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Business financing in Canada often ' revolves ' around the need to include revolving loans in your business finance mix. How does this type of credit facility work?
WHAT IS A REVOLVING LOAN FACILITY
Revolving loans are a type of business credit provided by banks and other commercial lenders that allow a business to draw down on financing and continue repaying and drawing down based on cash inflows from receivables, etc. These are known as ' facilities ' in that it is a type of service such as a defined line of credit that revolves.
WHY CONSIDER A REVOLVING LOAN?
Revolving business credit lines are a key tool in business finance and should be a part of your firm's overall business finance strategy. These ' revolvers' allow you to meet day to day operating needs and plan for anticipated cash flows based on sales and cash collection projections. In more mature companies that are established, they are a part of the overall capital structure of the business and are complemented by other long term financings such as term loans, leases, etc.HOW DO REVOLVING CREDIT LINES WORK?
Revolving business line of credit loans allows a company to access a defined amount, typically called a ' credit limit. Normal uses of this type of credit facility are for buying inventory from suppliers, maintenance and repairs, funding marketing, and addressing gaps in either the carrying of larger amounts of a/r and inventory or seasonal requirements based on the industry in question. A Typical revolving credit line is secured by the assets of the business - with the most common security being accounts receivable and inventory. In the case of asset-based lenders, they allow fixed assets that are owned by the company to be monetized within the same facility. Typically chartered banks do not include fixed assets as part of the' borrowing certificate ' that banks calculate monthly based on your levels of a/r and inventories.
In some cases, commercial lenders may utilize the concept of an Unsecured line of credit - which provides a certain level of borrowing based on a general security agreement - ' GSA ' on all the assets of the company. Typically personal guarantees of the business owners play a key role in unsecured credit.
The key aspect of revolving business lines of credit is clearly ' flexibility'. The continual drawdown and repaying of the facility creates a ' pay as you go ' scenario as businesses both use and consume cash as they run and grow their business. That's good news!
The key differentiator in business credit facilities that revolve is that it's not a term loan, via that continual drawing down and repayment we just referenced. However, like term loans, they do often come with ' limits’, but more importantly they vary with your assets.
Here an important distinction occurs. When it comes to bank credit lines these pre-imposed limits are often fixed and relate directly to typically receivables and inventory. However, if you chose an asset-based non-bank line of credit via a commercial finance firm that borrowing base typically has no upward limit if you in fact have growing sales and commensurate assets.
That monthly ' borrowing base' that banks and asset finance companies utilize comes with some pretty basic formulas. In the case of banks, utilizing receivables as an example the borrowing base is 75% of your A/R; asset-based lenders typically lend against 90%. (In both cases receivables must be under 90 days old). Those calculations are a key part of a revolving credit facility agreement, and establish your ' borrowing base ' which the lender documents regularly with a 'borrowing base certificate '
CALCULATING THE BORROWING BASED ON REVOLVING LOANS
Asset-based lenders and banks determine your borrowing power by ' margining' a discount factor against a specific asset based - most commonly receivables and inventory. As an example, if an asset-based lender allows a discount factor of 90% on receivables, which is common, a 1 million dollar receivable portfolio can represent a revolving loan of 900,000.00. The same type of calculation applies to inventory, and asset lenders also allow your unencumbered fixed assets to be margined in the same manner! Banks typically have revolving loan facility agreements around a/r and inventory only, with possible exceptions.
Various nuances might exist in your A/R margining relating typically to issues such as government receivables, high balance concentrations with one customer, etc.
Revolving loans from banks come with various covenants and restrictions. In general, we can make the statement there is a lot less restriction from non-bank asset lenders on this issue.
What then are some of the key issues around pricing revolving loan credit facilities? No one disputes the fact that Cdn chartered banks offer the lowest cost business financing rates - if you can satisfy the risk profile desired by the banks. That risk profile typically includes growing sales, profits, clean balance sheets and demonstrable cash flows.
Interest rate pricing on non-bank asset financings varies proportionately to credit risk. The good news here is simply that almost any firm with sales and assets is eligible for asset-based credit lines. So it’s overall credit risk and the amount and type of debt a company has is the driver behind asset-based revolving loans and other alternative working capital solutions.
TERM LOANS VERSUS REVOLVING LOANS
Commercial lenders have a clear separation around term loans versus revolving loans/credit lines. Credit criteria for a term loan involve a firm's total credit profile with a focus on clean balance sheets, profits, and the ability to generate cash flow as repayment of the loan over several years.
Business financing when it comes to credit lines is all about operating performance. Credit lines don't require fixed payment terms, they ' revolve ' and we can make the case they come with a maximum amount of financial flexibility. A bank or an alternative lender offering non-bank lines of credit ultimately like the facility to revolve and at some point be very significantly reduced before it is drawn down again based on the needs of the business. When it comes to revolving loans from either banks or an ABL lender it's your revenue and operating performance that allows you to access short term operating capital.
CONCLUSION
Revolving loans and bank or asset-based lines of credit provide a safety net for the business as the credit facility allows you to draw down on cash flow needs over time as your company generates sales. Interest rates are often higher when accessing business capital via an alternative lender but these ' ABL ' lenders provide capital when a company can't access traditional bank financing, particularly for small business and medium-sized companies who can't access public markets.
If you're on the search for the right type of credit facility for your firm your search will almost always end well by seeking out a trusted, credible and experienced Canadian business financing advisor who can assist you with your credit facility needs.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Click Here For 7 PARK AVENUE FINANCIAL website !
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.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2020
Business Financing In Canada: Your Search For Revolving Loans & The Right Credit Facility Just Ended
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