ABL Financing . Recognize Early Warning Signs For The Need For A Canadian Asset Based Finance Business Credit Line?
ABL Financing in Canada. How do you know when it just might be time to both discover and utilize one of Canada's best financing mechanisms for a business? There are in fact some strong signals and warning signs when it comes to switching to an asset based finance business credit line.
It kind of sneaked up on us, but asset based finance is growing and becoming more popular everyday in Canada as a business finance mechanism. While banks and other lending institutions focus on cash flow and ratios and covenants the asset based line of credit lender sits quietly in the corner and focuses just on one thing- ' Assets '!
We're going to discuss how you can recognize some key early warning mechanisms around when to consider this method of finance, but the simple rule of thumb is that you have to have assets such as accounts receivables, inventories, lien free fixed asses, and even real estate... well lets just stay... you qualify! That’s why wholesalers, retail organizations, and manufacturers and service companies of all types are gravitating to ABL finance.
We're always surprised when we hear clients say they haven’t even heard of ABL. More so when you consider some of the largest companies in Canada have abandoned bank facilities and moved to ABL. While for the larger company asset based finance business credit lines can in fact cost less and be more flexible, the reality is that for the small to mid size sector the cost of such a facility will in fact be more than bank credit. But, consider this, if you don’t qualify for the amount of bank financing you need that lower interest rate doesnt mean much when you're forced to restrict growth and focus almost all day on managing cash flow in an often crisis type mode. That's when reasonable financing costs should be the least of your problems.
Let's get back to some of those early warning signs that just might signify your need to check out a new paradigm in business lines of credit. Sales revenue has a direct relationship to working capital needs. Because those higher sales and growth opportunities bring higher levels of receivables and inventory and of course higher levels of payables.
Velocity, aka ' speed'. It not becomes a greater challenge to turnover assets to generate that working capital. It's up to the Canadian business owner and financial manager to, as you're growing establish what is acceptable in inventory levels, A/R collection days, as well as, oh yes, paying those suppliers.
Two ways for you to monitor your financial cash flow and working capital needs over time are to keep a simple track of working capital to sales and working capital turnover itself. The former is calculated simply by taking your current assets and dividing them by sales for, say, an annual period. Working capital turnover is measured by taking you sales and dividing them by your working capital for any period. You then track those!
Let's say you kept track of your working capital turnover and notice the ratio is trending lower. That means poor working capital performance, and you probably are feeling this via cash flow pressures.
When you utilize an ABL Financing facility you will find those assets can be monetized faster, with more liquidity in margining, resulting in higher borrowing power for working capital needs.
Speak to a trusted, credible and experienced Canadian business financing advisor when you feel your firm just might be exhibiting signs of a need for a better way in a Canadian business credit line via asset based finance.