Not All Business Credit Lines Are Created Equal And Here Is Why
OVERVIEW – Information on asset based lending in Canada . This type of funding is an alternative to the business credit line and provides significant liquidity for firms with assets and growth financing needs
Business credit line funding needs can be achieved in more ways than one. The concept of having your funding needs on a ' remote control ' should be very appealing to most business owners / financial managers. Asset based lending via ' ABL ' credit lines is one way to put your company on cash flow auto pilot. Here's how. Let's dig in.
Businesses requiring SME COMMERCIAL FINANCE funding for cash flow are always challenged by the requirements of our somewhat monopolistic banking system in Canada. The strength, market dominance, and the regulated nature of our banks make it often difficult for companies who are even doing quite well to achieve some or all of the financing they need. Simply speaking they fall ' outside the box '
The banks requirement of covenants in cash flow, debt, profits, equity simply can sometimes not be always met, and these are typically a written part of your bank arrangements. Firms who fall ' out of covenant ' with their bank often find themselves feeling not so ' special ' when they are placed in Special Loans Default dept's at the bank .
By utilizing your firms current and fixed assets asset based lines of credit allow you to leave your business on a kind of ' auto pilot '
When properly managed and utilized (and structured in advance!) this type of cash flow funding allows you to”
Finance operations
Engage larger clients/ larger orders/contracts
Finance inventory which in many bank circumstances is sometimes not achievable
Typically you would never use your revolving asset based credit line as a mechanism to acquire new assets - this is typically done via equipment leases or bridge loans that sometimes are more applicable when a firm is in a financing transition.
By the way, in a merger and acquisition scenario the Asset Based Credit Line is an excellent way to successfully acquire a target company.
How does the ongoing access to liquidity work in Asset based lending? A/R is often financed at 90%, and inventory borrowing margins, while depending on the type of inventory class (raw materials, work in process, finished goods) can range from 25-75% borrowing power. Should a business choose to monetize fixed assets as part of their revolving credit facility typically a third party appraisal/valuation is required.
It should be noted that ongoing reporting requirements are typical of an asset based line of credit - in some cases owners/managers might find rigorous monthly ( sometimes weekly ) reporting as a ' downside ' of ABL cash flow financing . While 99% of the time pricing on these facilities is higher than bank credit the alternative is a liquidity crisis for ongoing operations of growth.
We've shown how not all business credit lines are not created equal. If you're prepared to investigate the applicability of asset based lending to your business seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success
who can assist you with your funding needs.
Stan Prokop - 7 Park Avenue Financial :
http://www.7parkavenuefinancial.com
http://www.7parkavenuefinancial.com/business-credit-line-asset-based-lending-funding.html
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