Which type of Credit Facilities Does Your Firm Need?
Information on a business bank credit facility for Canadian firms . Loans and Credit Lines are … different!
A Canadian business bank credit facility. For the majority of Canadian firms chartered bank loans and credit lines are the optimal solution for operating and growth needs. Not every firm qualifies or has access to these ' preferred ' facilities, and for those that don't other financing alternatives, traditional and alternative are certainly available.
But let's focus in on the two types of typical credit facilities that are most sought after by firms needing credit. They are essential term loans and operating lines, also commonly known as ' revolvers '. There are different characteristics and qualities to each one.
Let's explore that ' revolver ' first, aka the ‘operating line of credit '. A bank credit line will almost always have a capped limit. But while they have a defined limit they actually fluctuate, sometimes wildly depending upon the asset levels of your firm. The two most common asset categories within the revolvers ' borrowing base' are accounts receivable and inventory. That of course is why there are those fluctuations - typically your A/R and inventories change, pretty well everyday. You purchase product, you move out product, you invoice clients, clients pay... and on it goes.
So how is that overall credit limit set for the operating line? Two general guidelines for Canadian chartered banks are 75% of receivables up to 90 days old, and a defined percentage of inventories. Here is where things get a bit tricky with the bank as they typically prefer A/R to inventory as collateral.
So far things seem simply, but what you need to address prior to discussing and applying for such a facility are the make up of your a/r. ... by that we mean credit quality of your clients, are they out of country companies or are you a victim of account concentration . If the majority of all or your A/R is focused around one or two major clients this typically becomes a concern to the bank. Even government accounts, as solid as they are from a credit worthy respective (we can only hope!) might actually pose a problem when it comes to borrowing against them, as the government typically doesn't acknowledge receivable assignments. More so they have the right of set off if you have government arrears, known in finance as ' priority payables’
Lets recap the other type of bank facility you might be looking for - it’s the ' TERM LOAN '. It's a fixed loan with typically a fixed rate, and it’s typically a bit higher than a revolver rate. Amortizations tend to be 3-5 years and of course banks prefer that the assets covered in the term loan are typically assets that generate cash or are critical to your business. Banks love cash flow! Memorize that!
Alternatives to term loans for fixed assets come from the Canadian lease financing industry. They are often sought after as the alternative because they don’t usually interfere with your bank borrowings - it’s a common fact that borrowers like to spread the risk around and not have all borrowings with one institution. It's critical to remember that if you borrow for assets within your bank facility that those dollars become a part of your overall credit line and might limit your access to more operating lines of credit.
If you're looking for loans or credit lines in Canada ensure you understand terms, conditions, and ramifications, it’s as simple as that. Speak to a trusted, credible and experienced Canadian business financing advisor for your business credit and borrowing needs.
BUSINESS CREDIT BANKING EXPERTISE
Stan Prokop - founder of 7 Park Avenue Financial –
http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 7 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details :
http://www.7parkavenuefinancial.com/business_bank_credit_facility_loans_credit_lines.html
