Choose Wisely, Not Randomly when it comes to Business Credit Lines
Business credit lines or more specifically, the lack thereof! … Can be a major business and growth challenge for Canadian companies.
Top experts tell us a commercial line of credit is in fact a necessity for any business that sells on credit and has investments in one or either of receivables and inventory. ABL facilities compete with Canadian chartered bank facilities to try and satisfy the thirst for business credit. Let’s dig in.
It should go without saying that commercial credit facilities differ significantly from consumer borrowing. There the emphasis is on personal credit, payment history, credit reports and scores.
The business of commercial borrowing revolves typically around your own firm’s lending practices to your accounts, as well as the peculiarities of your own business model/business cycle.
Credit lines for business really come down to two key areas – how you are managing your assets, as well as what type of commercial borrowing best suits your asset base.
Canadian chartered bank credit line rates are currently at historical lows – so the ability to qualify and borrow against those rates is a win for any business. Businesses that seek out ‘ ABL ‘ (asset based lending ‘) fall into two basic categories:
1. For a multitude of reasons they don’t qualify for bank facilities
2. They qualify for bank credit – but not for the amounts they need!
Businesses can also be considered for ABL lines if they are what the industry calls ‘ story credits ‘. Conditions for story credits typically include:
Explosive growth that doesnt allow for ‘ traditional ‘ financing
Erratic profit and loss history
Businesses that have had their bank loan called – they are in the so called ‘ Special Loans’ category at the bank
Numerous types of ‘ ASSET BASED LENDING ‘ players exist in Canada – they range from divisions and subsidiaries of our banks, U.S. owned commercial finance firms, Canadian finance companies focused solely on ABL lending, and… Sorry for making things more complicated… subsets of asset based loans that focus on niches.
Those ‘ subsets “? They include A/R financing , inventory finance solutions, Purchase Order Financing , SR&ED tax credit financing , and combinations of all the above !
So how do the Canadian business owner and financial manager choose ‘ wisely ‘ NOT ‘ randomly ‘ when seeking business credit lines?
First, get comfortable with how asset based lines of credit work. Typically they bundle your A/R, Inventory and Equipment values into one basic borrowing facility and you borrow as you need from there. By the way borrowing margins are more generous with ABL – receivables are margined typically at 90%, inventory anywhere from 30-70%.
Also, ensure you deal with a firm you are comfortable with from a management and reputation perspective. Some ABL lenders are divisions of asset liquidation firms – and in the past there have been examples of a focus on asset liquidation as opposed to client servicing via lending! Ensure also you’re not paying monthly for borrowing facilities you are not using.
Firms that consider bank ABL facilities sometimes have found those facilities not dissimilar from traditional bank credit. And while rates are (almost) always higher for ABL lines of credit that must be balanced against your ultimate access to capital – don’t just focus on cost. The good news – ABL rates have tended to come down.
If you want to better understand what thousands of business owners have been talking about, i.e. ABL… seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success who can assist you in choosing ‘ wisely ‘.
Author: Stan Prokop – 7 Park Avenue Financial :
Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 – Completed in excess of 90 Million $ of financing for Canadian corporations . Info /Contact :
7 PARK AVENUE FINANCIAL = CANADIAN BUSINESS CREDIT LINE EXPERTISE
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