Business Credit Line - Unlock Financial Flexibility for Your Business

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INTRODUCTION

Business credit line solutions in Canada, a surprise to some, might include asset finance lending as an alternative to working capital and cash flow generation. Why is this lending becoming so popular in Canada when it comes to a business line of credit? We think we know why - let's dig in on small business line of credit requirements!

WORKING CAPITAL FINANCING

The ability to access working capital via the balance sheet is key - it's been referred to as the management of the working parts of the balance sheet.

Positive working capital allows you to have the funding in place to cover off upgrades to your business while being able at the same time to invest in marketing while considering future investments.

Managing your investments in receivables and inventory and your ability to manage payables and supplies is the key to effective working capital finance. Asset turnover is key in the operating cycle of your business. The relationship between current assets and current liabilities is, in fact, the working capital formula.

THE DIFFERENCE BETWEEN WORKING CAPITAL LOANS AND LINES OF CREDIT

Working capital loans and business lines of credit are the 2 solutions around funding short-term business requirements.

Short-term loans for specific purposes or loans for permanent working capital come with set repayment and are usually tied to a specific need of the business. Short-term working capital loans have gained massive popularity in Canada as delivered by non-bank asset-based lenders.

ADVANTAGES OF USING A LINE OF CREDIT FOR WORKING CAPITAL

Business credit lines are revolving facilities that are drawn down as a business needs cash. The restriction on the facility is simply the credit limit instead of the need to make regular fixed installments

BUSINESS LINE OF CREDIT VS WORKING CAPITAL LOAN

When it comes to small business lines of credit, let's understand who we are talking about. For info on SMB/SME businesses in Canada, click here. Note also that we're talking about revolving credit facilities. A business line of credit vs loan signifies the difference between debt on the balance sheet or cash-flowing assets you already have. A working capital loan typically has regular fixed installments and amortized anywhere between 2-5 years as a ' term loan. '

FINANCING TAILORED TO MEET YOUR NEEDS

When we meet with a business owner to discuss the benefits of asset-based lending and asset-based business revolving line of credit solutions, we always highlight three things they need to know.

1. Business owners / financial managers need to know what an asset-based line of credit is and what it is not

2. Understanding the qualifications and daily mechanics of the facility is important

3. Asset-based financing pricing differs - here's why

So let's examine some of the key data you need to know to determine if this type of secured business line of credit balance sheet financing meets your company's working capital needs and demonstrate that you can benefit from the facility.

First of all, in terms of what we are discussing, an asset-based line of credit is not an asset loan per se. There is no additional debt that appears on your balance sheet in terms of permanent working capital loans if, for example, you thought this asset loan is, in fact, term debt. It is not.

It is simply what we can call cash lending, or cash flow monetization - your firm is utilizing asset-based financing as an alternative method to generate business financing for day-to-day working capital requirements. It's all about managing, and financing the relationship between current assets and current liabilities on the balance sheet - often measured by lenders over 12 months.

Due to ongoing tight credit conditions and the generally improving prospects of Canadian firms, it is becoming an increasingly attractive method of financing your firm - especially those focused on growth/expansion/new markets, etc. and the need for short-term working capital comes with those plans.

An even better way to think of it is to view it as a direct competitor to chartered bank lending in Canada on an 'operating' or revolver basis. Your firm would consider this type of financing in one of two circumstances - you don't qualify for bank financing, or, as in many cases, you have financing in place. Still, it simply does not supply the amount of cash flow and working capital you need.

Let's move on to # 2 - qualifications and methodology. In general, asset-based financing in the form of a revolving facility is available to any firm.

We tell clients that a solid entry point concerning financing needs is in the area of 250k and above. There is no upper limit on this type of facility, and many credit lines are in the millions of dollars and widely used in every industry. If you didn't know it, some of Canada's largest corporations utilize this type of financing - if they do, why shouldn't your firm consider this alternative?

BUSINESS LINE OF CREDIT REQUIREMENTS

When it comes to business line of credit eligibility and qualifications you should be prepared to, on an ongoing basis, supply monthly reports on your receivable and inventory levels. You are then advanced funds against these two asset-based balance sheet accounts. The only difference is that, in general, 99% of the time, you receive higher advances on your receivables and inventory than you would from a bank. Little if no emphasis is placed on credit score and the personal credit of owners, a factor that again differentiates it from bank financing.

INCREASING YOUR CREDIT LINE BY 100%? HOW TO ESTABLISH A BUSINESS LINE OF CREDIT VIA ASSET BASE LENDING ( ABL )

The reason is that the banks focus on the traditional balance sheet, income statements and operating metrics - while an asset-based line of credit focuses predominantly on one thing, your assets. (Typically combinations of accounts receivable, inventory, fixed assets/equipment, and real estate, if applicable).

When it comes to how to increase a business line of credit by 50-100%, it's important to understand that because receivables, inventory and equipment are margined much higher in ABL lending and given the fact that both fixed assets and even real estate can be a part of your credit line it's easy to see how credit facilities can significantly increase!

