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Business credit line operating loan arrangements are often sought by companies that are new, established, or growing (that pretty well covers all the scenarios!!) their businesses. The operating loan is often the heart of a company's financial arrangements yet many business owners/financial managers don't really understand all their options for a source of credit in this area of Canadian business financing.
And yes, there are two kinds of business line of credit arrangements your company can undertake, and time has proven there's room enough in town for both of them, but which suits your firm. Let's dig in.
About those two arrangements. There is of course traditional Canadian bank operating lines of credit. These come with typically a maximum ' credit limit' that you can borrow up to based on historical benchmarks of cash flow, sales levels, and quality of receivables and inventory. Banks of course prefer receivables to inventory as they are more liquid and manageable - and quite frankly they aren't in a position to do much with inventory if something goes awry in your business arrangement with the bank.
The key benefit of a bank operating loan and commercial line of credit from a traditional lender is that it is short term in nature and provides maximum flexibility around business borrowing based on the pre-set credit limit designating the amount of funds your firm can borrow at any given time.
Canadian chartered banks offer a revolving line of credit in order to allow your company to bridge payables as receivables are collected. Most Canadian business owners will immediately recognize that more and more clients are delaying payments in order to enhance their own cash flow. The ability to delay payables is a method by which any firm can increase cash versus taking on a business loan.
Bank facilities are priced based upon interest charges on funds used via the ' operating loan ' process. Naturally, balances are paid down as cash inflows are received by the company. When borrowing from a bank a company must satisfy terms and covenants within the approval. Banks view business credit lines as ' short term ' commercial borrowing, and a bank will typically constantly revisit the approval to evaluate ongoing risk - this is part of the regulatory and fiduciary responsibility of Chartered banks in Canada.
Bank facilities are secured, with the most common security being inventory and accounts receivable. Banks consider these types of facilities ' demand loans ', allowing the bank at any time to ' call ' the loan and, you guessed it .. ' demand ' payment in full. Banks register their security on these loans via the appropriate lien filings in the jurisdiction where the business operates. These ' secured loans ' are a large part of bank lending in the Canadian economy, for businesses both small and large, public and private.
KEY POINT - Although Canadian banks secure the operating line of credit via short term current assets ( a/r and inventory ) it is important to understand that the bank will almost always take collateral on all the assets of the company, as they would enforce security by liquidating both short term and long term assets. Those long term assets typically will be equipment and, if applicable, real estate.
From an accounting point of view, the bank line is designated as a liability on the company financials, typically shown as a ' current liability ' given the bank views this as a loan that revolves within a one-year business cycle.
Many businesses in the Canadian economy operate with heavy seasonality being a part of their revenue recognition model. Business lines of credit are a great ' gap bridging ' when seasonality occurs in your company. As a company's CASH CONVERSION CYCLE increases more dependence will be placed on a line of credit for business.
Having that access to bank credit should best be viewed as a strategic tool in your financing of day to day operations. Having the credit facility in place lets you know you have access to business capital at future points in time. Business owners and financial managers should view the ' operating line ' financing of their firm as a part of their overall financing structure, as the company will typically require long term debt in some form, whether that be term loans or equipment financing.
Unsecured Credit Line For Business
There is an important distinction between ' term loans ' and ' credit lines '. Term loans place major emphasis on the overall credit profile of the borrower - the focus will be good balance sheets, profits, and reasonable owner equity compared to the debt load. The 'credit line ' on the other hand focuses on ongoing financial performance and asset turnover.
We can make the case that the credit decisions and the amount of time it takes to get approvals in each case differ. Also, those term loans or cash flow loans ( also called ' mezzanine loans' ) come with monthly installments and a one time receipt of funds.
The obligation to make those monthly installments is different from the flexibility of the revolving facility that has no fixed payments - although it should be understood that lines of credit are best viewed by the bank when they ' revolve '. In a perfect world, the revolver facility should at some point be paid down in full and then borrowed against on an ongoing basis.
SMALL BUSINESS CREDIT LINE ? CREDIT LINE FOR BUSINESS NEEDS ?
HOW TO GET A BUSINESS CREDIT LINE
INFORMATION REQUIRED FOR BANK CREDIT LINE APPROVAL
At 7 Park Avenue Financial we focus on a complete package for clients looking for traditional bank financing. A typical package would include:
Articles of Incorporation
Financial Statements
Bank Statements
Aged payables/receivables
Inventory List
Cash flow Projection
Business Plan or Executive Summary
Generally, companies in early-stage/pre-revenue situations will have difficulty in establishing lines of credit. Companies not showing a profit or having inexperienced management teams will also be challenged in accessing revolving credit.
KEY POINT - Understanding qualification criteria, timelines, loan costs, and miscellaneous fees are crucial to being successful in obtaining bank credit. Understanding bank requirements around loan covenants, debt to equity ratios, and the proper amount of owner equity contribution in the business is key to successful bank negotiations if an advisor is not used. That debt to equity ratio typically desired by a bank is in the 2 to 1, or 3 to 1 range - implying the bank wants to see the proverbial ' skin in the game ' of owners.
