Business Capital. Easier said than done, right? Let’s examine how bank and other secured lenders offer business lines of credit – More importantly, we’re going to bet a dollar ( we’re conservative by nature!) that you might not be aware of some other options and alternatives for business line of credit financing !
Business operating lines are used to finance your investments. Your investments in receivables, inventory, and other current asset accounts of course. Canadian banks willingly offer these credit facilities (no seriously, they do) but the quality of the collateral they take is critical to that offering!
So how do the Canadian banks structure that facility in order to be made whole and feel comfortable in providing you with that business line of credit that is so badly needed for working capital and cash flow financing. For a starter, they take a first charge on the actual assets that are used to margin the facility – those current assets are accounts receivable, inventory ( raw materials, work in process and finished goods ) , all secured via a common security agreement which is typically referred to as a GSA ( General Security Agreement ) . You’ll of course be surprised at how un – general and very specific this agreement is!
So once you have a bank operating line of credit how long does it last for. In our experience these facilities are renewed on an annual basis – with the two criteria for renewal being your business financials of course, as well as how the account has operated over the past year.
How are limits established for bank business lines of credit in Canada? Typical ‘ ratios ” or ‘ margining ‘ as we have called it are 75% of accounts receivable under 90 days, and some per cent age of inventory. It’s only our opinion, but Canadian chartered banks really struggle with the inventory component of your business lines of credit – most typically because they can’t be expected to have experience on the value and disposal of all types of inventory. So typically you are very luck if you can get anywhere from 10-50% inventory financing on the value of your inventory.
Do your customers ever find out about how you are arranging business capital? Not really, the security is registered at a central registry, but clients and suppliers are never notified unless, of course, your loan is called.
Naturally many firms do also require long term financing commitments for business capital assets – i.e. those ‘ fixed assets’ on our balance sheet . Typical bank term loans in Canada range from 3-5 years, sometimes longer, and have strict repayment and cash flow coverage requirements
As many Canadian business owners know, often personal assets are also charged as extra collateral for business lines of credit in Canada. These include cash savings, home equity, cash surrender value of life insurance policies, etc.
So why do the majority of Canadian business owners and financial managers always try to get bank financing in place. In might just be force of habit, but we think two other factors play a role. They are the cost of bank financing in Canada (its low!) and, as importantly, their lack of knowledge of other financial options.
There are other financial options for business capital in Canada other than the banks? Yes, there are! Prudent owners and managers should investigate ever growing alternatives including asset based lending, confidential invoice financing, tax credit financing, and purchase order financing, and unsecured cash flow loans. How’s that for alternatives!
To more closely explore traditional or alternative options in business capital in Canada consider talking to a trusted, credible and experienced Canadian business financing advisor, who can put you on the path of business lines of credit that make sense.