Asset based lines of credit are solid solutions for Canadian business financing. They are often an alternative to a Chartered bank line of Credit – (in some cases the banks themselves even offer this unique financing as a subset of their services)
Asset based lending should not be confused with ‘loans ‘or ‘term debt ‘. Instead it is a working capital or line of credit facility that is tied to your firm’s inventory, receivables, and in some cases equipment and real estate can be added.
Although asset based lending, or ‘ ABL ‘ facilities as they are called are often viewed as an alternative to Canadian chartered bank lending, the hidden reality is that some of the largest corporations in Canada are now utilizing this type of financing . So if some of Canada’s largest corporations have abandoned traditional bank financing should your firm at lease consider and learn more about this type of facility. We certainly think you should investigate both the benefits and the mechanics of this type of financing facility.
Rates on ABL facilities in Canada vary, and you can pretty well guess the parameters of why they vary – which is simply:
– deal size of the facility
– your firms overall credit quality, and some component of assessing what industry you are in and
– How your industry functions Vis Vis profitability, seasonality, and other industry dynamics.
– We can say in general that rates on ABL facilities in Canada go from 7-9% per annum to 1 ½% per month depending on most of the factors we listed above.
Overall credit quality challenges should not deter you from looking into a Canadian asset based lending solution – for the simple reason that this type of financing focuses on assets, not overall balance sheet and income statement quality. Simply put, your company might be currently losing money or experiencing a unique challenge, but you might find you still qualify for a very significant facility.
On a day to day business the most significant feature of an asset based line of credit is the ability for you to bridge cash flow that you have tied up in inventory and receivables. Your asset based line of credit will fluctuate based on the key elements of the ABL security, namely the receivables and inventory. The good news is that as your receivables and inventory grow you can draw down on more funds – unlike a bank facility which might have certain caps on how much exposure the bank will take with your firm on an operating line basis.
The one aspect that you should consider in such a financing solution is additional reporting, but if you can properly account and report on receivables, inventory, etc you should not be concerned. Many clients tell us that some of the additional ‘reporting’ that comes with an asset based credit line actually has helped them understand their business better!
In summary, asset based lending solutions are working capital and operating facilities that are non bank based. They can provide you with greater liquidity and access to capital that might normally not be achieved through traditional banking. Talk to an expert in the area, determine if this financing meets your needs, and ensure, with the help of an expert, that you access the type of facility that provides you with working capital in a manner that suits your company’s cash cycle