YOUR COMPANY IS LOOKING FOR A BUSINESS CREDIT LINE!
CHOICES IN BUSINESS LINES OF CREDIT
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Financing & Cash flow are the biggest issues facing businesses today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Phone = 416 319 5769
Fuel Your Business Ambitions: How a Line of Credit Can Transform Your Company
The Business credit line in Canada. Most clients we initially meet tend to say 'What are our chances ' when in fact we maintain they should be asking 'What are our choices ‘! Let's dig in.
INTRODUCTION
Business lines of credit are a critical financial tool for a business - providing flexible access to cash when funds are needed - allowing a company to manage cash flow and cover short-term day-to-day expenses as well as allowing a company to assess growth opportunities. It's important to understand the advantages of business credit lines and how they are different from other forms of financing such as term loan structures, as well as the types of business lines of credit, their advantages and disadvantages, and how they differ from traditional business term loans.
WHAT ARE THE TYPES OF BUSINESS LINES OF CREDIT
There are two types of credit lines - Secured lines of credit and Unsecured business credit lines
Secured Business Line of Credit - The secured business credit line requires collateral, typically specific assets in the business such as accounts receivable, and inventory - Asset-based lenders combine fixed assets to further increase the size of the credit line. Business lenders take this collateral as security for the revolving line of credit facility.
Unsecured Business Line of Credit - The unsecured business credit line is typically offered by a bank as opposed to a non-bank asset-based lender- Banks take a general lien on the business as a whole, typically by a loan document known as a GSA/General Security Agreement. It does not specify specific assets but places an overall blanket lien on the business- Personal guarantees are also required in this type of facility, and businesses applying for unsecured business lines should be able to demonstrate good personal credit history of the owners as well as healthy financial statements. Interest rates on unsecured credit lines are typically very attractive and are often the lowest cost of borrowing.
HOW TO UTILIZE THE BUSINESS LINE OF CREDIT
There are numerous ideal Scenarios for Utilizing a Business Line of Credit - They include:
Addressing seasonal or cyclical cash flow gaps in a business or industry
Financing sales growth via new sales of marketing campaigns required additional short-term
overhead expenses
Seasonal Businesses Seasonal businesses can use a line of credit to cover overhead expenses
during the off-season or bridge cash flow gaps between seasons
Covering unexpected short-term expenses as a safety net in cash flow management, ability to meet
payrolls, etc
Growth - Businesses can focus on growth opportunities around new products or services or markets
without making a long-term capital commitment
WHAT ASSETS ARE FINANCED IN A CREDIT LINE
The essence of what we're talking about is the type of borrowing in a business loan that's associated with the monetization of assets via a line of credit for a small business. That's current assets by the way, which typically are essentially your A/R and inventory. We'll also discuss monetizing equipment and even real estate in this facility! Access to revolving credit facilities is a valuable tool for any business, large or small.
REVOLVING CREDIT FACILITIES ARE SHORT-TERM IN NATURE
Business credit lines should be focused on short-term borrowing. Longer terms are associated with term loans for equipment, mortgages on the business property, etc. Naturally, while a term loan expires when you make that final payment business credit facilities are there and available to your firm based on your ongoing level of receivables and inventory.
TERM LOANS ARE FOR LONG-TERM ASSETS
You will of course want to match the amortization of the term loan with the useful life of the asset. Let's use computers as an example - A typical lease term might be 3 years, and you would want to retire the lease or loan by that time as it is typically time to upgrade technology. But we digress..!
ASSESSING THE 2 CHOICES IN A BUSINESS LINE OF CREDIT?
And what about those ' CHOICES ' we talked about? It comes down to essentially two solutions for the business revolving line of credit:
1. The Canadian chartered bank solution
2. The non-bank asset-based business credit line - it’s typically called an ' ABL ' by the industry
WHY THE RISE OF NON-BANK FINANCING
Years ago any non-bank financing was viewed as an ' alternative ‘, in some cases, there was a perception it was the financing of last resort. Absolutely not the case today as the world of business credit changed dramatically, more so after the 2008 worldwide recession, where many firms, including banks, went under. That new form of financing, the ABL business credit line all of a sudden seems available and cost-effective in most cases.
KEY ASPECTS OF THE BANK CREDIT FACILITY
Bank business credit agreements or those of business credit unions for large companies as well as small businesses tend to be what is known as ' covenant based '. Even if the business owner and financial managers consider the company to be in growth mode it might in many cases not be able to meet some basic debt to equity and cash flow rations that are required by Canadian chartered banks in the terms and conditions of their loan agreements.
THE KEY DIFFERENCE BETWEEN BANK CREDIT LINES AND ASSET-BASED LENDING FACILITIES
Bank credit lines typically margin just A/R and receivables, and facilities are at a fixed or variable rate benchmarked against the current prime rate.