We advise clients to always have a backup plan in place for alternative financing solutions when time is of the essence and financing is critical.
THE ABL NON BANK BUSINESS CREDIT LINE
The other alternative, gaining more traction every day in Canada is the Asset-Based Credit Line. " ABL " )These facilities are offered by commercial finance companies and mirror bank arrangements really only when it comes to how you access funds and how the facility revolves. In almost all other cases differences are a bit more dramatic.
For companies that have a higher debt to equity ratio, or fluctuating profits and cash flow that is erratic at times- For that reason, it is the perfect facility for a business line of credit. The ability of a company to generate working capital by being able to cash flow the assets they have in the business.
At 7 Park Avenue Financial we have found that the ABL solution can assist companies in various categories of financial health - those that require restructuring and turnaround as well firms who require financing significantly more than a bank is willing to provide. That allows firms to grow without being impeded by the covenants and other restrictions a bank might place on a borrower.
Business credit line operating loans give a company the flexibility it needs to manage day to day operations through the ' operating cycle ' of the business - namely the time it takes for a dollar to flow throughout the company from the sale to cash collected. Depending on what industry the company is in that might be a significant amount of time - business experts call it the ' cash conversion cycle '.
Common users of non-bank business credit facilities will often include manufacturers, distributors, retailers, etc although services based companies can also utilize the asset based facility. Outstanding balances of the credit line will fluctuate based on sales revenues and cash needs.
Operating loans via asset-based lending allow a company to borrow a much larger percentage of margin based on the value of the assets. The collateral in the receivables, inventory, and equipment is called a ' borrowing base ' and provides funding on an ongoing basis based on sales revenues and ongoing operations.
In Canada the majority of the banks offer an asset-based business credit line operating loan, but these boutique divisions withing the bank are much smaller and many borrower feel that bank ABL's mirror traditional bank lending - which may or may not be the case in our experience here at 7 Park Avenue Financial. Remember also that banks operate in a highly regulated capacity, while the vast majority of non-bank commercial loan provides in asset-based lending are private firms that are self-regulated. Some ABL lenders in Canada are subsidiaries of foreign corporations wishing to establish a commercial lending base in Canada.
The solid advantage of an operating loan is the fact that you are only using credit when you need to - the facility revolves and interest is only charged on the funds you are using at any given time. Banks tend to structure these facilities as ' demand loans' which means they can be ' called' at any time. Trust us that's not a call you will always want to take!
To effectively access operating loans and business lines of credit of this type you need to ensure you have some key basics nailed down. They include perhaps a business plan or executive summary, but always your historical as well as up to date financials and a cash flow forecast. While asset-based line of credit lenders don't place an overemphasis on the personal credit of owner’s banks insist that the owner demonstrate personal creditworthiness and external assets as backup collateral.
carries.
BENEFITS OF THE ASSET BASED BUSINESS CREDIT LINE OPERATING LOAN
1. Companies take comfort in the fact that they have a steady supply of cash flow based on revenues generated - as revenues grow a company must invest more capital in receivables and inventory which have a time component attached to their conversion to cash
2. Any company that has some level of seasonality or ' bulge ' needs can access liquidity during times of large orders and the necessity to build inventories
3. Rapidly growing firms experiencing ' hyper-growth ' often cannot access traditional bank finance but ABL solutions allow the constant
4. While banks place significant reliance on covenants and operating ratios for financing approval the asset based lender is ' collateral-based ' and instead focuses on regular monitoring of business assets to maximize borrowing power
5. Many asset-based lenders have special niches of expertise in a variety of industries and will frequently customize a borrowing solution outside of the ' credit box ' of a Canadian chartered bank.
6. In some cases, an asset based lender will consider an ' over advance ' of the facility - allowing the company to temporarily borrow beyond the approved limit. A firm's cyclical nature will often be the driver in a request for an over advance - a classic example is when sales are slower but there is a need for inventory build-up due to seasonality. In other cases a borrower might be viewing an opportunity to acquire a large amount of product at special pricing.
At 7 Park Avenue Finacial, we strive to provide a balanced approached to the bank vs non-bank credit line facility debate.
So it's important for ABL borrowers to understand that the cost of business credit lines in the asset based lending environment will almost always be more expensive, and must be factored into the final borrowing decision. Many companies feel that need to constantly update their reporting places some level of burden on the company. Asset based credit lines provide the lender with the ability to control the business cash account when the borrowing base is lower than the approved operating line of credit amount.
Asset credit lines also differ substantially from a bank business loan in that they will almost always lend against your fixed assets as a part of your borrowing line. That's a key difference, especially in companies that are capital intensive.
If you're looking to ensure your search for operating finance and a business credit line operating loan is a boom, and not a bust, seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your operating loan and corporate loan needs.
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
7 Park Avenue Financial/Copyright/2020
