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Eliminating The Tough Road In Accessing Business Credit Lines
Business line of credit needs may often require the business owner/financial mgr look beyond the ' norm' associated with revolving credit lines. That's where ABL asset based lending and revolving loans come in - they're the viable bank alternative. Let's not forget though that bank facilities of this type offer low cost and flexibility if they can be accessed. Let's dig in.
An ' ABL ' is the acronym for the non-bank business credit line via the asset based lending solution. With the focus on using your assets as collateral the true ' borrowing power' of the facility provides your firm with a flexible cash flow solution based solely on the balance sheet assets. The facility actually suits every type of company but is often most successful for firms that have uneven financial statement ratios, fluctuating profits, and cash flows that might not resemble true operating cash flow performance.
Many companies, but not all as we've mentioned, used the facility to facilitate a turnaround or restructuring around their overall capital structure when that is mandated by owners or lenders! Many firms that are financed by Canadian banks might find themselves on the wrong side of covenants and ratios that often can only be solved by a new third party solution.
Solutions around asset based revolving lines demand that your firm has a good handle on your overall cash conversion/business cycle. That knowledge, combined with the ability to borrow a higher amount on your overall collateral will deliver the proper turnaround in your business finances. In some cases true asset based lenders will also consider term debt if it is appropriate and feasible.
WHY CONSIDER AN ABL BUSINESS CREDIT LINE / REVOLVING CREDIT FACILITY?
Many new clients at 7 PARK AVENUE FINANCIAL aren't fully aware of the differences in ABL loans as compared to bank credit or other facilities. They have found via experience that bank credit is difficult to get given the personal guarantees, covenants, and other obligations Canadian chartered banks might impose. Accessing all the bank credit you require can easily become a full-time job! As one of our mentors used to say ' tuition is very expensive in the school of experience '!
There are a number of reasons why your firm might consider an ABL revolving line. Some of these reasons might include:
ABL Finance will provide significantly more, and immediate liquidity to the business
Firms that might be under a cash flow crunch or constantly facing bulge financing needs due to issues around seasonality, etc will find themselves fully financed
Asset based credit lines tend to almost automatically grow as your revenues rise Growing sales requires constant replenishment of working capital due to the build-up your investments in receivables and inventory consistent with any company with growing sales.
ABL financing is 'covenant friendly', with asset based lending companies place much less, or even no focus on debt to equity ratios, financial leverage, outside collateral, etc ( ABL Lenders can do this as they constantly update your overall all asset coverage around aged payables, receivables, fixed asset lists, etc - The software and reporting mechanisms ABL lenders use provides them with a total update on how your firm is doing
In summary, asset based lenders who feel comfortable with their asset security, as well as your firm's ability to provide regular updates on performance, provide a significant amount of liquidity into the Canadian business financing landscape.
Are There Disadvantages To The ABL Facility And A ABL Revolving Line Of Credit?
99% Of the time asset based lending will always cost more than traditional bank financing. The bottom line interest rate and the focus on continual reporting is the tradeoff your firm gets from it's access to maximum liquidity. However, similar to bank financing the ABL environment allows you to pay for only the credit you utilize. ABL lenders have a higher cost of financing as they are typically financed privately and have higher costs around the monitoring of collateral and reporting.
Fundamentally it's all about the cost of financing benchmarked against the ' risk ' associated with your firm or its industry. It's at these times that looking at alternatives make sense.
Revolving credit facilities are primarily used for growth; and in some cases they are a solid re-financing alternative.
HOW DOES THE ABL BUSINESS LINE OF CREDIT WORK? THE REVOLVING CREDIT AGREEMENT
The ability to constantly access and drawdown working capital/cash flow needs is the key attraction of securing the proper line of credit facility. The assets that make up and drive this type of business credit are:
Receivables
Inventory
Equipment / Real Estate (if applicable)
As these two ' current asset' levels rise and fall so does the line of credit accessibility. Technically speaking the bank, or the asset based line of credit provider determine your firms access by establishing what they call a ' borrowing base' - typically on a monthly basis
In the case of a bank facility, typical margins against these two assets are as follows -
A/R = 75%
Inventory - 50% (varies)
The asset based lenders who provide lines of credit typically offer higher margin borrowing:
A/R - 90%
Inventory - 50-75% - (varies)
We can with confidence and experience say that asset based non-bank credit lines, while more costly, almost 99% of the time offer more borrowing power.
