The Perils Of Perception In Asset Based Business Lines Of Credit
OVERVIEW – Information on business credit lines in Canada. Whether it’s the bank or asset based loan it’s critical for owners/managers to understand the positive and negative implications of each type of revolving facility
Business credit lines , we’ve found, come with certain ‘ perceptions’ from business owners and financial managers in Canada. There are some dangers in those perceptions. Let’s dig in.
A business revolving credit line actually comes in a couple different shapes and sizes – and the differences between bank facilities and other commonly used financing methods are significant. So how about a ‘ hall pass ‘ on our subject. We’ll look at the typical use of these facilities, who qualifies for what, and how they are structured in terms of collateral and security. Along the way you’ll see there are some benefits and disadvantages from each type of facility, as well as some major cost differences.
Revolving credit lines are a specific type of secured financing and are directly related to the current and fixed assets of your business. Although Canadian chartered banks typically lend against receivables and inventory ( mostly receivables actually ) an Asset Based Lender has the ability to bundle a/r, inventory, and even your fixed assets into one asset base you can borrow against on a continuous basis . That’s one of the key differences between a bank line and a credit facility
Credit facilities are available from either a bank or commercial finance firm for almost any size, and no firm is really ineligible – every industry really qualifies and that includes mfg firms, distributors, service firms, and technology related industries. Firms that sell on an all cash basis rarely qualify for bank or asset based credit lines unless they are large retailers where the financed asset is the inventory.
If there is one simple way to view the difference between a bank credit line and an ‘ ABL ‘ solutions it’s simply the difference in how each of those two lenders looks at it. One is cash flow based (‘the bank ‘ ) and the other is asset based. (‘the asset based ABL lender’).
Asset based lending focuses on the constant ebb and flow of turnover of assets – in almost every business there’s a certain ‘ rhythm ‘ in that turnover that constantly repeats itself. So as the ABL lender gets comfortable with your peaks and valleys, and the quality of A/R and inventory it’s relatively easily for your business to achieve all the working capital you need based on sales and asset growth.
Costs are a huge aspect of the conversation around bank vs. ABL lending. While mostly, (but not always) more expensive, asset based lending delivers on more borrowing power. The business owner/manager must balance access to credit vs. cost of credit. Additionally banks impose various covenant and ratio restrictions that must be met. Those restrictions tend to be only borrowing based focused when it comes to an asset based lien of credit.
If you’re looking to maximize liquidity and borrowing power from business credit lines, and want to know the difference between your two choices seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success who can ensure your credit line needs are met with an objective and workable solution.
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 ASSET BASED FINANCE AND BUSINESS CREDIT LINES EXPERTISE
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