A business line of credit may or may not be achieved via a bank facility .only. One of the fastest growing trends in Canada revolves around a concept known as an ‘asset based line of credit ‘. Ironically when we meet with many clients they are not even familiar with the term, let alone its benefits!
So what are the two reasons this type of business financing is in fact better than a Canadian chartered bank line of credit. They are as follows:
1. The facility will bring you higher levels of liquidity, cash flow and working capital based on your asset base
2. You qualify much more easily for a facility that is in fact even higher in line of credit requirements
In recent years the term asset based lending had somewhat of a negative effect or perception when it was discussed by business owners. But, guess what – time changes, and nothing changes faster than trends in business. The 2008 and 2009 global economic meltdown forced thousands of businesses, small, medium and even large to re assess their financing. In some cases that was simply because their financier disappeared! This happened less so in Canada, but the ripples of global liquidity clearly touched Canada also!
So let’s get back to our premise #1 which is that utilizing an asset based line of credit brings you greater liquidity. Why is this so? It is simply because the asset based facility focuses solely on the assets. Traditional financing, as you may have so painfully discovered, focuses on balance sheet ratio, profitability, external collateral, and personal guarantees. The reality is that if your firm is selling shoes to WALMART then historically your bank or lender had no sense of what those shoes were worth or what to do with them in a worst case scenario.
Enter asset based lending! Working with a credible, trusted and experienced asset based lending advisor will allow you to truly leverage assets to borrow for more liquidity, working capital and profit growth.
So what are those assets you can leverage – they are as follows:
Equipment (that is unencumbered)
Look at your current working capital and credit facilities – you may have these through a bank, or even more challenging, you might be self financing. If you could leverage tomorrow 90% of your receivables, 50-70% of your inventory, and borrow on a monthly basis against fixed assets would that work for your firm? We have a feeling that in many cases we just doubled and tripled your borrowing power.
Let’s look at our premise # 2- you qualify for more capital with less stringent qualification requirements. This point somewhat dovetails on our point #1 – that is to say that the total focus of an asset based line of credit revolves mostly around one work – the ‘ Asset ‘ ! The values of your assets in fact determine your total operating facility – it is not pre determined by balance sheet ratios, covenants, etc. Most business owners and financial managers use the facility for the primary purpose of providing day to day working capital and liquidity to their firm. Asset based lending has less stringent overall requirements, but we should mention of course that it generally is more expensive than bank financing.
In summary, an asset based line of credit can be used for:
Acquisition of a Competitor
Speak to an expert in this area and determine if the benefits of a true asset based line or credit or non bank working capital facility work for your firm.