OVERVIEW – Information on asset lending as the newest form of a business revolving line of credit . Here’s why this works .. and how
Is a business revolving line of credit the only one of its kind in Canada, or the universe for that matter? The answer is a resounding ‘ no ‘! – Apparently it’s really a ‘ multiverse ‘! where asset lending has created a unique version of business borrowing for revolving credit facilities. Let’s dig in.
Asset lending is somewhat of a ‘ stealth ‘ type of borrowing in Canada – unbeknownst to many it has become extremely popular. So in our parallel universe we have the Canadian chartered bank line of credit as well as the ‘ABL’ (Asset Based Lending ‘) facility. While our banks choose to focus on a combination of cash flow, balance sheet proportions, and evidence of good profits the ABL credit line chooses to keep it simple – it’s all about your assets – namely a/r , inventory, and fixed assets; any single or combination thereof .
The asset based line of credit also distinguishes itself in that it can also be used as the base financing for purchasing a business, merging with one, or reviving one via a turnaround. Larger retailers, who typically only carry inventory as their financeable asset, are excellent candidates for asset lending as one can imagine.
In the U.S. for example some of the largest and most successful well known corporations have turned to asset based lending as their ‘ credit line of choice ‘. It should be mentioned that for larger successful companies there is almost no negligible difference in rates/financing costs when benchmarked against bank lending.
However, in the SME COMMERCIAL FINANCE area in Canada these facilities, while providing more liquidity come at a higher cost. So for the business owner/financial manager its all about balancing liquidity needs and access to capital versus cost of financing.
Similar to bank facilities the ABL credit line is typically renewed on a yearly basis; although some companies prefer (or are asked) enter into multi year commitments for the financing.
How do commercial asset based lenders justify this type of borrowing when it comes to their own returns and risk? The answer is quite simple – as one top expert put it, they are ‘ fanatical’ about asset quality and turnover, as well as putting in more disciplined reporting. This offsets the need for covenants, ratios, and outside collateral, which is the staple of commercial bank lending in Canada.
Typical asset lending provides a borrowing margin of 90% on receivables and a much higher level of borrowing power on inventories and fixed assets. So, in case you haven’t figured it out your business has access to different solutions in your business revolving line of credit needs. Whether it’s traditional bank financing or credit line achieved via asset lending seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you navigate the financing universe, or should we say ‘ multiverse’.
Writer 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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