Did you hear the one about the Canadian firm that went out of business because they were too profitable and growth was great? That’s an ironic statement to many business people, but the reality is that profits don’t equal cash flow and business lines of credit via a secured facility is the capital you need to survive all that success .
It’s actually pretty simply when you think of it, but because your firm has made that investment in accounts receivable, inventories and other working capital assets, you need operating loans to make your business work on a day-to-day basis.
It’s pretty safe to say that if you are running out of cash or working capital, whether you’re a Financial Post 100 company in Canada or all the way back to a start up, it is a concern for any business person. And of course the business papers are full of those stories every day .
So that’s put us squarely in front of the bank with the proverbial tin cup in hand! Yes, there are numerous alternate sources of cash flow and working capital, but our focus here is on bank-secured lines of credit. Oh, by the way, there aren’t really business banking unsecured lines of credit for your business, so we’re in a narrow field here!
Canadian chartered banks do it a bit differently when it comes to operating lines and lines of credit. They take an assignment of your assets (just in case!) and wrap this security agreement into a demand loan type arrangement. These are typically reviewed on an annual basis.
How much you get from your secured facility is, in general, pretty standard. Typically, that’s 75 percent of what is called your “eligible” receivables, which are those clients of yours under 90 days and within North America. On occasion, clients that have extensive foreign receivables are required to complement business lines of credit with export credit insurance from government organizations such as EDC and some other private firms.
Inventory margins under business lines of credit are a bit trickier. It is rare you can achieve 50 percent borrowing value, and all sorts of analysis might be required on the type of inventory you want to finance.
Giving due credit to the banks, it’s safe to say that any type of inventory financing for capital purposes is risky, and any lender rarely gets back what they have loaned out on this asset class.
One of the areas that works well under a secured capital facility is that your borrowing is your own business. There are no client notifications, and your customers would really only be notified in the event of a default by your firm. In this case, your customers would be asked to pay the bank directly, which only makes sense.
If there is one danger area in a business line of credit, it is simply the fact that your business should use these funds for short-term working capital. Taking these funds you have borrowed on a short-term basis to buy equipment or make longer term corporate investments generally leads to problems.