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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
REVOLVING LINES OF CREDIT
What is a Revolving Credit Line?
A revolving credit line is a type of credit account that allows you to borrow and repay funds repeatedly, up to a specific maximum credit limit, without having to reapply.
This flexibility makes it a valuable financial tool for both individuals and businesses. With a revolving credit line, you can borrow money, pay it back, and borrow again as long as you make minimum payments and do not exceed your credit limit.
This type of credit is also known as a revolving credit account or a line of credit. It provides a continuous source of funds, making it ideal for managing cash flow and covering unexpected expenses.
Break Free from Cash Flow Constraints
Problem: Managing unpredictable business expenses and maintaining steady cash flow presents challenges for Canadian businesses. Late payments, seasonal downturns, and unexpected opportunities can strain your financial resources, potentially forcing you to miss crucial business opportunities.
Solution: Let the 7 Park Avenue Financial team show you how a revolving line of credit provides the flexibility to access funds when needed, repay when able, and maintain control over your business's financial destiny.
Three Uncommon Takes on Credit Line Revolving Facilities:
- Using the line as a backup to negotiate better terms with suppliers, even if you don't draw on it
- Leveraging the revolving feature to create a rolling investment strategy for equipment upgrades
How Revolving Credit Works
Revolving credit allows you to borrow money from a lender up to a certain credit limit and then repay it, either in full or in part, over time.
As you repay the borrowed amount, your available credit increases, allowing you to borrow again. This cycle of borrowing and repaying can continue indefinitely, provided you adhere to the credit agreement terms.
Revolving credit accounts typically have a variable interest rate, which means that the interest rate can change over time based on market conditions.
You will be charged interest on the borrowed amount, and you may also be required to make minimum monthly payments to keep the account in good standing.
Business Credit Line Alternatives
Business credit line alternatives boil down to two choices. Secured credit lines, supported by collateral, can be a more cost-effective option for businesses.
These two fundamental solutions around a revolving credit facility ‘revolve’ around participation with a Canadian chartered bank or a non-bank facility.
While non-bank facilities have more flexibility and liquidity for your business, they come at a higher cost. How can the business owner/financial manager recognize and ‘engineer’ the right solution for their business? Let’s dig in.
The Rise of Asset-Based Lending
Asset-based lending has become the ‘new’ alternative to bank credit lines.
This type of lending can significantly impact credit reports, as maintaining good credit behaviour is crucial to avoid negative marks from late payments reported to credit bureaus. We highlight the word ‘new’ only because this solution is not new; it was either misunderstood in the past or generally not known to owners/financial managers.
Circumstances such as the 2008-2009 global recession put much more emphasis on alternative lending practices such as ‘ASSET-BASED FINANCE’ (ABL).
Understanding ABL: Collateral and Monitoring
The Role of Collateral in ABL
ABL is all about collateral and constant monitoring by the lender. Secured credit lines are supported by collateral, which can lower interest rates.
That monitoring typically revolves around reporting weekly or monthly on your business’s key assets—i.e., aged receivables, payables, inventory lists, and fixed asset summaries.
These assets (excluding payables!) are rolled into one borrowing facility, giving you maximum borrowing power.
The Impact of Sales on Borrowing Power
Because your sales are constantly changing (i.e., going up, but not always), your liquid current assets, such as A/R and inventory, make up the bulk of your borrowing power.
Simply speaking, the more sales, the more access to borrowing power. Interest is incurred only on the amounts drawn from the entire credit line, not the full credit limit.
That’s contrasted with bank solutions, which typically have fixed credit limits with annual renewals. These solutions do not always recognize that your business grows or has bulges in borrowing needs. Banks might occasionally require a periodic third-party audit, but this typically pertains to larger facilities in the millions.
Key Differences Between Bank and ABL Credit Lines
It’s, therefore, easy to understand the main difference in how a bank or financial institution provides credit lines.
As we have pointed out, the reporting and admin controls that ABL lenders place on your business are much less rigorous in a banking environment.
Let’s also not forget that the flexibility around bank credit comes with the lowest borrowing costs.
