The business credit line in Canada. Clients we meet to can visualize it... they sometimes just can't access it - it's almost as if it’s an ancient art they haven’t quite perfected. As a result... cash flow and working capital challenges. Does it have to be that way? We think you know the answer already... it doesn't and here's why. Let's examine the ABL bank alternative.
Clients at 7 Park Avenue Financial find asset based lending is the perfect credit line when traditional financing is not a good alternative or an alternative at all! This type of business credit line has some cost benefits to is, as well as having a large amount of flexibility. Additionally you self manage the facility to a large degree with no intrusion required into your suppliers or clients. Many companies have a measure of seasonality to the business, so ABL, ' asset based lending ' addresses that very well as limits are quite flexible and can be adjusted to your needs.
Alternative funding via ABL asset based loans is clearly becoming the bank alternative and is widely used in the United States where this type of business financing originated. Focusing on the liquidity of key current and fixed assets these credit facilities have become the business finance alternative for borrowing for operating facilities. Some business owners will be surprised to know that ABL LENDERS can also be banks, as these unites operate as smaller boutique financing lenders within the traditional banking system, both in the U.S. and certainly in Canada.
We can make the business case that ABL Lenders are more comfortable in lending to many firms when banks either won't or cannot simply because they are experts in collateral value and have the ability to adjust the line against the credit lines they have set. One expert has called it ' real-time ' lending!
Business credit lines via ABL finance lending are attractive to Canadian businesses seeking financing for a variety of reasons in almost any economic time, pandemics included. In fact, asset based lenders for the most part continue to fund business which has significant value to firms looking to access cash flow or to achieve more financing than they could otherwise achieve through traditional sources. Even companies that are restructuring are able to source business credit line arrangements based on assets.
The ability to have a source of credit that is creative and flexible will almost always provide greater liquidity to your company, with less reliance on the banking covenant based lending championed by Canadian banks. That's the business lending that 7 Park Avenue Financial clients tell us they want. The trade-off to the typically higher cost of an ABL line is increased access to capital, notwithstanding your obligation to be in a position to report more regularly on asset values such as a/r and inventory, which most firms should be looking at anyway, right?
For this type of business credit line to be successful your company has to have the ability to create the usual management reports that highlight your asset accounts so that typically would be aged receivables, payables, and inventory lists. That allows you to successfully manage and access this creative way of financing your business.
Part of the challenge of those business credit lines is simply the fact that the majority of business owners and financial managers are fairly focused only on one solution - which is of course the commercial bank line of credit.
That is definitely one solution. The other (What? There's Another?!) is a non bank asset based credit line facility. Both facilities monetize your receivables and inventory... the difference then? ... The Asset based credit line often monetizes and equipment and real estate also; as part of your overall borrowing power. The big difference is the real key point here - lending is more generous in a non bank asset credit line. Receivables and inventory are margined more aggressively, and in bank scenarios rarely are your unencumbered fixed assets monetized into credit lines.
Why Should Your Company Consider An Asset Based Lending Business Credit Line?
Most small and medium-sized companies in Canada recognize that Canadian banks cannot meet all their borrowing needs. This might be for a variety of reasons which include profitability, an industry being ' out of favour ', or the actual financial results of a company which might not have the balance sheets and income statements they require to lend against, given the banks are both regulated and somewhat risk-averse relative their fiduciary responsibility to shareholders and depositors. It is a true irony of Canadian business that banks generally do not like a firm growing, for example at 25% per year, which then requires constant working capital needs.
Because non bank business credit lines have your borrowing against sales and assets there is not the concern of higher growth, which is in fact: Encouraged ! More cash availability than standard bank offerings is the cornerstone of borrowing against your sales and core assets. It's not about the financials, it's about sales/assets.
As we have noted the thousands of companies using asset based credit lines in Canada use it for different purposes. Some companies might be early stage, some might be in high growth mode, while other companies that are in fact bank worthy utilize it because rates in the case of high quality companies can be very competitive to low bank rates. Naturally, the current low rate environment for business borrowing in Canada is a plus for all borrowers.
Some firms that are experienced a level of distress might be using the facility simply based on the amount of their assets that still qualify for borrowing under a credit facility. These companies might find themselves in the ' Special Loan ' category of the bank. This can be a stressful transitionary period on the road to business financial recovery - asset based financing works very well to correct the financing and allows a company to get back on track.
At this point customers would already be reporting on their financial more often and assessing a workout plan that might get them back into traditional banking, or on the other hand, transition their senior lending facilities into asset based business credit lines. They might still well be 100% financeable with having to raise additional equity or outside collateral. It allows troubled firms to protect the company with a workout refinancing that makes sense, often paying out the bank in the process.
The options and financing flexibility alternative your firm now has allows you to successfully operate on a daily basis. As your revenues grow your receivables and inventory will always fluctuate relative to business grwoth and how you manage your current assets. Those daily changes drive the ABL credit line. Many firms that are in high growth / hyper-growth find they cannot satisfy traditional bank requirements, with the asset based facility focusing on your sales and assets, not financial statement ratios within your balance sheet or income statement.
By allowing your financing partner to properly assess asset values and growth potential, allows you to borrow effectively on the true market value of your sales and assets. As an example receivables are typically financed at 90% and inventories are margined based on the type of inventory your firm has. It should be noted that many industries are different when it comes to quality and type of assets, your facility will resemble the industry norms around types of assets. Both banks and asset based lending firms recognize specific aspects of your industry.
