An Update From The Holy Cow Department On Business Credit Choices
OVERVIEW – Information on the credit line for business. Two alternatives exist for revolving credit; bank line or ABL asset based lines of credit . Here’s the differences
A Credit Line for Business . Occasionally a client will say to us ‘ Holy Cow ‘ I didn’t know that! It turns out ‘ that ‘ refers to the fact that it turns out a number of business owners/ financial managers don’t know they have two choices in revolving credit facilities for their daily operations. One is the Canadian chartered bank solution; the other is the Asset Based Credit solution, known simply by the term ‘ ABL’. Let’s dig in.
Canadian businesses use credit lines for working capital and cash flow. This types of borrowing in effect funds your ‘ current assets ‘, typically A/R and inventory. Because no business in Canada runs on a straight line when it comes to the ups and downs of sales, collections, etc credit lines address those ‘ bulges’ in our businesses.
Two solutions, as we have noted becomes your ‘ choice’ for the business credit line. The first is the Canadian chartered bank, the other is a non bank commercial financing facility known as ‘ asset based credit ‘.
How do these facilities compare in price, which most clients focus in on immediately? The reality – if your company is established, growing, has profits and a clean balance sheet and is of a decent size the costs of these two facilities are in effect ‘ neck in neck ‘. At this point everyone wants your banking business and you’re in charge of who gets it. Not a bad situation to be in.
Unfortunately we very rarely meet clients in the Canadian business financing landscape that have the ability to be ‘driving the bus’
when it comes to addressing financing needs. Of course large private corporations, public companies and subsidiaries of multi nationals have the option to demand the most facilities at the lowest cost. It just turns out that in Canada that seems to only cover 5% of the companies who need financing.
Because of that ‘ size’ breakdown ABL asset based credit facilities tend to cost more. The reason couldn’t be simpler – it’s that the commercial finance firms offering this credit are in fact borrowing from banks… to lend to your firm!
While any business can theoretically ( key word = theoretically ‘!) obtain a bank business credit line, secured or unsecured , the ABL credit line typically works best for facilities in excess of at least 250k . Upper limits can of course range into the millions and tens of millions.
One key point in the choosing of which facility makes sense for your firm is the fact that ABL facilities tend to, 99.9% of the time, create more borrowing power for your firm. Simply speaking receivables and inventory are margined higher, and you have the ability to throw your fixed assets into the mix, borrowing against their value when you need it.
When your firm is banked by a Canadian chartered bank a strong element of trust exists between your company and the bank. You’ve passed with flying colors the key requisites of a good commercial bank facility – profits, clean financials, good cash flow, and the ability to meet ratios and covenants required by our regulated bank system in Canada.
Many clients for whom we originate bank financing simply have to report annually, or in some cases monthly on their borrowing needs and financial results. The ABL lender is more generous, and, no surprise, more cautious.
So while your borrowing ability increases you tend to be reporting more often on asset values of your firm. In our experience this just makes your firm a better ‘ manager of assets ‘ so that’s hardly a bad thing.
If you’re uncertain about which business credit line works for your company seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with a credit line for business that makes sense for your company’s borrowing needs.
Author: Stan Prokop – founder of 7 Park Avenue Financial
7 Park Avenue Financial
Phone = 905 302 4171
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7 Park Avenue Financial
Canadian Business Financing