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Business credit facilities in Canada increase your firm’s ability to access the cash flow and working capital you need to run and grow your business. At the same time, the challenge of accessing these revolving loans has many firms feeling as if they are temporarily ' off the grid ' when it comes to business financing needs. Let's dig in.
Properly structured revolving loans allow your business to access credit for day to day operating facilities. In some ways they are the ultimate in flexible financing given how they are repaid, and ' revolve ', allowing you to constantly ' re-borrow ' to meet cash flow needs. It is critical to not confuse an operating line of credit with term loans, which have fixed repayment, typically on a monthly basis for anywhere from two to 5 years most often.
Interest rates are a key consideration in a revolving credit facility and rates are typically not fixed when a bank facility is in place. Alternative lenders who offer non-bank business lines of credit typically do not utilize variable rates for their facilities. At the end of the day both Canadian bank and Non-Bank lenders provide solutions that allow you to fund and replenish working capital for ongoing operations and growth. The non-bank lender will charge more for their facilities but in most cases the amount of credit they provide to your firm would typically not be available from a bank.
WHAT TYPE OF BUSINESS CREDIT LINE IS BEST FOR YOUR FIRM?
It is important to distinguish between secured Business credit facilities as opposed to unsecured lines of credit. Typically banks and Asset Based lenders will offer a facility that is secured by the assets of the business, as well as a focus on the firm's ability to generate sales. The current assets of the firm, typically cash on hand, accounts receivable, and inventory are the main security for the majority of facilities. External collateral will often be secured under the same facility, and that will be fixed assets and real estate if applicable.
Typically the 'ABL ' ( Asset Based Lender) will offer a larger facility as their ability to understand and work with your asset based is a key differentiator in non-bank lending. They will almost always margin receivables and inventory to a larger extent than Canadian chartered banks. Their focus on the value of the assets is very different to bank lending which has a larger focus on operating cash flows, profits, balance sheet ratios, external guarantees of owners, etc.
Many facilities these days are offered under the term ' Working Captial Loans '. These facilities are in effect short term loans based almost solely on the sales of your firm. They are not tied to margin formulas around a/r and inventory, instead, loans are made based on the annual sales revenue of the business. Loans typically are based on a formula of 15-20 percent of your annual sales and are paid back on a daily, weekly, or monthly basis, specifically geared to your cash inflows.
These loans are quite expensive, and around out of the MERCHANT ADVANCE industry that provided credit to retailers who to don't sell in the B2B/Business to Business marketplace. No collateral is taken on these loans, and they often rank behind any of your other secured creditors or senior lenders . The personal credit history of the owner is a key discussion point in the approval process. These ' unsecured' facilities are not really a line of credit for businesses in the true sense of the word.
TERM LOAN OR BUSINESS LINE OF CREDIT? WHAT TYPE OF BUSINESS CREDIT SOLUTION SUITS YOUR FIRM?
We've shown the differentiation of a business revolving credit facility versus short term working capital loans. The other item to consider is whether a term loan of a revolver facility is best for your firm. Term loans are typically cash loans based on the historical cash flow of the business. Loans are typically 2-5 years in length and provide a permanent cash flow injection into the business.
Qualifying for a term loan is significantly more different than a business credit line , given the credit line is focused more on the assets of the business, both current and fixed, while term loans are repaid typically monthly, over a defined period of time, based on cash flow. It would not be unusual that a business line of credit would be repaid and used many times over during the time that a term loan would be in place. So think of the credit revolver as your short term operating needs, accessing funds based on sales and asset turnover.
When firms are ' off the grid ' they are financing themselves successfully - they are business finance ' self-sufficient '. What then are the qualifications your company needs to access business credit lines, and are there choices?
Revolving loans always come down to borrower assets. This type of loan is either offered by a Canadian chartered bank, as well as independent commercial finance companies.
BANK LOANS FOR BUSINESSES
Canadian banks offering a revolving facility are focused on a credit limit that will fluctuate according to the borrowing limit. Paying that facility down regularly as you generate sales and collect receivables is key to a bank type facility. For a commercial line of credit you are only paying for what you have drawn down on the facility and interest costs decrease with less use of the facility. This allows your business to capitalize on sales opportunities.
Bank credit lines usually are margined against only inventory and receivables and margins are more conservative than asset-based lending facilities. Banks structure lines of credit as 'demand' loans callable at any time. Normally the bank facility is shown under current liabilities as typical credit lines are reviewed annually with the current liability limit of 12 months.
A bank line of credit approval has requirements that are very clearly defined, as businesses must demonstrate shareholder financial commitment and growing sales and profits, as well as the ability to produce properly qualified financials and more often than not a business plan or cash flow projection.
The two asset categories primarily driving your ability to access a business credit line are accounts receivable and inventories. While these two ' current assets' on your balance sheet can be financed separately they are best combined in either a bank credit line or commercial asset based line of credit.
Understanding the approval process is key to success in business credit lines. Factors that a bank or commercial lender will consider will be the size of your facility, the overall credit profile of the business and your ability to generate cash flow from sales to ensure the facility revolves properly. While banks might place emphasis on personal credit scores this is less so when dealing with a non-bank asset based lender .
How Does The Revolving Line Of Credit Facility Work?
The use of the business line of credit is tied to your need for funding your daily operations as they relate to working capital and cash flow, In any business sales fluctuate for a variety of reasons and expenses will not always match incoming and outgoing cash flows. The ability to draw on your line of credit facility and then replenish it as receivables are collected is the key to credit availability. Typically banks will review the facility annually, sometimes more often and ongoing credit will be based on sales and the circumstances around your financial performance as they relate to profits and cash flow generation.
Companies can in a way almost pre-determine their qualified credit line borrowing amount. That's because both the banks and commercial finance firms lend between 75-90% against receivables and specific percentages against inventory. While not all companies carry inventory these days it's important to note for those that do the actual quality and marketability of the inventory play a key role in assigning a borrowing percentage.
Companies who do best in accessing business credit lines from banks or finance companies typically demonstrate that they can ' turn over' assets - specifically collect their receivables and generate inventory turns. That type of positive operating performance distinguishes many firms who successfully can access revolving business credit facilities.
Rates and financing costs associated with revolving loans vary. While the lowest cost and flexibility is associated with banks the non-bank commercial asset based financing industry almost always address the needs of borrowers with assets, albeit at a higher cost.
In today’s competitive financing market many ' niche ' subsets of business credit facilities exist. These potential alternate solutions include:
P O Financing
Tax Credit Finance
Letters of Credit
Royalty Financing
Business owners and financial managers should review the need for a credit line facility as the requirement to bridge the cash flow gap in your cash conversion cycle - helping you fund the working capital needed as a dollar flows through your business in different timelines.
If your firm wants to get ' back on the grid ' when it comes to commercial borrowing needs seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help your firm identify best financing solutions.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
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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.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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