Asset Finance continues to be a priority for Canadian business owners and financial managers. One of the ways to achieve this is via an asset based line of credit In the context we are referring to it is a non-bank line of credit, via an independent finance firm, not a bank .
Over the past couple years as we head into 2010 the business of asset based financing and asset based lines of credit has become increasingly complex for business owners. When you enter into or entertain such a facility you should consult with your accountant, or more importantly a trusted and credible and experienced financing advisor in this area of Canadian business finance.
The most important thing you can do in contemplating such a transaction is to both understand the financial offering, and at the same time ensure you understand how the Canadian marketplace works.
Asset finance, or asset based lines of credit provide your Canadian firm with maximum utilization of asset values related to 3, possibly essential components of your firms asset base. Those components are inventory, accounts receivable, equipment, and, as we have noted, in some cases, real estate.
So why does this facility work differently than a more traditional chartered bank line of credit? The answer is simply higher margining. What is meant by that? Well is simply the ability of your firm to leverage higher borrowing, when and if you need it, against those asset classes which we have just mentioned. In the case of receivables it tends to be 90% of receivables less than 90 days, and in the case of inventory it’s a case of understanding in advance the true value of your inventory on an ongoing basis re your costs and ultimate marketability of that inventory.
The beauty of an asset finance and asset based line of credit facility is that you use the facility when you want and to what extent you want – from a cost perspective that equates to paying for only what you use.
Asset finance and asset based lines of credit tend to traditionally be more expensive than banks lines of credit. Let’s just understand the basics of that. Currently banks pay between one or two per cent, perhaps three per cent to depositors in Canada. If they can lend out those funds at 2-300 basis points more – i.e. 5 or 6% rates to your firm the banks consider that a winning proposition . But they want to be secure on that transaction, so that involves your personal guarantee, lower margining of the asset, and strict rules and covenants around ratios, operating performance, etc.
Independent finance firms borrow from banks, or raise capital themselves – they therefore mark up those funds so in general, asset finance and asset based lines of credit cost your firm more .
But if your firm can grow revenues and increase profits with a higher borrowing cost is that not ok. We think the weight of evidence suggests that proper consideration of an asset finance and asset based line of credit warrants significant merit.
The Commercial Finance Association, which is a trade association of asset based lenders, has just reported (June 2010) that 30% of asset finance lenders have increased commitments to their customers and business continues to improve. The bottom line is as follows:
The economy is getting better
Bank lending is still difficult to access for many small and medium sized firms
Asset based finance and lending continues to have significant appeal to small and medium sized firms.
Investigate asset finance, determine your needs, and work with a credible advisor to ensure your Canadian asset facility can help your firm grow revenues and profits.