At 7 Park Avenue Financial we're asked all the time about the ' best bank for a business line of credit ' .. and our opinion revolves around more the banker than the bank! Business line of credit lenders are as much about the people as the financial institution.

A business line of credit without a personal guarantee from the owner/owners is challenging. Still, borrowers will note there is some creativity around this issue, and, as well, it should be noted that asset-based lenders place much less emphasis, if any, on this issue which is so key in traditional business banking in Canada via banks or credit unions.

WHAT IS THE BUSINESS LINE OF CREDIT INTEREST RATE?

Pricing in Canada varies concerning operating line of credit requirements. We tell clients this is for several reasons, simply that the Canadian market is underdeveloped in this area when getting a business line of credit and consists of some large U.S. firms. Several smaller Canadian firms, privately owned, are geographically constrained or have certain limits themselves concerning their own capital base. Business loan interest rates in Canada are at an all-time low in the current economic environment.

The business line of credit in Canada rates vary from 5% per annum and can, in fact, go up to 1-2% per month if, in fact, your firm has significant challenges but could benefit from the financing. Interest rates should always be factored into your decision.

Looking for a business line of credit for a new business? A startup business line of credit solutions is challenging. Still, there are solutions in the alternative lending area that can provide the business capital start-ups required to run and grow their products or services.

Banks will often offer new business credit facilities, but this is typically business credit secured by a ' HELOC' .. aka the home equity line of credit.

CONCLUSION - SPECIALIZED FINANCING SOLUTIONS

It is important to understand the difference between business lines of credit and working capital loans. Both offer the solution to fill the void in business cash flow and each comes with a variety of options, along with pros and cons tied to each. Talk to the 7 Park Avenue Financial team about the most appropriate financing for your business needs via business advise you can count on.

A small business line of credit is one of the most valuable tools small businesses can have for short-term funding needs. Your ability to turn assets quicker and generate more cash and profits can significantly offset any cost.

Call 7 Park Avenue Financial, a trusted, credible, and experienced advisor in this area who can confidently walk you through Business Credit Line Asset Finance Working Capital solutions for your business growth and long-term goals.

FAQ: FREQUENTLY ASKED QUESTIONS /PEOPLE ALSO ASK / MORE INFORMATION

A business credit line is a type of financing that allows businesses to borrow up to a certain limit and pay interest only on the money actually borrowed. This flexible financing option can be used for a variety of purposes, including managing cash flow, financing new projects, and covering unexpected expenses.

How does a business credit line differ from a traditional loan?

Unlike traditional loans, which provide a lump sum of money that needs to be repaid with interest over a set period, a business credit line offers a credit limit that can be tapped into as needed. This flexibility allows businesses to use funds as required without paying interest on unused amounts.

A business credit line offers numerous benefits including improved cash flow management, the ability to handle emergencies and unexpected expenses without delay, and the opportunity to invest in growth opportunities quickly without the need for a long loan approval process.

What are the typical qualifications needed to obtain a business credit line?

Qualifications can vary by lender, but typically include a review of your business's financials such as income statements and balance sheets, your business credit score, and possibly personal credit scores of the owners. Lenders also consider your company’s age, revenue stability, and existing debts.

While a business credit line offers flexibility and convenience, it also comes with risks such as the potential for overuse, reliance on debt for operating expenses, and possible changes in interest rates that can increase the cost of borrowing.

Yes, if the credit line is personally guaranteed, any activity, including utilization rates and late payments, can be reported to personal credit bureaus and may impact your personal credit score.

What are the typical interest rates for business credit lines?
Interest rates for business credit lines vary widely depending on the lender, the creditworthiness of the business, and market conditions. Generally, rates can range from the prime rate plus 1.5% to over 10%.

You can draw from your business credit line as often as needed, as long as you do not exceed your maximum approved limit. Each draw must be repaid according to the agreed terms with the lender.

Exceeding your credit line limit can result in penalties, increased interest rates, and negative impacts on your credit score. It's important to manage your finances to avoid surpassing the limit set by the lender.

Can I increase the limit of my business credit line in the future?

Yes, you can request an increase in your credit line limit if your business has shown financial growth, improved creditworthiness, and a reliable repayment history. Lenders typically review credit line limits periodically and may adjust them based on these factors.

How do you get a business line of credit?

For the credit application businesses should be able to demonstrate 1-2 years in business and be generating revenues. Bank credit lines require good credit scores from business owners, while asset-based financing focuses on the business assets as a source of repayment. Business owners should be potentially prepared to provide info on credit history a good credit score, and personal financial investments -particularly when it comes to a bank unsecured business line loan agreement. Fixed or variable interest rates are often available from a choice perspective.

What is a working capital loan?

A working capital loan / small business loan is a product that is designed to help finance a business’s everyday needs. Unlike term loans or even merchant advances and business credit cards, a working capital loan is designed for more immediate needs. Minimum monthly payments are typically required under this type of facility.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Business Credit Line: Your Guide to Flexible Business Financing | 7 Park Avenue Financial

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