One You Might Not Have Heard Of When It Comes To Business Credit

OVERVIEW – Information on the business line of credit in Canada. Who offers it ( not just who you think ) , how it works, and how you qualify

The revolving loan for business in Canada. More commonly called the ‘ business line of credit ‘ by the Canadian business owner. Are you sure you really understand how they work, and more importantly, is this the only game in town?

(SPOILER ALERT – It’s not) Let’s dig in.

A good place to start on our subject is to define what business lines of credit are NOT! They are not term loans with defined payments and interest rates, Also they are not covered under the Government SBL loan which only finances equipment, leaseholds and real estate under very favorable terms.

You would never use your business line of credit to purchase capital assets. That typically is done via equipment financing via a lease or loan. The reason for that is simple, but often misunderstood by the Canadian business owner and financial manager. The reason is simply that you want to be able to ‘ match ‘ your financing properly. By that we mean you don’t want to you short term credit borrowing to financing long term capital needs. If you do we can guarantee you that your business will run out of working capital and daily cash flow… quickly.

So think of business credit lines as you daily operating facilities, similar to your personal chequing account that we run our consumer lives on.

A credit line in business is of course essentially an ‘ overdraft ‘ facility. It allows you to draw funds when your operating capital is tied up in inventory, receivables and prepaid obligations. Simple as that.

A key word in business lines of credit, whether they apply to Canadian chartered bank facilities or non bank facilities (more about those later) is in fact the word ‘ REVOLVING ‘. Banks like it when facilities revolve. In general if you have a business line of credit in Canada and you are always at the very top of it there is a safe assumption that two things are happening:

Your asset turnover in A/R and inventory is not happening as quickly as it should

You need a higher business credit line to meet your growth and operating needs (We’re assuming your business is growing – if its not there are other issues to be discussed on another day)

Bank credit lines are structured from a collateral perspective as ‘ DEMAND LOANS’. The simple explanation to that term is that the bank can ask for all the money back at any give time. And we repeat ‘ALL ‘ the money back. At that point your loan is termed ‘ called’ and the scramble ensues!

Your revolving loans will not be called if your business is performing fairly well and you show solid fluctuations in the facility. When we look at a client’s financials we often ask for 3 months of bank statements to see those inflows and outflows.

We have hinted at another solution to revolving loans in Canada. They exist, and are called ABL’S or asset based lines of credit. They are non bank in nature, and they monetize your A/R, inventory and equipment into one business line of credit that you draw against daily as you need it. While typically ( but not always ) more expensive they provide much more liquidity than commercial bank lines and have easier credit qualification when it comes to ratios, covenants, collateral , and the dreaded personal guarantee.

If you want to ‘ plug in’ to alternatives and solutions around the business line of credit seek out and speak to a trusted, credible and experienced Canadian business financing advisorwho can assist you in your operating finance needs.

Author: Stan Prokop – founder of 7 Park Avenue Financial

http://www.7parkavenuefinancial.com

Originating business financing for Canadian companies, specializing in working capital, cash flow, and asset based financing. In business 10 years – has completed in excess of 90 Million $$ of financing for Canadian corporations. Core competencies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details:

CONTACT:

Greg LaBella
7 Park Avenue Financial
Phone = 905 302 4171
Email = greg@7parkavenuefinancial.com

7 Park Avenue Financial
Canadian Business Financing