finance firm manages this quite effectively, and a common way they do this is to set up what is known as a ' lockbox ' or ' blocked account '. Here is then what happens. As you generate sales on a daily or ongoing basis you immediately receive funds. As these funds are collected by yourself, or your finance firm the monies are deposited into an account controlled by the finance firm. That makes sense given you have already received the funds when you generated sales.

We hasten to add that the recommended solution for this type of ABL factoring is in fact a confidential facility, allowing you to bill and collect your own receivables and maintain effective customer relationships.

Final point today - and it’s about your limit. As we noted bank arrangements typically are focused on one pre set limit. This sometimes does not address seasonality or bulges in the business of the Canadian business owner and financial manager. ABL factoring on the other hand in essence grows automatically with your sales. In effect its unlimited financing with your qualified assets; i.e. receivables and inventory.

So, our point today? Understand the terminology and nuances and what they can and can't deliver for your firm. Need help? Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in managing the reality check of cash flow and working capital financing in Canada.

7 PARK AVENUE FINANCIAL
CANADIAN ASSET BASED LENDING & WORKING CAPITAL EXPERTISE


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 7 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details :

http://www.7parkavenuefinancial.com/factoring_revolving_credit_line_limit_abl.html