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Don’t You Need Bank Financing ? Here’s How it Works !
Information on bank lines of credit . Why business to business financing requires specialized finance knowledge
Canadian businesses use operating lines of credit to finance current assets. Typically those asset categories are predominantly accounts receivable and inventory.
So how do banks facilitate this borrowing arrangement? The typical manner in which this is done is to simply have a document executed that provides the bank with a conditional assignment of accounts receivable, your inventories, and any other current assets.
Canadian bank operating facilities are also called demand loans, because they are typically secured by another document called a GSA, which stands for Genera Security Agreement. This document, as you can imagine, allows the bank to ' call ' your firms loan at any time .It's just common sense that Canadian banks do never with to ' call ' those loans, its simply their protection if and when things go awry.
Clients are sometimes under the mistaken impression that bank lines of credit are good for an indefinite amount of time. Typically however they are renewed annually - which requires a review by your account manager.
If there is one other very common question asked by clients it revolves around how exactly the banks calculate lines of credit. The formula is not as complicated as you think! A typical business to business financing on a Canadian chartered bank line of credit margins your accounts receivable at 75% or their value. Its critical here to note that the bank uses 90 days as a measurement tool - no receivables over 90d days can be margined, or in effect ' borrowed against ‘. Why is that? Again, common sense prevails, in that the bank, (and us too by the way!) makes an assumption that the receivables over 90 days are uncollectible to a certain extent. Your firm might think differently, but that’s how it’s done.
Inventory. Wow! What a different kettle of fish this is! If we had to generalize, but be as specific as we can be for info purposes we can say that in general banks really wrestle with inventory financing. Margining and inventory percentages are very different based on your industry, as well as the composition of your inventory. (Inventory typically comes in three categories: raw materials, work in process, and finished goods)
Typical bank financing of inventory usually never exceeds 50% and at the same time usually has a cap on the facility, meaning that even if your inventory is growing it still might be subject to a maximum of financeability.
The take away here is that banks aren’t in the inventory business, these assets are much harder to liquidate than receivables, and rarely does a lender ' win ' in an inventory liquidation!
So let’s get back to the security the bank takes on bank lines of credit. Do your clients find out about this? In Canada they would normally never be notified unless there is a default by your firm on the line of credit facility. In that case you clients would receive a notification of assignment, in which the bank would direct your clients to pay them directly, reducing the loan of course.
Banks register their security with the appropriate provincial and federal authorities, further protecting their position.
There is a great tendency in Canada to ' blame ' our conservative banks for limiting lending possibilities for commercial business to business financing. (We love our banks by the way).
Consider the reality though, that we entrust them to protect our savings and deposits, and its Canadian business owners and financial mangers that run their businesses into problems.
Clients are encouraged to maintain solid relations and seek out great commercial business bankers. (Not all are great unfortunately). If you're looking for a banking facility that works, for both you and the bank seek to speak to a trusted, credible and experienced Canadian business financing advisor who will assist you in managing your bank as a partner, not an adversary, thereby maximizing your bank line of credit for your firms sales and profit growth.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
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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