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7 Park Avenue Financial
South Sheridan Executive Centre
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Suite 301
Oakville, Ontario
L6J 7J8
Asset-based financing in Canada is really another term for a ' simple design tweak' in the business credit line requirement your firm needs for cash flow/working capital operations. Clearly,' the chase is on ' for alternate methods of financing your business in the current environment. Let's dig in.
The Canadian chartered bank requirement for a revolving credit facility for firms both large and small is obvious - track records and financial statements that measure up in every way, from clean balance sheets, profits and cash flow coverage. But what if your firm can't meet one, much less all those criteria? One solution is the ' ABL ' - commonly called the asset-based line of credit.
These facilities mirror bank financing and typically secure the same assets - i.e. receivables and inventory. However, asset financing credit lines differ in that they can, at your option, also include fixed assets/equipment and even real estate as a part of that revolving credit line. Talk about an increase in business borrowing power.
There is no need for business owners/financial managers to struggle in understanding how the asset credit facility differs from a bank line - Bank lending in Canada is steeped in what banks consider time-tested methods of analyzing risk - i.e. debt ratios, covenant breaches, etc. Canada's strong banking system also imposes a lot of regulations on banks. Asset-based credit facilities are typically offered by commercial finance firms that are not regulated via banks' constraints by gov'ts and shareholders.
The concept of a business credit line's uses and needs in Canada is based on what lenders call your ' borrowing base' - namely, the pool of assets financed. Typically the current assets, i.e. A/R and inventory, form the majority of your borrowing base. Typically these asset categories will fluctuate based on sales and asset turnover, i.e. days, sales outstanding and inventory turns.
It's always important to remember that neither a bank line nor an asset-based credit line are ' term loans.' Your business credit line fluctuates daily and does not add debt to the balance sheet - suffice to say there are no fixed payments or amortization schedules.
Certain types of business present challenges to the need for a credit line - some examples might include construction industry exposure or government receivables. Also, ' inventory' is a key asset for many companies and a large part of the current asset ' mix. While banks might often be reluctant to finance certain inventory, the asset-based lender takes another approach, preferring to determine inventory and advance market values based on that assessment.
If your company is looking to explore business credit line options and alternatives via either a bank or asset-based financing solution, seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your needs.
Stan Prokop
