YOUR COMPANY IS LOOKING FOR A BUSINESS CREDIT LINE!
ASSET BASED LOAN / LINES OF CREDIT COMPARISON
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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
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The business credit line in Canada. Should your firm go with a bank or ABL credit facility? What we find most interesting is that a solid majority of business owners/managers didn’t even know there was a debate going on! So let's lay out some hard facts on solutions and options you have when you're on the search for a business credit facility to facilitate options and growth.
WHY IS THE ASSET BASED LENDING ' ABL CREDIT FACILITY' BECOMING MORE POPULAR WITH BUSINESS OWNERS
The day to day reality is that the ABL facility is gaining a lot of traction in the race for your company's daily borrowing requirements. Although the term ABL is used by many in a variety of circumstances here we're talking about the revolving business line of credit secured by the assets of the business. The way in which this differs from a bank facility is really what leads many businesses to investigate ABL. No one can deny though that Canadian chartered bank financing is perceived by almost all as the lowest cost, and flexible.
ABL IS ALL ABOUT THE BORROWING POWER OF ASSETS
When your company has assets, or is ' asset rich' but cash flow poor the ABL option is a solid solution. Rather than focusing on conservative margining of receivables and low inventory borrowing capacity, covenants, personal guarantees, outside collateral, cash flow debt service ratios, etc . ! .. The ABL business credit line focuses solely on assets and maximizing your borrowing power to the maximum possible
BANKS ARE REGULATED
We should also recognize that our chartered banks are regulated and provide the cornerstone for Canada's finance needs at consumer and commercial levels; however some of the constraints that come with that limit the Canadian business borrower.
THE PERSONAL GUARANTEE ISSUE? DO BANKS OFFER ASSET BASED LENDING?
Two technical points come out of our information above. First of all owner guarantees are in fact required on ABL deals also, it’s just that in our opinion much less emphasis is placed on them. Secondly, our Canadian banks are no slouches - they recognize a good thing when they see it and many have adopted niche divisions within the bowels of the bank to address ABL needs. We will leave it to our clients and others to determine whether policy and philosophy differ internally between commercial bankers and their ABL counterparts. If you get the drift!
HOW ARE BANK AND ABL CREDIT LINES SIMILAR - It's ALL ABOUT MONETIZING THE ASSETS
Bank and ABL facilities are similar in that they collateralize receivables and inventories to permit the drawing of working capital. The more accounts receivable and inventory you have the more working capital assets you're committing to our balance sheet. Monetizing them is the role of the bank and ABL facility. There is also no difference in how borrowing bases are calculated in each type of facility, bank and ABL. Standard ‘borrowing base' certificates are used that monitor the inflows and outflows of collections, inventory turnover, sales generated, etc. Note also that company owner real estate equity can also be blended into your credit facility if that is required.
HOW DOES THE ABL CREDIT FACILITY WORK ON A DAY TO DAY BASIS
One significant difference between bank and ABL facilities is that the asset-based line of credit typically uses a lockbox that allows for control of inflows of cash from your ABL lender. The reason? Simple. Typical ABL lenders aren’t banks and they use the lockbox as the efficient mechanism to monitor the ups and downs of your revolving facility. Credit risk on accounts receivable will always remain with the borrower unless you have a non-recourse facility.
ASSET BASED LENDING EQUALS ' BORROWING POWER ' FOR YOUR BUSINESS FUNDING NEEDS
Borrowing power is typically significantly increased in ABL lending. A/R comes in at 90% (versus bank 75%) and inventory, on balance, is always leveraged higher than the bank. The downside, if you call it one, to the ABL credit line is that you're doing more monthly reporting on A/R, inventory, payables, etc. Its true ' asset monitoring '. Many bank credit lines are redone and reviewed in a significant manner annually, often with no visit to your premises. What a difference between the two! It is important in all types of commercial lending that your financial statements be up to date.
CONCLUSION
The bank business credit line abl credit facility conundrum.If you want the facts to be able to weigh in on the debate of Chartered bank credit line versus ABL borrowing seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your borrowing needs for day to day working capital.
P.S. The ABL credit facility is, 95% of the time more expensive – meaning higher interest rates, but what could you do with all the business borrowing you need to generate sales and create more profits? Are asset-based loans for your company? It's all about access to credit versus the cost of credit - let the business owner decide!
