Clients who listen to us tout the positive aspects of business revolving credit  via abl asset based lending and financing sometimes have a great question for us ; namely  ' How can we compare this type of Canadian business financing to other forms of lending, i.e. the traditional chartered bank line of credit ?'

Good question! Right?  So a good way to do that is to set up 6 common benchmarks that allow you as a Canadian business owner or financial manager to do a proper analysis or comparison. Let's cover off the basics of those 6 comparison points.

First of all, we can start with borrowing capability. In general terms we can make the following statement - under a bank facility you have a pre -set credit limit that typically is reviewed annually. However with an ABL facility your borrowing is always tied to the asset base of your firm, which typically is a total sum or receivables, inventory, unencumbered equipment, and even real estate. While bank A/R facilities are more often than note capped at 75% of A/R the asset based revolver will typically come in at 90%. On top of that you will also receive more generous inventory margining 99% of the time, in our opinion.

Let’s move on to overall structure, our 2nd comparable.  Larger more high quality asset based facilities typically have a multi year length, while your bank facility is renewed (hopefully!) annually based on historical financial performance.

Point # 3, which we will call follow up or monitoring via your lender.  Here is where a dramatic difference occurs. Your bank will assess and provide and renew the credit facility based on operating ratios, loan covenants, external collateral perhaps, and quality of owner guarantees.

Asset based lending takes a different approach; it counts your assets, both at the start of the facility, and periodically during the facility. So in the same manner that you provide what bankers call ' borrowing certificates ‘the ABL lender actually only focuses on those same assets within those certificates. Are we making ourselves clear, it’s always about the assets!

Point # 4. Bank lines of credit are available from... you guessed it... Canadian chartered banks. The ABL revolving credit universe in Canada, while not huge, is non bank in nature.

 It is made up of  ' unregulated " (banks are regulated) independent finance firms, small and large that offer revolving credit financing to Canadian business. Faculties are available from 250k to hundreds of millions of dollars in size. As such all types of firms that might not qualify for traditional bank financing are immediately eligible for ABL finance, even if they have financial challenges, up to and including considering a bankruptcy filing!

Let’s move on to point # 5 - pricing. While bank pricing is generally perceived as the best financial cost on Canadian business borrowing clients of the same credit quality can achieve the same or better pricing via an asset based line of credit. Firms who can't obtain bank lines of credit still qualify, but of course pay more for these facilities.

Last, but not least, covenants. While banks focus on cash flow coverage (typically 1.25:1) balance sheet ratios, and leverage ABL lending draws on appraisals of assets, reporting, and operational type audits.

What’s better for your firm a traditional bank business line of credit or an ABL financing. You're now in a position to better decide. Speak to a trusted, credible and experienced Canadian business financing advisor today on moving forth with the selection of your choice.