Canadian business owners and financial managers continue to hear about newer forms of corporate finance in Canada, especially capital-based funding, and even more an asset-based credit line.
Clients always ask us the same thing, this is a form of debt financing, and exactly what is the difference between this and a Canadian banking administration. Lets examine these questions more closely.
In general, asset-based financing is a broad term that can actually refer to a number of things. We have the same problem with other terms like working capital and cash flow, they seem to be catching all phrases for a number of types of corporate finance and to make things more complicated, the different things go out for different people.
So lets be clear, using asset-based credit magnitude lines, were talking about a credit card offered by a Canadian charter bank and comparing it with the new child in the city as an asset-based credit line through an independent commercial finance company.
When you start an asset-based credit facility, you use the liquidity of your current assets usually receivables and inventories and in some cases you withdraw some liquidity from non-current assets such as equipment and real estate. Yes, you can access cash flow from your equipment and land if they are in fact unjustified.
We still have probably most business owners confused a little because they are asking right now that it seems exactly what my bank is doing or you would like them to do.
So here is the difference, assets based lenders are highly specialized, they, unlike many banks who are generalists, are highly focused on the actual underlying value of your assets in a running manner. Through ongoing, we mean daily, weekly, monthly, not long term. In old days and boy, we wish the old days were here in corporate finance you met your banks quarterly or yearly, reviewed your finances, set the credit line and yours went to grow, flourish and succeed.
However, business banking has changed in Canada and it has become more challenging to have access to the cash flow and working capital you need daily. The banks are governed by provincial and federal governments around their capital bases, what they can borrow and are subject to concentration issues. Thus, we mean that a bank could not choose to lend its entire capital to an industry such as cars etc.
So the most important differentiator in asset-based credit lines is simply that you work with a company that is usually not regulated and is staffed by a specialist who has a strong deal on your asset base. This is where the good news appears, because you can sometimes gain access to 50-100% more in rotating credit facilities as advances to receivables, stocks yes inventory! And other assets are maximized. In essence, you work with a capital-based lender who can give you maximum cash flow and work with you to give you insight into asset sales and help you through special situations. And keep in mind that this is not debt financing through futures or additional debt on your balance sheet. Youre just making money on your cash to the highest.
So thats the biggest difference, and if this kind of financing for your company seems meaningful, youre talking to a trusted, trustworthy and experienced corporate finance advisor who guides you through the next development in Canadian Corporate Finance.