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Information on the benefits of asset based lines of credit in Canada
The facility is generally totally focused on what we generally refer to as working capital, or more specifically, short term working capital. The largest part of the asset based financing facility tends to be your firms accounts receivable, but quite frankly in our experience it can be inventory also, as well as a component of equipment even purchase orders .
Most business owners are surprised when we tell them they are in a position to quite accurately calculate their own amount of total credit facility. That is because there are some very accepted rules as to how much is advanced and on what. By now the business owner or financial manager of a Canadian business understands that this type of financing is an alternative to a Chartered bank line of credit. The facility ‘ in general ‘ works in the same way , but there are some major difference in setting up the facility and in the effects , or rather lack of effects it has on your business .
Let’s clarify. If your business has a Chartered bank line of credit there are three things that facility has that don’t apply to an asset based lending facility. They are as follows:
A facility cap or maximum
Loan covenants and ratios
Additional collateral often required, with heavy emphasis on owner guarantees
Asset based credit facilities, also called ‘ABL’’s” are generally able to increase to the same extent that your firm can increase its receivables and inventory. The bottom line is that you are not constrained to grow!
There are little or no covenants or ratio requirements in an asset based lending facility, it’s totally based on the amount of assets you have
In general the assets financed are the only assets secured
One of few similarities of an asset based credit agreement is that, similar to a bank facility, receivables under 90 days are the only receivables that are financed.
So let’s just focus on the receivables portion of our asset based line of credit for a moment. A quick example would be:
Your firm has 500,000.00 in accounts receivable - Under your facility you can borrow up to 80 or 90% of that amount at any given time. Naturally the line fluctuates daily, (similar to a bank facility) because you are receiving payments every day and you are invoicing every day.
We can say as an across the board statement that asset based lines of credit are less restrictive than bank lines, they also cost more. Customers we meet with regularly though are in a position where they frankly don’t qualify for traditional bank financing – this could be for a variety of reasons. (A net loss in the current year, a high debt/equity ratio, can’t meet bank interest coverage requirements, etc.)
So yes, your firm has a higher cost of borrowing – asset based credit facilities in Canada have a wide spectrum of pricing, from 8-9% per annum, or in some cases 1-2% / month . But if your firm needs financing for growth, or even survival, and you have no access to traditional bank or term credit, asset based financing in many cases will save your company, give you almost unlimited access to working capital based on your sales, and at the same time position you for the next level of growth or a return to traditional financing. Many customers we have dealt with actually decide not to return to traditional bank financing once they realize and calculate the benefits of an asset based line of credit.
In summary, investigate asset based lines of credit via an experienced and credible advisor in this area of Canadian financing. Weigh the benefits and advantages and you may find this is the business financing solution you never heard of but works for you!
7 Park Avenue Financial :
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Office = 905 829 2653
Email = sprokop@7parkavenuefinancial.com
Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations .
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Stan Prokop
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