It’s not pretty. It’s actually a bit stressful also. We’re talking about finding yourself in the position of requiring Special loans financing in Canada when your commercial loan or business line of credit has been called… typically by the bank.
Options .Yes! Strategies and solutions – a double yes! Let’s examine some real world solutions around the difficult situation of both being in and emerging from a special loans environment.
Typically the assets that have been used to finance and qualify your for your business operating loan of credit and/ or commercial loan are receivables, inventory, misc working capital accounts, and equipment . These assets have of course been collateralized by the bank under both a demand loan and general security agreement.
When we meet with clients who are facing a special loans financing requirement they typically have been up for review and renewal of their credit facility and have been advised that the facility will not be renewed under the favorable terms they have been receiving. Moreover other severe ramifications emerge, most notably a demand letter to exit the bank by a certain date.
It’s critical at this time to assess in a very realistic manner the quality of your assets, as they are the accounts that will allow you to emerge under a satisfactory refinance strategy.
So let’s get back to that asset discussion, because that is what is going to take you successfully out when you are in a position of a commercial loan called scenario.
Canadian chartered banks have typical margining and borrowing for certain asset classes. In the case of receivables its typically 75% while inventory, no matter in what state, rarely reaches a 50% margin eligibility, whether its raw materials, work in process, or even saleable finished goods .
As challenging as it may be to finance inventory in the current Canadian business financing climate it just might be that inventory line on your balance sheet that allows you emerge from a special loans facility. Why, one word – ABL! Well it’s actually an acronym for ‘ asset based lending ‘ because it is typically an asset based lending arrangement that will be your exit strategy from a commercial loan that’s been called.
In our opinion and experience one Canadian chartered bank will typically only in rare occasions re finance a customer who is in special loans financing need? Why? We think there are many reasons, but the main one being that in general credit analysis and posturing with commercial clients all banks have the same general criteria of commercial loan credit extension.
Therefore if you are out of covenant or off ratio based on your current loan agreement doesn’t it make sense that another similar institution would not waive those covenants and ratio arrangements that your firm has broker. Its just common sense we think.
So, it is the asst based lender that will typically be your solution, and yes savior in some circumstances when you require an exist strategy in special loans financing. Banks will rarely margin receivables and inventory to the extent that an ABL lender will, therefore increasing your borrowing base and in many cases not only providing you with an exit from the bank, but in fact more working capital that you had before.
In summary, it is often only an ABL… asset based lending arrangement that will be your solution to a called commercial loan in Canada . Facility structure and size and pricing vary great, so a great suggestion is to consult an expert, an experienced, trusted and credible Canadian business financing advisor who can work with you to relive the stress and financial ramifications of special loans financing in Canada.