Dear Anxious – A great question and now for some hopefully great answers on the subject of an asset based revolving credit facility for your company.
No doubt you have heard about the relatively newest form of business financing in Canada .What you may not understand is simply how an ‘ ABL ‘ loan is different from comparative offerings, such as the traditional chartered bank line of credit.
While is has many similarities to its competitors in daily utilization, the benefit of the facility tend to be significantly more enhanced for firms such as yours.
Typical borrowing facilities of this type are secured by two key assets, your receivables and inventory. Your goal when you enter into such a facility is clearly to optimize working capital around whats available today, and what you might need in the future. That’s where an ABL loan comes in. By giving your asset based lender the security around those two assets you create a borrowing margin immediately available to yourself.
We know you’re asking yourself ‘ so whats so different about that ‘… ‘Haven’t you just described what a bank line of credit facility is?’? The true merit of the asset based revolving credit facility is twofold, if we’re going to keep things simple.
First of all the advance rates or the amounts you borrow can be significantly more than in other more conservative facilities. It is certainly no unusual to achieve an 85-90% advance rate on your eligible receivable, those under 90 days. And when it comes to inventory, don’t get us started ; because once its clearly understood what type of inventory you carry, what the general turnover is, and how you capture and track this asset you can usually borrow anywhere from 30- 70% against your inventory line .
The other key benefit is the absence of a lot of those ratio and covenant restrictions imposed by traditional financing, including the de-focus on areas such as your personal guarantees .
Let’s keep things simple. If you weren’t getting any significant inventory margining before, and were getting standard 75% a/r advance we can safely say that many companies can increase their borrowing capacity by anywhere from 50-100% on day one .. Via their ABL loan facility.
We keep using the term ‘ ABL LOAN ‘, but the reality is that your company is taking on zero additional debt in a true asset based line of credit scenario . You are simply ‘ monetizing ‘ assets for liquidity. Your facility goes up and down everyday, in the true business cycle as you buy inventory, reduce payables, generate sales, and of course collect them. It’s as simple as that.
So, who is eligible for this type of business borrowing? As we said, we like to keep it simple, so the reality is that any business requiring a working capital line of credit in excess of 250k is in fact eligible. And, get this, you can be public, private, doing well, financially challenged, or even in bankruptcy proceedings. We think we can safely say that ABL financing doesn’t discriminate – if you have assets your eligible in some form for this great new trend in Canadian business financing!
Well that’s it ‘Anxious’. Want more info? Consider speaking to a trusted, credible and experienced Canadian business financing advisor on the merits and differences in asset based revolving credit facilities in Canada.