Wednesday, May 2, 2012

Asset Based Line Of Credit and Working Capital

Canadian business owners and financial managers are increasing optimistic about 2010. That optimism is balance with their concerns re their ability to finance both operations and growth.
An asset based line of credit is a solid working capital alternative for Canadian business. Although financing continues to be one of the most serious considerations for business in Canada the alternatives are certainly not as available and obvious as they once were.
Working capital and capital expenditures top the list. Small and medium size business naturally has the greatest challenge, as they don't have the bench strength of larger firms. While Canadian chartered banks are certainly paying lip service and trying to, for the most part support small and medium business the reality is that the ability to finance basic growth of inventory, receivables and contracts is a challenge.
So is there a Canadian solution to additional working capital and cash flow needs when traditional bank financing can't be finalized? The reality is that more and more Canadian businesses are considering a financing solution that is becoming more developed every year in Canada - that solution is broadly referred to as an asset based line of credit, or a ' working capital facility '.
Is there a special requirement for this type of financing - just one? Assets! Asset based lending is simply the provision of the maximum amount of cash flow and working capital that can be loaned against assets. We used the word loan. But this is not a loan or term loan, it is a revolving facility based on inventory and receivables, (and sometimes customer purchase orders) that your firm generates. The facilities only security is of course the A/R, inventory, and unencumbered equip that your company has available to finance.
Our clients usual ask - ' Well don't banks do this also?' And the answer is of course yes they do. But traditional bank financing in Canada focus on balance sheet ratios, income statement rations, and covenants and outside collateral.
Asset based lines of credit, or working capital facilities as we have called them focus on only one thing, the collateral. These facilities are provided by independent commercial finance firms, and pricing varies by transaction facility size, the overall quality of your business risk profile, and, more importantly who you pick as a partner firm in this area. We therefore strongly recommend that since this is a newer breed of financing that you speak to and work with a trusted and credible business financing advisor in this unique area of Canadian business financing.
So what is really happening in our facility - it is simply leverage the business assets you have on an ongoing basis to their maximum monetized value. That tends to be 90% of receivables under 90 days, as well as inventory advances of 40-80%, and on top of that unencumbered equipt is valued and advanced on if required. (Real estate is also a component, although less widely used.)
Years ago a description of this financing would have come with terms such as ' lending of last resort ' but the new reality is that asset based lending is fundamental to thousands of businesses in Canada , and growing everyday .
Asset based lines or credit and working capital facilities - investigate them, consider the advantages, and benefit from the cash flow and working capital they bring to the growth of your Canadian business.

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