Asset Based Lending Lines Of Credit Canada
Asset based lending in Canada is a solid financing alternative for firms that require
financing for the traditional build up of accounts receivable and inventory that come with sales and revenue growth . More and more Canadian firms who purchase product overseas or in the United States marketplace are finding of course that to achieve economics of scale in pricing and shipping they have to purchase in significantly larger quantities, and also allow for shipping time. And, even more critical is the questions of how to address the supplier's payment request which often includes hefty deposits or full payment in advance.
Although established firms have access to operating liens of credit with Canadian chartered banks even these facilities often cannot provide the full financing resources that come with strong, explosive, or seasonal bulges in revenue growth.
Enter asset based lending, or the actual facility which is called an asset based line of credit. The simple definition and explanation is as follows it is an operating or revolving line of credit facility that totally focuses on the assets of your firm, those being primarily inventory, receivables, and fixed assets such as equipment.
When your Canadian firm applies for a chartered bank line of credit there is a very strong focus on your operational metrics and your overall all balance sheet and income statement rations. A line of credit is set up with your bank that is very much related to your firms tangible equity, its debt load, historical cash flow, etc. ( Yes, we said historical cash flow! Which means that the banks focuses on how you have generated cash and profits in the past! That is little solace to the mfr, wholesales or distributor in Canada that needs cash flow now to fulfill order, contracts, etc.
The asset based line of credit places only a small reliance on those issues, what if focuses on instead is the true current value of your inventory, receivables and unencumbered equipment assets. Asset based lending specialists have a very strong sense and experience around the true liquidation values of your inventory , receivables, and fair market values of your equipment . Therefore the final amount of the asset based line of credit you are approved for is often, almost 99% of the time, larger that a bank facility. That allows you to draw down immediately on the values of those assets, generated more cash flow. Many companies who have bank lines in Canada actually do not even have an inventory component in those facilities so just the fact that you can now generate today cash flow out of inventory values is a huge cash flow benefit.
While asset based lending in the U.S. and, more recently in Canada was considered a non traditional form of business financing it has clearly now entered the mainstream. You would be very surprised at the medium and large corporations in Canada that utilize this type of financing.
Different financing strategies achieve different benefits for each company. The main benefits of this type of financing facility are:
-Easier to set up , get approved, and administer
-Although facilities are set up with an initial cap the reality is that as your assets grow via increased sales the facility grows also Why? Because, as we said, its asset based, not covenant or ratio based
-Higher advance margins are place on receivables, usually 90%, and inventory, which in many cases hasn't been or couldn't be financed before is now immediately financeable
-The facility usually always includes a/r and inventory , but more often than note has a fixed asset equipment or real estate component also
ABL facilities, which is the acronym these financings are known as, are specialized financings. They are an alternative to bank or traditional financing. They are becoming more popular everyday, and business owners are encouraged to speak to a specialist who is trusted, credible and experienced in this exciting new area of Canadian business financing.
by: sprokop
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