Business Finance Solutions

Stan Prokop asked:

Canadian business owners and financial mangers place a great importance on their ability to achieve and maintain operating lines of credit. Traditionally in Canada the bank line of credit is also called an ‘ operating loan ‘. It is short term in nature, it actually revolves day to day, and so may finance people also call the operating facility a ‘revolver’

So what does that facility provide the Canadian firm with? It is simply a financing facility under which the bank agrees, in advance, to lend a maximum amount of money – typically against receivables and inventory. The facility is short term in nature, not a term loan, so it does not include equipment or real estate, which is financed under other conditions.

In bank lines of credit certain conditions have to be met by your firm, and you are generally paying interest only o the amount outstanding on a daily basis. Revolving lines of credit or operating lines work best when they go up and down. Typically customers that are always at the top of their credit line are in fact candidate for other financing such as equity or cash flow term loans.

Most Canadian business owners know that the bank focuses more on receivables than inventory. Because inventory cannot easily be converted into cash by a bank, (if it had to) you will typically get a much lower advance rate or margin rate on inventory. So, what happens when this traditional type of financing doesn’t work for your firm? You will know it is not working when some or all of the following seem to occur:

- You are consistently maxed out on the operating line
- Collections are slow, which further exacerbates the line revolving to your and the banks satisfaction
- You are worried that you do not consistently have enough cash flow and working capital to take on new orders or contracts.

Is there a solution? Absolutely – a new breed of line of credit financing is gradually taking hold in Canada. It is called ABL, or asset based lines of credit. The total focus of these facilities are to maximize the liquidity of your assets to a much greater extent – and when we say all assets we mean inventory, receivables, equipment, potentially real estate, and new contracts and purchase orders. That’s true asset based financing!

One of our customers had a 100,000.00 line of credit with a Canadian chartered bank that grew into a 2 Million dollar asset based financing arrangement. The asset based lending industry is robust in Europe and the U.S. It is slowly taking traction in Canada. Although one or two of the banks offer these facilities, the majority of this type of financing is independent of the banks. Due to the somewhat early and fragmented nature of this financing in Canada your firm is strongly encouraged to seek the experience, advice, and credibility that comes with talking to a business advisor in this area of Canadian financing.
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