Are you on board or close to falling off the track? We’re of course talking about Canada’s newest entrant into business credit financing, commonly called an ‘ asset based line of credit ‘.
Let’s talk about what this type of business financing is, why is it different from what you may have come to expect, and what are the benefits for your business when you consider this type of financing.
It is all about one word – ‘ assets’ – if you have them, you qualify, if you don’t have them, well, lets not go there…
An asset based line of credit loan in fact is not a ‘ loan’ per se, that’s where we spend a lot of time talking to clients about what this type of financing really is – because they view it as borrowing and adding debt to the balance sheet.
In reality the asset based financing we are talking about is simply a revolving line of credit that is tied very specifically to the value of your assets – the most common asset categories under this line of credit are inventory and receivables, the other assets that can be thrown into the mix are unencumbered equipment, tax credits, real estate, etc . And again, at the risk of over repeating, we are not talking about loans, we are talking mainly about borrowing on a daily basis, as you need it, and using these assets as collateral .
We have seen countless examples of how this type of Canadian business financing has increased a company’s borrowing ability by 100-200% or more. How can that possibly be, ask clients. It is simply because the borrowing you are used to, if you have been able to achieve it, is based on rations and covenants and credit limits, and your ability to achieve forecasts for institutions such as the Chartered banks. When you aren’t able to achieve that we will call traditional cash flow financing in Canada via a business line of credit the asset based facility is a solid solution.
Clients invariably ask ‘ How do we get approved – do we qualify?’ – We have already talked about your qualifications- got assets? You’re approved. That’s a simplistic answer, so let’s explain in more detail. Typically in Canada these types of financings work best for facilities in the 250k+ range. Facilities smaller than that tend to be receivable based financings only. In general the asset based lender prefers a higher ratio of receivables to inventory, but that is not always the case, depending on your industry and your asset categories.
Most Canadian business owners and financial mangers know the general cost of bank financing – asset based financing is more expensive, but offers you unlimited liquidity without the shackles of ratios, covenants, outside collateral, emphasis on personal guarantees. Many of the largest corporations in Canada use this type of financing, but it also covers what we call ‘ story credits ‘. These are cases where your firm is in a turnaround, perhaps it has new contracts, perhaps you are coming off a less than satisfactory year, etc. There are a multitude of reasons for choosing this type of financing.
So if cash flow finance is your challenge and asset based line of credit is your solution. Speak to a trusted, credible and experience Canadian business financing advisor who can demonstrate to you the benefits of this innovative form of a new breed of cash flow finance for your ongoing growth needs.