Working Capital Financing – Why Asset Based Lines of Credit Work
How can Canadian business owners and financial mangers secure working capital financing and cash flow financing for their business at a time when it seems that access to business financing provides significant challenges?
The answer is that a potential solid solution exists by the name of an ‘asset based line of credit ‘otherwise what we call a ‘working capital facility’. What is this type of financing is it new to Canada, and more importantly – how does it work and what are the benefits and risks?
Although asset based lenders tend to be specialized independent finance firms many business people are surprised to find that deep in the bowels of a few Canadian bank there exists small, somewhat boutique, divisions who specialize in asset based lending. Ironically they are many times competing with their peers down the hall in more traditional commercial corporate banking.
The most active assets these firms finance tend to be ongoing receivables and inventory, but in many cases, utilizing an expert advisor or partner you can structure a facility that also includes a component of equipment and real estate.
Generally speaking a good way to think of an asset based line of credit is one that for a temporary period, typically a year or so in our experience, allows you to margin up and get higher advances on receivables and inventory. That translates into more cash flow and working capital.
One of the main attractions of an asset based lending facility (insiders call it an ABL facility) is that your firms overall credit quality doesn’t play the largest role in determining if you can get approved for this type of financing. As its name suggest, financing is on your ‘assets ‘! And doesn’t really focus on debt to equity ratios, cash flow coverage, loan covenants, and outside collateral. Business owners who borrow from Canadian chartered banks on an operating or term loan basis are of course very familiar with those terms – in some ways we could call them ‘ restrictions ‘
Most lawyers and accountants will tell you that any type of business borrowing should in fact be entertained only with a respected, trusted and credible business financing advisor who can guide you through the roadblocks and pitfalls of any commercial financing arrangement. Missteps in business financing can lead to long term negative effects around such issues as being locked into a facility, giving up too much collateral, or being locked into pricing that isn’t commensurate with your overall asset and credit quality.
What are the key issues you should consider when considering such a financing facility? Primarily they are:
-Advances rates on each asset category (A/R, inventory/equipment)
- How is pricing defined (asset based lines of credit and ABL lending is general is more generous in overall facility size, but you should ensure you are only paying for what you use
- Contractual obligation – in a perfect world (we know its not!) you should be focusing on the ability to pay out at any time, or at a minimum with some form of nominal breakage fee
Why Early-Stage Startup Companies Should Hire a Lawyer
Many startup companies believe that they do not need a lawyer to help them with their business dealings. In the early stages, this may be true. However, as time goes on and your company grows, you will find yourself in situations where it is necessary to hire a business lawyer and begin to understand all the many benefits that come with hiring a lawyer for your legal needs.
The most straightforward approach to avoid any future legal issues is to employ a startup lawyer who is well-versed in your state’s company regulations and best practices. In addition, working with an attorney can help you better understand small company law. So, how can a startup lawyer help you in ensuring that your company’s launch runs smoothly?
They Know What’s Best for You
Lawyers that have experience with startups usually have worked in prestigious law firms, and as general counsel for significant corporations.
Their strategy creates more efficient, responsive, and, ultimately, more successful solutions – relies heavily on this high degree of broad legal and commercial knowledge.
They prioritize learning about a clients’ businesses and interests and obtaining the necessary outcomes as quickly as feasible.
Also, they provide an insider’s viewpoint and an intelligent methodology to produce agile, creative solutions for their clients, based on their many years of expertise as attorneys and experience dealing with corporations.
They Contribute to the Increase in the Value of Your Business
Startup attorneys help represent a wide range of entrepreneurs, operating companies, venture capital firms, and financiers in the education, fashion, finance, health care, internet, social media, technology, real estate, and television sectors.
They specialize in mergers and acquisitions as well as working with companies that have newly entered a market. They also can manage real estate, securities offerings, and SEC compliance, technology transactions, financing, employment, entertainment and media, and commercial contracts, among other things.
Focusing on success must include delivering the highest levels of representation in resolving the legal and business difficulties confronting clients now, tomorrow, and in the future, based on an unwavering dedication to the firm’s fundamental principles of quality, responsiveness, and business-centric service.
Wrapping Up
All in all, introducing a startup business can be overwhelming. You’re already charged with a host of responsibilities in which you’re untrained as a business owner. Legal problems are notoriously difficult to solve, and interpreting “legalese” is sometimes required. Experienced business lawyers know these complexities and can help you navigate them to avoid stumbling blocks.
Although many company owners wait until the last minute to deal with legal issues, they would benefit or profit greatly from hiring an experienced startup lawyer even before they begin. Reputable startup lawyers can give essential legal guidance, assist entrepreneurs in avoiding legal hazards, and improve their prospects of becoming a successful company.
Think Twice Before Getting Financial Advice From Your Bank
This startling figure comes from a recent review of the financial advice offered from the big four banks by the Australian Securities and Investment Commission (ASIC).
Even more startling: 10% of advice was found to leave investors in an even worse financial position.
Through a “vertically integrated business model”, Commonwealth Bank, National Australia Bank, Westpac, ANZ and AMP offer ‘in house’ financial advice, and collectively, control more than half of Australia’s financial planners.
It’s no surprise ASIC’s review found advisers at these banks favoured financial products that connected to their parent company, with 68% of client’s funds invested in ‘in house’ products as oppose to external products that may have been on the firms list.
Why the banks integrated financial advice model is flawed
It’s hard to believe the banks can keep a straight face and say they can abide by the duty for advisers to act absolutely in the best interests of a client.
Under the integrated financial advice model, there are layers of different fees including adviser fees, platform fees and investment management fees adding up to 2.5-3.5%
The typical breakdown of fees is usually as follows: an adviser charge of 0.8% to 1.1%, a platform fee of between 0.4% and 0.8%, and a managed fund fee of between 0.7% and 2.1%. These fees are not only opaque, but are sufficiently high to limit the ability of the client to quickly earn real rates of return.
Layers of fees placed into the business model used by the banks means there is not necessarily an incentive for the financial advice arm to make a profit, because the profits can be made in the upstream parts of the supply chain through the banks promoting their own products.
This business model, however, is flawed, and cannot survive in a world where people are demanding greater accountability for their investments, increased transparency in relation to fees and increased control over their investments.
It is noteworthy that the truly independent financial advisory firms in Australia that offer separately managed accounts have done everything in their power to avoid using managed funds and keep fee’s competitive.
The banks have refused to admit their integrated approach to advice is fatally flawed. When the Australian Financial Review approached the Financial Services Council (FSC), a peak body that represents the ‘for-profit’ wealth managers, for a defence if the layered fee arrangements, a spokesman said no generalisations could be made.
There are fundamental flaws in the advice model, and it will be interesting to see what the upcoming royal commission into banking will do to change some of the contentious issues surround integrated financial advice.
Many financial commentators are calling for a separation of financial advice attached to banks, with obvious bias and failure to meet the best interests of clients becoming more apparent.
Chris Brycki, CEO of Stockspot, says “investors should receive fair and unbiased financial advice from experts who will act in the best interests of their client. What Australians currently get is product pushing from salespeople who are paid by the banks.”
Brycki is calling for structural reform to fix the problems caused by the dominant market power of the banks to ensure that consumers are protected, advisers are better educated and incentives are aligned.
Stockspot’s annual research into high-fee-charging funds shows thousands of customers of banks are being recommended bank aligned investment products despite the potential of more appropriate alternatives being available.