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ASSET BASED LOAN AND ASSET BASED FINANCING SOLUTIONS IN CANADA
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Business credit lines, we've found, come with certain ' perceptions' from business owners and financial managers in Canada. There are some dangers in those perceptions. Let's dig in.
WHAT ARE THE DIFFERENT TYPES OF CREDIT LINES - HOW TO GET FUNDING FOR YOUR BUSINESS
A business revolving credit line actually comes in a couple of different shapes and sizes - and the differences between bank facilities and other commonly used financing methods are significant. So how about a ' hall pass ' on our subject. We'll look at the typical use of these facilities, who qualifies for what, and how they are structured in terms of collateral and security. Along the way, you'll see there are some benefits and disadvantages from each type of facility, as well as some major cost differences.
CANADIAN BANKS VERSUS ASSET BASED LENDERS
Revolving credit lines are a specific type of secured financing and are directly related to your business's current and fixed assets. Although Canadian chartered banks typically lend against receivables and inventory ( mostly receivables actually ), an Asset Based Lender has the ability to bundle accounts receivable and inventory, and even your inventory and fixed assets and equipment. Such as into one asset base you can borrow against continuously. That's one of the key differences between a bank line and asset-based loans revolving facilities. When looking at your balance sheet, the business owner should get a strong sense of accounts receivable inventory borrowing capacity. These facilities for either a bank or an ABL lender are not debt or structured as a term loan but simply an asset monetization strategy.
Business owners and financial managers should note that company-owned real estate can also be included in your revolver, significantly different from bank lines.
ALL FIRMS SELLING ON CREDIT QUALIFY FOR CREDIT LINES
Credit facilities are available from either a bank or commercial finance firm for almost any size, and no firm is really ineligible. Every industry really qualifies, including mfg firms, distributors, service firms, and technology-related industries. Firms that sell on an all-cash basis rarely qualify for bank or asset-based credit lines unless they are large retailers where the financed asset is the inventory. Solutions for finance for startups are always challenging as we have noted but if a business have sales and receivables there are some forms of financing such as factoring that will generate funding needed via a financing company.
CASH FLOW BASED FINANCING VERSUS ASSET BASED LENDING
If there is one simple way to view the difference between a bank credit line and an asset based line of credit, aka ' ABL ' solutions, it's simply the difference in how each of those two lenders looks at it. One is cash flow-based (‘the bank ' ), and the other is asset-based. (‘the asset-based ABL lender'). In asset-based abl facilities, a monthly borrowing base is established based on sales and assets and your drawdown on funds as you need them.
ASSET TURNOVER IS KEY
Asset-based lending focuses on the constant ebb and flow of turnover of assets - in almost every business, there's a certain ' rhythm ' in that turnover that constantly repeats itself. As the ABL lender gets comfortable with your peaks and valleys and the quality of receivables and inventory, it's relatively easy for your business to achieve all the working capital you need based on sales and asset growth.
INTEREST RATES AND THE COST OF FINANCING
Costs are a huge aspect of the conversation around bank vs. ABL lending. While most (but not always) more expensive, asset-based lending delivers on more borrowing power. The business owner/manager must balance access to credit vs. cost of credit. Additionally, banks impose various covenant and ratio restrictions that must be met. Those restrictions tend to be only borrowing-based focused when it comes to an asset-based line of credit.
CONCLUSION
If you're looking to maximize liquidity and borrowing power from business credit lines and want to know the difference between your two choices, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can ensure your credit line needs are met with an objective and workable solution.
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Stan Prokop
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