Lawyers, Guns and Money – You need neither of these to ensure you have access to a Canadian bank line of credit. We simply love that term, it’s actually the title of a great song by Warren Zevon.
But you do need to ensure you understand the difference between a business line of credit in Canada, what you need to qualify, and how these facilities work. More importantly, are there alternatives to this type of operating line financing. There are!
Naturally Canadian chartered banks are the first stop in a business owners or financial managers mind when determining a source of operating financing and working capital.
From a banks perspective it’s a very strong focus on your ability to achieve the amount of operating credit you need – secondary to that of course comes your overall collateral.
It’s sometime easy to forget why bank credit is sometimes difficult to obtain – we sometime forget to focus on the fact that our banks in Canada have to obtain the right capital base relative to what they lend – they have their own issues relative to profits and maintaining liquidity. That then affects your business, because your collateral, cash flow, collateral and guarantees directly impact your ability to access their credit facilities.
Unfortunately many clients often find themselves placed into a ‘ non performing’ loan status because your financials don’t fit into what the bank considers a performing well loan. The reality is that if your business is growing you are using cash, not generating it, and that becomes a prime challenge in getting the amount of business credit you need.
It’s a bit of a balance act at all times of course, the irony is that bank interest rates on a business operating line of credit are absolutely the lowest cost of financing in Canada .
We have often thought that the actual ratios and financial covenants that come with bank credit are much more important than the Canadian business owners need to get the absolutely lowest rate in bank financing – typically that is 1-2% over prime. You never want to be caught in the trap of managing your business because of what your bank covenants say.
For small and medium sized businesses in Canada the issue of personal and even spousal guarantees becomes a large one. Canadian chartered banks want to ensure you maintain that repayment responsibility – unfortunately the guarantee is one way of doing that. Many Canadian business owners therefore take great care to separate their business and personal lives when it comes to assets.
So, if a bank is the absolute low cost financing for a business operating line of credit is there any better alternative? There definitely is and it’s called an ABL (asset based line) revolver .Its specialty business financing, focusing on your firm’s assets, not your cash flow or personal guarantees or outside external collateral.
ABL lending facilities can give you all the financing a bank line of credit then. Rates are often competitive, but in many cases more costly. But at the same time you’re managing and growing your business, not reacting to ratios and loan covenants.
Want clarity on a bank line of credit, or its alternative, an ABL facility? Seek out and speak to a trusted, credible an experienced Canadian business financing advisor who can assist you in the completion of either facility.