Asset based lines of credit are a unique way for Canadian business owners to achieve operating liquidity outside the chartered bank environment.
Asset based lending, also commonly known as ‘ABL ‘ financing in Canada, is not debt financing, and should not be confused as such – It is operating and working capital financing.
Asset based lines of credit are used by medium sized firms and larger firms throughout Canada, and are growing in popularity. In general they are inappropriate and difficult to structure for small firms and start ups – In those two cases it might be more advisable to focus on straight receivables financing solutions such as factoring.
Canadian asset based lines of credit are structured around some of the following parameters:
– Industry fundamentals such as asset quality and perceived industry risk
– Your general credit profile
– Size of the financing facility and who is offering the facility (the industry is somewhat fragmented in Canada
We noted your firms ‘ general credit profile ‘ as a key consideration. Probably the most surprised of our clients are the ones that now understand that while overall financial statement strength is one factor in the financing facility such as this, it is absolutely not the most important factor. Why? That is because an ABL facility focuses more on assets than operational performance.
We are not telling clients that they can get an asset based line of credit if their firm is in a serious death spiral, but if your firm has challenges such as temporary operating losses or an extenuating circumstance setback you still are a very strong candidate for asset based financing credit.
How do these facilities work? Very simply it’s a similar version of a bank operating line of credit, but without many of those restrictions, covenants, additional collateral requirements, etc. Receivables, inventory, and sometimes equipment and real estate are margined to their proper values. Typically that is receivables at 90-100% of invoice value, inventory at 40- 80%, and equipment and real estate per acceptable appraised values.
Are there any drawbacks to such a facility – we can think of two discussion points and they aren’t necessarily hard and fast drawbacks – those two points are :
Asset based lines of credit traditionally have higher pricing than bank lines, and you are more often than not required to do detailed reporting of a/r, inventory values, etc on a monthly basis . We point out to customers that additional reporting can sometimes turn into a benefit as it helps you understand your business better!
In summary, asset based lines of credit are financing facilities that provide alterative funding to typical banking type arrangements. They almost always give your more capital, you do not incur debt, and in many cases can help your firm either regain its financial footing or grow more quickly.
Talk to a credible, experienced financing expert for information on this unique type of financing.