The two main sources of borrowing in this type of credit line are your receivables and inventory. They are the main drivers that determine the amount of your facility but there can easily be a fixed asset/equipment component to the borrowing for all the hard assets your firm owns.
The true strength of this type of revolving credit is that it can grow as your sales revenues and other assets grow - they in fact determine the amount of the credit line. There are some very simple formulas around how these assets are margined for lending. As your sales grow and you collect your receivables the ABL business credit line fluctuates, allowing you to borrow less .. and finance less, or, more importantly, borrow more if you need it!
We have referenced those other assets you can borrow against within your credit facility, with those two asset categories being equipment and, if applicable, real estate. Those amounts have a value assigned to them at the start of your facility working, which might include an outside appraisal to determine maximum borrowing power. Naturally these two categories of assets are typically not in Canadian chartered bank business credit facilities, so they highlight the benefit and flexibility of revolving ABL facilities.
Many companies that are unable to satisfy bank covenants, ratios, outside collateral etc find they can easily double their borrowing power using the high borrowing leverage of a/r, inventory, and equipment/real estate. That becomes the ABL business credit difference, a business finance solution that is tailored to your company's specific needs. Your credit line availability is calculated on an ongoing basis, allowing you to plan for your business cash flow needs - at the end of the day is ' quicker borrowing '.
Accounts receivable plays a major role in the asset based business credit line model. Your financing firm will focus on the type of receivables you have, average size, major account concentrations with any one customer, account contras with suppliers that might be in place, as well as your a/r days sales outstanding turnover and bad debt.
Businesses should also be prepared to demonstrate that CRA and provincial HST is not in default, but borrowers in default will be happy to know that these type of debts are often paid out of the first advance in ABL business credit lines by asset based lenders.
The use of your business credit line in Canada, whether it's a bank line of non bank in nature can be viewed as a ' replenishment ' of cash from funds your firm has invested in working capital and fixed asset accounts. That need becomes even more acute when your business is growing. The simple reason - you've got more sales tied up in still uncollected receivables, inventory, and the need for some fixed asset or technology replacement here and there!
Whether you disagree or not, all banks have very specific rules in Canada around business credit lines. Bank credit lines for start-ups or very new businesses in Canada essentially... Don't exist! That’s because of our strong banking system in Canada places a large emphasis on historical strong financial history, solid profits, and squeaky clean balance sheets. So while corporate credit risk at banks for the middle market companies in Canada at banks focuses on profit, cash flow generation and shareholder equity ABL has a focus on asset turnover and turning business assets into cash. We can say that the shorter-term operating cycle of a business is what drives asset based loans.
Business owners if not familiar with The Cash Conversion Cycle would benefit from checking it out.It is really tied into the concept of cash flowing your working capital assets and how turnover affects liquidity and the need for more outside business credit. The continual revolving ability of a credit line works without your firm being tied to any type of installment and loan debt. Here the power of ABL kicks in because as sales revenues grow cash flow via the abl line increases and receivables and inventory are liquidated.
If your firm is offside on banking requirements it's still exceptionally very safe to say that you qualify for an asset based credit line from a non bank commercial finance firm. And that higher leverage and borrowing power is still there of course - it’s another major appeal of the ABL (Asset based Line)
By the way, if you are in fact 'off side' with your bank on their key metrics, ratios, covenants, and collateral issues the ABL line rides to the rescue more time than you think. So while your business may have temporarily stumbled the non bank asset based line of credit steps in to keep cash flowing and working capital working! Their are different credit types and credit risk and the asset finance underwriter is well positioned to take the time to understand your firms situation.
It's not pure roses and sunshine all the time with your business credit line. You should always be prepared to supply proper reporting and updates on your business assets, even more so with ABL type facilities which in some cases might even require due diligence visits, appraisals, etc.
There are several supplementary / complementary solutions to the asset based credit line - These can be used with or separate to your business credit line facilities in asset based finance .
One of these is Purchase Order Financing. This solution becomes extremely valuable if your firm is in a position to receive large orders or contracts that in the normal course of your business you would be unable to finance due to the working capital component of the transaction, namely having to pay suppliers, facilitate your order or service, and then wait for the collection of your receivable related to that order/contract. The financing works as follows - your supplier is paid directly by your P O financing firm asset based lender. The receivable that is attached to that order or contract can then be financed under your already in place asset based lending facility, or in some cases a separate P O Finance arrangement if you do not have either a bank credit line or an asset based line in place. Purchase order financing rates are higher and your firm must have good gross margins to absorb the 2-4% fee on the order but can be invaluable to firms looking to grow larger with access to traditional finance,
If there is a bottom line here in corporate finance its that the business owner/financial manager needs to understand both the alternative to credit lines, as well as the nuts and bolts of how and why they work best. That will lead to a better capital structure and a more guaranteed level of long term success.
If you want to consider revolving credit lines based solely on collateral value or new and replacement alternative credit facilities seek out and speak to a trusted, credible, and experienced Canadian business financing advisor. Your want a finance partner/advisor that has a solid knowledge of the ABL lending market and has the capabilities and expertise and track record of finance success to facilitate business credit line needs.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
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. He is an experienced
business financing consultant.
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 financing 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.
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