Variations in Asset-Based Lending
A/R Financing and Inventory Loans
Although we have referenced two types of leading credit line solutions, there are subsets of asset-based lending.
A cash advance allows users to access funds upfront, like a revolving credit facility. These include simple A/R financing and inventory loans/finance. Inventory loans tend to be suited to retailers with no commercial receivables.
The Best Way to Finance Your Receivables
Regarding the best way to finance your A/R outside the bank, we recommend CONFIDENTIAL RECEIVABLE FINANCING, which allows you to bill and collect your own receivables without notification to others.
Financing receivables can impact credit reports, as timely repayment behaviour is crucial for maintaining a good credit score.
Benefits and Drawbacks
Revolving credit accounts offer several benefits:
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Flexibility: They allow you to borrow and repay funds repeatedly, giving you the flexibility to manage your finances as needed.
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Convenience: Many lenders offer online access and mobile apps, making managing your account and accessing funds easy.
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Emergency Funding: Revolving credit accounts can provide quick access to funds in case of unexpected expenses or financial emergencies.
However, there are also drawbacks to consider:
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Interest Rates: Revolving credit accounts often have high interest rates, making paying off the borrowed amount difficult if not managed carefully.
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Fees: Many accounts have fees, such as annual, late, or balance transfer fees, which can increase the cost of borrowing.
Credit Lines and Business Growth
It’s essential to recognize that credit lines are simply the monetization of your existing assets; this is not permanent debt.
Although a working capital term loan might make sense in some cases, both in bank and ABL financing, that’s a rarity.
CASE STUDY
A Canadian industrial equipment manufacturer with 45 employees struggled with seasonal business cycles that created significant cash flow challenges. Their peak production periods required substantial upfront investment in raw materials, while revenue often lagged by 60-90 days due to client payment terms.
Initial Challenges:
- Forced to decline large orders due to working capital constraints
- Missing out on supplier early payment discounts
- Operating with minimal inventory buffers
- Staff overtime costs during rush periods
- Inability to invest in new equipment
- Seasonal Layoffs Affecting Workforce Stability
The Revolving Line of Credit Solution: After careful analysis, they secured a $500,000 revolving line of credit with the following features:
- Interest only on drawn amounts
- Online access for immediate draws
- Flexible repayment schedule
- Monthly credit line review
- No prepayment penalties
Strategic Implementation: The company used the revolving line of credit to:
- Build strategic inventory reserves during off-peak seasons
- Take advantage of supplier volume discounts
- Maintain consistent staffing levels year-round
- Invest in automated equipment
- Accept larger customer orders
Key Takeaways
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Credit utilization directly impacts future borrowing capacity and should be managed strategically.
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Regular payments maintain credit availability and strengthen lender relationships.
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Understanding variable interest rates ensures optimal usage timing
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Collateral requirements determine initial credit limits and borrowing power
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Maintaining clean financial records expedites future credit increases
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Revolving lines offer flexible credit options, allowing borrowers to access funds multiple times up to a specified limit, with the ability to draw down and repay repeatedly
Conclusion
Focused on re-engineering your business credit line borrowing?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with solutions that make sense for your firm’s credit profile and size.
FAQ
How does a revolving credit line support business growth?
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Provides immediate access to working capital
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Enables quick response to opportunities
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Supports inventory management
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Helps manage seasonal fluctuations
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Strengthens vendor relationships
What makes revolving credit different from traditional loans?
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Reusable credit facility
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Pay interest only on used funds
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Flexible withdrawal options
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No fixed monthly payments
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Revolving availability
How can businesses maximize credit line benefits?
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Strategic timing of draws
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Maintaining credit availability
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Regular financial reviews
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Proactive communication with lender
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Monitoring credit utilization
What happens if I exceed my credit limit?
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Transactions may be declined
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Potential over-limit fees
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Impact on credit score
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Required immediate payment
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Review of credit terms
How often can the credit line be reviewed?
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Annual reviews standard
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Performance-based increases
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Financial statement requirements
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Business growth consideration
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Market condition factors
What determines credit line interest rates?
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Business credit profile
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Market conditions
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Relationship with lender
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Collateral quality
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Industry risk factors
