Canadian business owners and financial managers will quickly acknowledge that is more challenging than ever to successfully obtain a business line of credit. That same challenge is why an ABL is fast becoming the business financing vehicle of choice for many Canadian firms. Great, say our clients, but what is an ABL?!
ABL is an acronym for an 'asset based line of credit '. This business line of credit is a working capital facility, similar to your bank facility that provides working capital on a regular basis against inventory, receivables, and in many cases equipment and real estate if that is applicable. We can argue the case forever on whether Canadian banks are providing the right amount of financing and support for small , medium, and yes even large businesses in Canada we don't think we'll get full closure on that discussion .
Therefore let's simply assume you either can't qualify for a chartered bank business line of credit or that you perhaps do, but the facility doesn't meet your needs. That's where an ABL, or asset based line of credit comes in.
So whats the solution and how does it work ask our clients. It's a simple, no nonsense form of financing provided by non bank type firms. You can choose to call it alternative financing, but we can assure you this form of 'alternative financing 'is becoming more mainstream and popular every day.
Because the chartered banks focus on traditional metrics such as your overall financial performance, outside collateral, personal guarantees, etc you will find the overall ABL process much simpler and common sense. It's simply a case of borrowing against your real assets, with little or no reliance on the issues we outlined above relative to a bank type facility.
The specialty of an asset based line of credit provider is simply their strong knowledge of your industry and assets so because of that your ability to generate almost unlimited working capital becomes very obvious very early on in the picture. What do we mean by that? Simply that if you have receivables, assets and equipment you can always borrow against them on an on going basis typically you can draw down on 90% of receivables, 40-70% of your inventory values, and pre agreed upon amounts on the appraised value of unencumbered equipment .
Typically companies that are the best prospects for this type of financing are firms with fast growth and in some case a limited track record i.e. a start up, etc.
In some cases this type of business line of credit could possible be complimentary to your existing bank facility, but more often than not if replaces it totally.
While there are a number of key advantages to an asset based line of credit they do normally cost more than bank facilities Depending on the size of the facility and the overall nature of your firm, its industry, and other challenges you might be facing the final pricing will reflect a realization of those issues. But let's keep in mind that you have in effect just negotiated unlimited working capital, and have the ability to turn assets more quickly and generate increased cash flow, revenues and profits. That's a true business financing triple threat if we have every seen one relative to your competition in your own particular industry.
The bottom line is to ensure you understand that you have a non bank alternative when considering a business line of credit via an asset based facility. Yes, it will cost more, but those costs can be significantly offset by increased cash flows via inventory turns, ability to purchase smarter with that cash, and to convert receivables immediately into cash for additional sales efforts. Speak to a trusted, credible and experienced advisor in this area to ensure that you determine if you can benefit from such a business financing arrangement.
About the Author:
Stan Prokop is founder 7 Park Avenue Financial ; Originating financing for Canadian companies,specializing: working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies . For info / free consultation on Canadian business financing / contact details see: