YOUR COMPANY IS LOOKING FOR RECEIVABLE FINANCE VIA FACTORING OR REVOLVING CREDIT LINE!
NEED AN ABL FACTORING OR BANK LINE OF CREDIT?
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Financing & Cash flow are the biggest issues facing business today
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Credit lines for business are a vital financial resource for maintaining cash flow and supporting business growth.
Struggling to find reliable funding for your business? Discover how credit lines can offer the flexibility and support you need!
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Credit Lines For Business & solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
BUSINESS CREDIT LINE OPTIONS IN CANADA
When Canadian business owners and financial managers are up to their necks in running their companies, growing sales, and managing operations to use assets effectively... the last thing they think they have time for is to understand some critical differences in terminology when financing their current assets.
We're talking about receivables, inventories, and tax credits they might have, etc.
BUSINESS CREDIT LINES VS.LOANS - WHAT YOU NEED TO KNOW
Access to flexible funding, such as business lines of credit, is critical for businesses aiming to fund daily obligations, grow, and take advantage of new opportunities. A business line of credit offers an invaluable financing tool, providing business owners and their financial managers with the liquidity needed to pay routine expenses and unexpected costs that seem to always come up.
Let the 7 Park Avenue Financial team show you the benefits, the application process, and how to compare financing options.
Let a business credit line be a game-changer for your company’s financial health and stability!
UNDERSTANDING THE TERMINOLOGY OF 'ABL'
So why is the terminology so important in small business finance when you borrow money?
Credit lenders play a crucial role in providing business lines of credit, each offering different credit limits, interest rates, fees, and unique features.
Simply because we have found different terms have different meanings depending on who you are talking to. Let’s explain why you need to know this when it comes to considering either a bank revolving credit line limit, or an ABL factoring type of arrangement.
BANK CREDIT LINE VERSUS ABL
Bank lines and a credit limit are typically put in place for a one-time set amount. It’s pretty safe to say that they are, in general, reviewed on an annual basis.
Here’s where the terminology gets important. Under this type of facility your assets, primarily A/R and inventory are in effect ‘collateral’ for your borrowing. You have given the bank this ongoing collateral - and in the majority of bank deals, you are also required to provide personal guarantees or outside collateral.
Credit unions also offer business lines of credit as an alternative to banks, often providing competitive rates and terms but with stricter requirements, such as a solid credit history, revenue, and business experience.
Your current assets are then margined, again, typically on a monthly basis and you can borrow within the previously mentioned limit. Banks manage this process by a simple document called a ‘borrowing base certificate’, essentially highlighting the aging and turnover of your current assets.
So how does this differ from an asset-based line of credit through a non-bank ABL firm? (A = Asset B=Based L= Lending)
FACTORING IS ONE TYPE OF ASSET BASED LOAN
Factoring or receivable financing in asset based lending is the most common, let’s call it a ‘ subset ‘ of asset-based lending.
So although this could include fixed assets and real estate, to keep things simple we’ll focus today on just receivables and inventory. Factoring is not a ‘ term loan’ - it is simply a monetization of your receivables as you generate sales revenue.
In comparison, traditional business loans from banks and credit unions often have competitive rates but strict requirements, while alternative online lenders offer faster access to funds with more lenient qualifications.
HOW DOES ASSET-BASED LENDING FACTORING ABL WORK ON A DAY-TO-DAY BASIS TO MANAGE CASH FLOW GAPS
In the case of factoring receivables, the documentation somewhat differs when you set up your facility because it specifies that any receivables you wish to finance are, in effect, ‘ sold ‘ at the time of financing.
Financial statements are crucial in the application process for asset-based lending, as they demonstrate your business's financial health and ability to meet obligations.
The finance firm manages this quite effectively, and a common way they do this is to set up what is known as a ‘ lockbox ‘ or ‘ blocked account ‘. Here is what happens: As you generate sales on a daily or ongoing basis, you immediately receive funds.
As these funds are collected by yourself, or your finance firm the monies are deposited into an account controlled by the finance firm. That makes sense given you have already received the funds when you generated sales. The revolving line continues and can grow as you generate additional sales.
We hasten to add that the recommended solution for this type of ABL factoring is, in fact, a confidential facility. This facility allows you to bill and collect your own accounts receivable and maintain effective customer relationships.
KEY TAKEAWAYS
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Understanding Eligibility Requirements: Knowing the criteria to qualify for a business credit line can help businesses prepare and increase their chances of approval. Sometimes, a personal guarantee may be necessary, especially for newer companies or specific credit products.
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Benefits of Credit Lines: Highlighting the key advantages, such as flexibility and revolving credit, provides insight into why businesses should consider this option.
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Application Process: Detailed knowledge of the application steps simplifies the process for potential borrowers.
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Interest Rates and Fees: Awareness of the costs involved helps businesses make informed decisions about their financing options.
