Working Capital Financing: Why Asset-Based Lines of Credit Work

How can Canadian business owners and financial managers obtain working capital and cash flow financing for their businesses at a time when access to business financing appears to present significant challenges?

The answer is that there is a possible robust solution by the name of an ‘asset-based line of credit’, otherwise what we call a ‘working capital service’. What is this type of financing? Are you new to Canada and more importantly how does it work and what are the benefits and risks?

Although asset-based lenders tend to be specialized independent financial firms, many business people are surprised to discover that deep in the bowels of some Canadian banks exist small, somewhat boutique divisions that specialize in asset-based lending. in assets. Ironically, they often compete with their peers down the aisle in more traditional commercial corporate banking.

The most active assets of these financial firms tend to be accounts receivable and inventory in progress, but in many cases, using an expert advisor or partner, you can structure a facility that also includes an equipment and real estate component.

Generally speaking, a good way to think about an asset-based line of credit is one that over a temporary period, usually a year or so in our experience, allows you to increase your margin and make higher advances on receivables and inventory. . That translates to more cash flow and working capital.

One of the main attractions of an asset-based loan service (experts call it an ABL service) is that the overall credit quality of your business doesn’t play the biggest role in determining whether you can get approved for this type of financing. As the name suggests, the financing is in your ‘assets’! And it doesn’t really focus on debt-to-equity ratios, cash flow coverage, loan covenants, and external guarantees. Business owners who borrow from Canadian chartered banks in the form of operating or term loans are, of course, very familiar with those terms; in a way, we could call them ‘constraints’.

Most lawyers and accountants will tell you that, in fact, any type of business loan should only be considered with a respected, trustworthy, and credible business finance advisor who can guide you through the hurdles and pitfalls of any financing deal. commercial. Missteps in business financing can have long-term negative effects around issues like getting stuck in a facility, giving up too many collateral, or pricing that doesn’t match your overall asset and credit quality.

What are the key issues to consider when considering such a financing service? Mainly they are:

-Advance rates on each asset category (A/R, inventory/equipment)

– How the price is defined (asset-based lines of credit and ABL loans are generally more generous in overall installment size, but you need to make sure you only pay for what you use)

– Contractual obligation: In a perfect world (we know it’s not!) you should be focused on ability to pay at any time or at the very least with some sort of nominal breakage fee

– Make sure the asset-based lending facility, which usually costs more, will allow you to stay or focus on profitability; we spend a significant amount of time with customers on how that can defer the additional costs of Abl facilities through several different strategies

So what is the bottom line? As always, it’s simple: consider asset-based lending and an ABL facility as a solid alternative to financing your business. Work with a trusted advisor, as this type of financing is generally poorly understood or not widely known in Canada. Be selective in structuring your facility around the themes that work best for your business relative to the benefits derived.