In the case of an Asset-based business credit facility the borrowing allows you to borrow the market value of the lump sum of all your assets - so that might be a/r, inventory, tax credits, and equipment.
Any unpledged asset becomes financeable. While there is typically a ' credit limit ' in bank facilities ABL lines are more flexible and can increase as your sales and assets grow, pretty well automatically. The ability to get approved for an ABL loan also is typically a much shorter time cycle than more traditional financing through the application process.
IS THERE A DISADVANTAGE TO NON-BANK OPERATING LINES OF CREDIT?
Recently we were at a client and the CEO asked a very basic question - ' What then is the downside of ABL ‘. The answer? Other than a typically higher cost such as the interest rate on the facility the benefits are:
No outside collateral required
Higher borrowing power,
Unlimited growth - it’s not a capped credit line per se. While the credit history of your business is important, the focus nevertheless is on ... Business assets & sales!
If we had to state one ' downside ' it might be the fact that you are required to report more regularly on your asset lists. In many cases that made most of our clients better managers of their business.
Having a good credit line in place allows companies to avoid higher cost interest charges for short-term working capital loans, merchant advances, business credit cards, etc - Those latter 3 work but are not optimal for day-to-day funding of your operations and also demand a focus on the credit score/credit rating of the business owner/owners.
The business owner must balance the cost of capital versus access to sorely needed capital to run and grow the business. Important to know is the fact that of course you only pay interest on the amount of the facility you are using, as that amount will fluctuate depending on the inflows and outflows of cash in your business - every company has a different operating cycle.
Bank business credit is always going to be low-cost and flexible if your firm meets traditional criteria. When it doesn’t the business owner should know that he or she has another choice, the ABL line. And by the way, many clients often try ABL for a year or so and then are faced with the decision that they are eligible to be ' bankable ' in the traditional sense.
WHAT IS THE DIFFERENCE BETWEEN A LINE OF CREDIT VS. A TERM LOAN
Term loans and lines of credit are 2 different types of financing - for term loans banks and commercial finance companies and asset-based lenders focus on the current financial health of the business - term loans provide a fixed lump sum installment of capital with periodic payments structured as repayment of the loan
Business credit lines are revolving facilities that allow companies to draw funds as they need them and they pay interest only on the funds that are used under the facility - That is why credit lines are suited to general working capital and cash flow needs giving business flexibility of when to borrow for specific purchases.
CONCLUSION - REVOLUTIONIZE YOUR BUSINESS CASH FLOW WITH THE POWER OF A BUSINESS LINE OF CREDIT
Business credit line facilities give a business the flexibility to manage cash flow needs and fund day-to-day operations - Business owners must assess what type of credit facility meets their specific needs that will allow the company the financial flexibility it needs in different market conditions in today's competitive landscape.
Bottom line. You have a choice in your business credit needs. Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor with a credible track record who can help you facilitate the business credit line you need.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is a business credit line?
A small business line of credit is a flexible business financing option that provides established businesses with access to a predetermined amount of capital under a credit limit, the facility is used by the business as needed for various short-term financial needs. Unlike term loans, lines of credit allow businesses to borrow, repay, and borrow again (similar to a business credit card ) under the revolving nature of the credit lines, up to the approved credit limit. The company does not have to continually reapply for business credit under this type of financing tool. An unsecured line is often offered by banks to established businesses. A monthly or annual fee may apply to a credit facility.
How long do you need to be in business to get a line of credit?
The length of time a business needs to be in operation to qualify for a line of credit varies depending on the individual lender and the requirements around the size of the facility. Typically businesses that have been operating for at least two years are eligible for a bank or credit union facility, as it demonstrates stability and a track record of business success. However, some lenders such as asset-based lenders may offer lines of credit to newer businesses, depending on their financial performance and other factors around collateral and guarantees.
Is personal credit checked for a business line of credit?
Yes, personal credit is often checked when applying for a business line of credit. Many lenders consider the personal credit score of the business owner or primary applicant as an indicator of creditworthiness and financial responsibility. While having a strong business credit profile is essential, a good personal credit score can also help increase the chances of being approved for a line of credit and secure better terms. Asset-based lenders place less emphasis if any at all on personal credit history, but banks place a high level of emphasis on the credit history and net worth of the business owner in assessing a higher credit limit. Online lenders offering credit facilities also focus on the business owner's credit score.
Does a business line of credit affect credit score?
A business line of credit can affect both personal and business credit scores, depending on how the credit line is managed and the nature of the personal guarantee. If the business makes timely payments and maintains reasonable balances that fluctuate in the facility, relative to the credit limit, it has a positive impact on credit scores. Late payments, high balances, or defaults can negatively affect credit scores. It is essential for businesses to build business credit responsibly to maintain a strong business credit profile. The minimum credit score required by most institutions is 650.
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