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Comparison with Other Financing Options: Understanding how credit lines compare to other financing aids such as business credit cards or merchant cash advances in selecting the best financial product for specific needs.
CONCLUSION
This is the final point today—about your line of credit limit. As we noted, bank arrangements typically focus on one preset limit for a line of credit.
This sometimes does not address seasonality or bulges in the business of the Canadian business owner and financial manager. ABL factoring, on the other hand, grows automatically with your sales. In effect, it’s unlimited financing with your qualified assets, i.e., receivables and inventory.
Consider whether an unsecured business line of credit might suit your company. While it does not require collateral, it may involve higher risk and interest rates, and newer companies might not qualify.
So, our point today is to help you understand the terminology and nuances of factoring and asset-based lending and what they can and can’t deliver for your firm.
Need help? Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you in managing the reality check of cash flow and working capital financing in Canada. Let our team solve the challenge of finding the best business line of credit for your business.
FAQ
How do business credit lines work?
Business credit lines provide a set amount of revolving credit that businesses can draw from as needed, similar to a credit card, with flexible repayment terms.
What are the main benefits of a business credit line?
Compared to small business loans, the main benefits of credit lines include flexibility, easy access to funds, and efficient cash flow management. They also offer interest payments only on the amount used, meaning you only pay interest on what you borrow. Business credit interest rates will be determined by facility size and type , overall credit quality, and business credit history.
How can a business qualify for a credit line?
Businesses typically need a solid credit history, proof of revenue, and sometimes collateral to qualify. Financial institutions may have specific criteria based on their policies. In the SME financing space, the personal credit score of the owner is also important. A good credit score will be in the 650+ range.
Proper business financial statements and providing business chequing account information are key to any business borrowing.
What is the difference between a secured and an unsecured business credit line?
A secured credit line requires collateral, such as property or inventory, while an unsecured credit line does not. Secured lines often offer higher credit limits and lower interest rates based on business revenue and profits and other factors.
How can a business effectively manage a credit line?
Effectively managing cash flow involves tracking expenses, making timely payments, and using the credit line strategically for growth opportunities rather than routine expenses. Interest costs can be reduced via effective asset turnover of inventories and A/R.
What are the common fees associated with a small business line of credit?
Typical fees include annual fees, transaction fees, and late payment fees. It’s essential to review the terms and conditions before committing.
Can a business credit line impact credit scores?
Yes, using a business credit line responsibly can positively impact business credit scores. However, missed payments or high balances can negatively affect scores.
What is the typical interest rate for business credit lines?
Interest rates vary based on the lender and the business’s creditworthiness. Generally, rates can range from 5% to 20%.
How long does it take to get approved for a business credit line?
Approval times can vary but typically range from a few days to a few weeks, depending on the lender’s process and the completeness of the application. A bank's lending process will always take longer than that of non-bank commercial lender processes. The quality of the business's accounts receivable is also a factor that is reviewed.
Can startups apply for business credit lines?
Yes, some lenders offer credit lines specifically designed for startups. However, given that future cash flow potential is more difficult to identify, these lines may have stricter requirements or higher interest rates.
What is a revolving credit line?
A revolving credit line allows businesses to borrow, repay, and borrow again up to a set limit, providing ongoing access to funds.
How does a credit line differ from a term loan?
A credit line offers flexible, revolving access to funds versus a traditional bank loan based on cash flow lending principles and who are typically structured as a term loan. A term loan provides a lump sum repaid over a fixed period with set monthly payments.
What happens if a business exceeds its credit line limit?
Exceeding the credit line limit can result in penalties, higher interest rates, and potential damage to the business’s credit score.
Are there tax benefits associated with business credit lines?
Interest paid on business credit lines is often tax-deductible, but consulting with a tax advisor for specific advice is essential.
Can a business use a credit line for any expense?
Yes, businesses can use credit lines for various expenses, including inventory, payroll, and unexpected costs, offering great flexibility with cash flow based financing of this type.
How can a business improve its chances of getting a higher credit line?
Maintaining a strong credit history, demonstrating consistent revenue growth, and providing collateral can improve chances of securing a higher credit line.
What should businesses do if they struggle to repay their credit line?
If repayment becomes difficult, businesses should contact their lender to discuss options such as restructuring the debt or negotiating new terms. Asset based lending works best for businesses with growth sales, receivables and other assets.
What are the different types of business line available?
There are several types of business lines of credit, including secured and unsecured lines. Secured lines require collateral, while unsecured lines do not. Additionally, some lines are specifically tailored for small businesses, startups, or established companies with varying interest rates and fees.
How can businesses compare different business lines of credit?
To compare different business lines of credit, businesses should evaluate the interest rates, fees, eligibility criteria, and benefits offered by various lenders. It's also important to consider the specific needs of the business and how each option aligns with those needs.