True revolving facilities are the most typical credit line - your firm draws down on the facility and then pays the facility down as you collect receivables and generate cash. The facility ' revolves ' - hence the name 'revolver'. The key drives of that ' revolving ' tend to be the turnover over inventories and collection of receivables as the company completes its sales cycle.
Many industries find themselves perfectly suited to asset based credit; examples might be distribution companies, manufacturers, distributors, etc.
In current times many firm are service or software-based , and these firms focus on the collection of a/r or their ability to contract clients via recurring revenue streams. When you set up your facility with the asset based finance company you will mutually agree on a ' borrowing base ' which will identify the maximum you can draw down at any time. Revolving credit facilities make the most sense economically when they ' revolve ' allowing you to minimize borrowing costs which at the same time being able to access capital when you need it.
This is why good attention to your inventory turns and DSO ( the key measurement of receivable turnover ) are so critical for the ownership/management team.
Asset based lenders use bank lockbox agreements to allow them to control the overall facility and ensuring the funds you receive are used to constantly pay down the facility. Over time your ability to have the facility ' revolve ' properly will have a key place in determining facility size, rates, collateral monitoring, etc.
If your firm has a good relationship with your lender you can often negotiate an ' over adance ', allowing you to temporarily ' over-borrow ' above the approved facility size. In these cases we always recommend clients be prepared to put together a realistic cash flow projection based on the current situation and needs of the business. Those situations might arise out of the ' seasonality ' in your industry, or your ability to take advantage of special vendor pricing, etc.
One other possibility surrounding this type of facility is the potential for the asset based lender to include a ' term loan component ' in the overall structure of the facilities. Payments can be adjusted to be made separately on the loan or also utilizing the ' balloon repayment ' scenario, allowing for the loan to be collapsed when the facility is paid out by another lender.
Suffice to say good asset coverage is required in these latter two scenarios. Although almost all Canadian banks have an ' ABL ' division Canadian borrowers will always struggle with the concept of trying to understand the difference between bank ABL and non bank ABL.
In the U.S. ' second liens' are popular, allowing lenders to be 2nd on charges of equipment already secured by another lender; this practice is very uncommon in Canada. When banks do provide ABL loans in Canada their rates are often considerably better than their non-bank counterparts - however minimum loan sizes are often in the 5-10 Million range and upward. Banks will take a more extensive look at a multitude of factors in these larger ABL loans such as overall credit quality, pricing, and the company's ability to comply with the operational aspects of loans.
It is safe to say though that on balance there is more lender risk in asset based loans given constantly changing assets of the borrowing firm, along with major fluctuations in cash flow and often struggling working capital ratios, which is why various conditions will be imposed by a Canadian bank or non-bank LOC provider. We can (again) say with confidence (and, again experience!) that conditions imposed by asset based lenders are less onerous and more flexible. To some extent the actual limit on the line of credit can almost automatically increase without further applications, etc
What then is the bottom line of your firm's search for revolving lines of credit? The key points include:
Consider the entire funding landscape currently available in Canada
Be open to looking at both bank and non-bank solutions - aka ' traditional' versus ' alternative’
Have a strong sense of your working capital and cash flow needs
Ensure you have the data to allow a bank or non-bank lender to consider the credit facility - typically that's financials, aged receivables, inventory, payables, etc
ALWAYS BE OPEN TO A PLAN B!
In certain cases your company either may not be eligible for an asset-based credit line. There are numerous other solutions that can provide a similar type of liquidity including accounts receivable credit lines, purchase order financing and inventory loans, sale-leaseback scenarios, factoring loans, etc. Each of these types of facilities has different pricing and benefits attached to them.
Certainly a sole accounts receivable line of credit is always more achievable and can meet the needs of many firms, particularly those with smaller facility size requirements. Although there is no hard and fast rule our experience at 7 Park Avenue Financial is that for firms requiring facilities less than 500k these secondary solutions we have highlighted will often do the job, particularly if your firm doesn't qualify for a true ABL through a commercial lender or the bank.
Solutions such as the factoring line of credit are easily put in place, so business owners and their financial mgr's should always investigate types of asset-based financing.
These secondary types of offerings, versus the operating line of credit, are generally easily accessed, and certainly, approvals are more quickly put in place.
In summary, if you’re focused on shortening the journey on the tough road to business cash flow and working capital financing consider all options, including speaking to a trusted, credible and experienced Canadian business financing advisor who can assist you with funding needs... that deliver.
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
