Considering an ABL Asset-Based Secured Business Line of Credit ?

What Canadian business owner or financial manager hasn't wondered if they have properly considered all the financing alternatives available to their firm in today's challenging borrowing market? One mechanism not fully known or understood properly is the secured ABL asset-based business line of credit. Is it for your firm? You'll decide shortly!

Although Canadian commercial bankers still proudly trumpet the fact that chartered bank commercial credit facilities are widely available, hundreds or thousands of businesses in Canada are unable to meet the qualifications for such financing. Basic qualifications for a bank credit facility that margins receivables (and hopefully inventory) are not complicated to understand. They are of course difficult to achieve or provide! They include clean balance sheets, income statements that show profitability and positive cash flows, both historical and current. Oh, and by the way, owners must often backstop these facilities with guarantees that often require personal assets to be either pledged.

Don't get us wrong. Bank financing in Canada is available and cost effective, but it's simply just a bit harder to get if you can't qualify under out criteria we set out above.

So, enter the secured ABL facility. Here's business working capital and cash flow financing with an emphasis on only one word: Assets! The ABL lender is focused. That focus? Your key business assets of receivables, inventory, unencumbered fixed assets. You borrow against the total current market value of these assets via a revolving secured business credit facility. If there is a bottom line, it's a simple one - a focus on collateral, not ratios, covenants or outside collateral.

A common question from clients revolves around what dollar level of facilities is either the entry point or the cap on such secured facilities. The good news is that there is no upper limit on deals in Canada. In fact, unbeknownst to many, some of Canada's largest companies use ABL facilities, having forsaken bank facilities that no longer make sense for their business.

We consider a solid entry point for such facilities to be in the $250,000 range, which more often than not is a combination of receivables and inventory. We hasten to add that there must be a reasonable mix, as typically A/R has a higher borrowing value. However, there is always an exception to the rule, so a good example of a great solution is the financing of inventory for retail chains, etc.

Pricing on secured facilities fluctuates widely in Canada. Pricing can be either below bank comparables, slightly higher than or as high as 1.5-2 percent per month, depending on who you choose to deal with. Mid-market firms who have assets are great candidates for this type of business financing,

A proper submission for an facility should include financials, proper aged payables, receivables and inventory, as well as miscellaneous information you would associate with any type of business finance application.

So why consider an alternate method of financing in the new year? It's about increased borrowing power, easier qualifications and competitive pricing commensurate with your overall credit and asset quality.