Business credit lines in Canada. Unbeknownst to many Canadian business owners and financial managers there is a lot going on in revolving credit facilities financing. And we think you’ll see that these credit lines have been fixed, but not by whom you necessarily think! Let’s dig in!
Businesses in Canada utilized revolving credit facilities to attend to the ups and downs of collecting their sales receivables and managing cash outflows via payables, etc. This type of loan financing – its not a loan per se … allows owners and managers to optimize working capital and cash flow… when they need it .
And in a perfect world you clearly would like to be in control of your destiny, i.e. service and collect your own sales without any interference by a third party such as in a traditional factoring finance solution.
ABL financing is the acronym for the asset based credit line. It provides the same borrowing mechanism as a Canadian chartered bank facility, with the only difference being a great one – more liquidity and access to capital! While traditional bank lines allow you to borrow 75% against your A/R the ABL solution typically comes in at 90%. So you’re up 15% already – congratulations on that!
And then comes inventory. Whether inventories are in raw materials, work in process or finished goods they have traditionally presented a borrowing challenge to banks. The asset based line of credit focuses on business assets – your inventory is an asset, and as a result it’s not uncommon to have borrowing power anywhere from 25-75% of your inventory component on the balance sheet.
While we have in fact focused on inventory as one of most firms current assets the reality is that many service and technology type firms in fact have no inventory on their balance sheets. In that case ABL financing focuses solely on the borrowing power of receivables.
Qualifying is of course the $ 50,000.00 question when it comes to accessing the capital you need to operate and grow. While approval for Asset based lending facilities can hardly be described as ‘ loose’ the fact is that key measurements that the banks use to approve your firm arent really on the table when it comes to ABL . While the bank focuses on profits, cash flow, and ratio covenants Asset based financing solutions focus on three other components – assets, assets, and, you guessed it assets!
Typically ABL financing works best when it comes to firms that require growth financing. The general rule of thumb is that your facilities grow as you grow – In the banking environment typical faculties are approved annually and you are then locked into a business credit limit. We’ve always found it interesting that a lot of bank credit analysis focuses on the past and not the future, but that’s a discussion for another day!
Nirvana is pretty hard to find when it comes to a Canadian business financing solution. So when you do check out an ABL solution for business credit lines remember that there will be costs to assets your assets and that you’ll be doing a bit more monthly reporting when it comes to aged a/r lists, inventory summaries, and a/p schedules.
But the bottom line? Simply that the ‘ gospel ‘ of ABL has created a powerful new tool when it come to daily business borrowing for working capital and cash flow needs .
Seek out and speak to a trusted,, credible and experienced Canadian business financing advisor who can assist you in understanding why theres a new paradigm shift the the biz credit line in Canada .