A Line of Credit Based on Assets: Unlock Your Business's Hidden Potential
Stan Prokop
Canadian Business Financing | Cash Flow Financing | Asset Based Lending | Equipment Finance | Lender Financing | Purchase Order Financing | Acquisition Financing | SAAS Financing | Acquisition Financing
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: Asset-based lines of credit revolutionize business financing by transforming idle assets into powerful sources of working capital.
Unlock your business's hidden wealth: Turn assets into instant cash flow with asset-based lines of credit.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer LINES OF CREDIT BASED ON ASSETS solutions that solve the issue of cash flow and working capital – Save time, and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
A Line of Credit Based on Assets - A Solid Business Loan Strategy
A line of credit based on your sales and assets allows your business to unlock true financial and cash flow potential.
These credit lines allow you to leverage key assets - inventory, equipment, or accounts receivable, fixed assets, and even commercial real estate - That is true flexible funding!
For companies unable to achieve traditional bank financing in Canada, facing cash flow challenges, or seeking growth capital, the non-bank asset-based line of credit is a solid finance tool.
How To Get A Business Line Of Credit In Canada
Our Canadian chartered banks and ‘non-bank’ commercial lenders offer true business lines of credit.
These non-bank lenders, often called asset-based lenders ( A B L ), operate outside banking regulations and are privately owned.
Both solutions offer revolving facilities, except that asset-based lines of credit focus more on your business's substantial assets.
It is important to understand that a revolving line of credit is typically tied to sales. As you sell your products and services, you generate collectible receivables ( hopefully ) and turn inventory if your company sells a product rather than a service.
Typical bank facilities focus on account receivables and sometimes have an inventory component tied to the borrowing formula. ( That formula, by the way, is known as a ‘ borrowing base ‘, which is an important concept to understand in business credit lines.
Out of this borrowing base, you will draw down your firm’s cash flow needs on an ongoing basis.
Asset-based lenders focus and lend more against your assets, and in turn, they tend to monitor your a/r and inventories more closely - as those two assets are typically the prime collateral for your asset-based loan.
KEY POINT -
Asset-based lines of credit, the non-bank type of facility, also can easily put your owned fixed assets into the borrowing formula. This total focus on ‘ assets ‘ greatly increases your borrowing power when combined with a/r and inventories.
Bank Line Of Credit Vs. Asset-Based Credit Lines
While banks do require some ongoing reporting on your assets, typically monthly, sometimes only annually, they instead focus substantially on your operating characteristics of profit, cash flow, debt load, and character and personal collateral of owners.
Banks finance inventories but are often challenged by their ability to understand and monitor them, while asset lenders have developed experience in numerous industries and inventory types.
Borrowing conditions for inventories depend heavily on the type of inventory and its overall liquidation ability.
For example, perishable foods are often hard to finance.
Business Credit Line Rates & Cost
What’s my rate? That’s the ongoing battle cry of business owners and financial mgrs when they consider a line of credit needs and benchmark the offerings of their bank or asset-based lender.
While your borrowing capacity can often double or triple in asset-based revolving facilities, they come at a higher cost. A credit report check for a line of credit can lead to a hard inquiry, temporarily lowering the credit score.
Conventional bank financing is cheaper but more challenging regarding the amount of approval or whether your firm is bank-financeable! An interesting note is that in recent times, due in part to general competitiveness and the low-rate environment, asset loans have dropped in overall cost. You only pay interest on the money borrowed, and the interest rate can be affected by your credit score.
Startup, fast-growing, as well as financially challenged companies, are prime candidates for asset-based lines of credit.
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They have limited or challenged cash flow generation performance but require rapid access to cash flow and working capital. The conservative financial position demanded by banks focuses on ratios, cash flow, debt-to-equity relationships, and owner guarantees.
It’s important to note that many, shall we call them ‘ subsets,’ of asset-based loans can help deliver liquidity to your business.
Other Working Capital / Cash Flow Alternatives
Factoring/Confidential A/R financing
Bridge loans
Sale-leaseback strategies on physical assets /equipment
SR&ED Cash flow loans
Short-Term Working Capital Loans ( Note - while these short-term working capital loans are popular and positioned as business revolving credit lines, they are, in fact, just short-term loans based on 15-20% of your sales volume and are tied to the personal credit history of the owner/owners.
Personal loans offer lower interest rates than credit cards and can be used for unexpected expenses or consolidating higher-interest-rate loans.
KEY TAKEAWAYS
CONCLUSION
If you’re focused on ‘ keys to success ‘ in your working capital and cash flow needs, call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor with a track record of success in business finance.
FAQ
How does a line of credit based on assets differ from traditional loans?
Asset-based lines of credit offer revolving funds secured by collateral, providing flexible access to capital to borrow money as needed, unlike fixed-term loans from banks and other financial institutions with predetermined repayment schedules.
What types of assets can be used as collateral for this financing?
Common collateral on a company's assets consists of accounts receivable, inventory, equipment, and real estate. The specific assets accepted depend on the lender and your business type.
How is the credit limit determined for an asset-based line of credit?
Credit limits are typically calculated based on a percentage of eligible collateral value, known as the borrowing base, regularly updated to reflect current asset levels. Eligible accounts receivable are those receivables under 90 days old.
What are the main advantages of using an asset-based line of credit?
Benefits include improved cash flow, flexible borrowing, potentially lower interest rates, and the ability to leverage existing assets without diluting ownership.
Are there any drawbacks to consider with asset-based lines of credit?
Potential drawbacks include stricter reporting requirements, ongoing collateral monitoring, and the risk of losing pledged assets if unable to repay the borrowed funds.
What happens if the value of my collateral fluctuates?
Your available credit may increase or decrease as asset values change. Lenders typically conduct regular collateral audits to adjust the borrowing base accordingly base on agreed upon loan to value ratios in the borrowing base agreement.
Can startups or new businesses qualify for asset-based lines of credit?
While more challenging, some lenders may offer asset-based financing to newer businesses with strong collateral and growth potential. However, established companies often have an advantage. Banks focus on cash flow lending, making it difficult to access business credit. Many start up and early stage companies force the owner to consider a home equity line of credit to access capital they need for the business.
How quickly can I access funds from an asset-based line of credit?
Once established, you can usually draw funds within 1-2 business days. Some lenders offer same-day funding for urgent needs, subject to available credit.
Is personal credit a factor in obtaining an asset-based line of credit?
While personal credit is considered, asset based lending focuses more on the value and quality of collateral. This can benefit business owners with less-than-perfect personal credit.
How does an asset-based line of credit impact my company’s balance sheet?
It appears as a liability on your balance sheet but can improve working capital ratios by converting assets into predictable cash flows based on sales and assets. This can potentially enhance your financial position.
What factors should I consider when choosing between an asset-based line of credit and other financing options?
Consider your collateral availability, cash flow needs, and business needs around growth.
' Canadian Business Financing With The Intelligent Use Of Experience '
STAN PROKOP 7 Park Avenue Financial/Copyright/2024
Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil