"They let us run our business": Businesses on the Move Find Creative Lending Alternative
In business, no growth or slow growth can pose problems. But rapid growth presents its own challenges. Chief among them is the need to access working capital to fuel the fast expanding operations.
That's the pleasant dilemma that faced Greg Shannon, President of The Shandex Group. The Pickering, Ont.-based distributor of private label packaged goods has been on a major expansion kick. This year, it's on pace to do about $120 million in sales. That's up from $45 million last year, $31 million two years ago, and $13 million three years ago.
"We've been a fast-growing company from day one, and desperately needed capital to keep going," says Shannon.
Shandex, like a growing number of Canadian companies, discovered the benefits of asset-based financing.
Though common in the U.S. - more than 50% of all borrowing facilities there are asset-based financing deals - this lending method is fairly new in Canada.
In Shandex's case, the firm arranged asset-based financing through RBC Royal Bank, where it already had a conventional loan. RBC also happens to be one of only two Schedule A banks to offer this type of lending.
Just what is asset-based financing?
Typical loans are based on the strength of the balance sheet, consistent earnings, and credit history, and controlled through adherence to covenants and ratios. Bankers look to cash flow for repayment.
Contrast that with asset-based financing, which involves a revolving line of credit based solely on the value of a company's working capital assets - accounts receivable and inventory. This allows companies to access larger overall operating lines of credit compared to covenant-based facilities. And as sales increase - which will result in the growth of accounts receivable and inventory - the operating loan availability grows right along.
Shandex, for instance, has skyrocketing sales, and ships about three million cases of products a year - everything from diapers to ziplock bags - out of 200,000 square feet of warehousing. The firm deals with just about every major retailer across Canada.
"The bottom line is that greater access to capital gives your company the flexibility it needs to grow," says Pascal Proulx of RBC's Asset-Based Finance team.
Proulx notes that companies turn to asset-based financing to deal with a whole set of business challenges:
- Evening out cash flows during business cycles or seasonal bulges.
- Funding mergers, acquisitions, restructuring, or leveraged buyouts.
- Facilitating high growth in under-capitalized or over-leveraged situations.
- Raising capital in a less costly way than bringing in an equity partner.
- Taking advantage of, rather than foregoing, growth opportunities.
With asset-based financing, companies like Shandex can obtain a working capital loan, or can transfer account receivables to the bank, turning sales into immediate cash.
For example, with working capital loans, RBC advances up to 90% of accounts receivable and 85% of appraised inventory value. Typically, loan facilities are for between $1 million-$50 million. Under selective invoice discounting, RBC purchases invoices at up to 100% of their face value. Those loan facilities are between $1 million-$25 million.
Often, asset-based financing is a relatively short-term solution. At RBC, says Proulx, clients can return to traditional lending any time, with no penalty.
A. Holliday & Company Inc., a Toronto-based company that sells bulk tea, coffee and specialty products to packers and flavor houses throughout North America, Europe, Asia and Australia, went with asset-based financing at RBC for 18 months.
"We were looking for a financial partner to provide trade finance solutions for our global trading activity, someone with strong expertise," says Alex von Niebelschutz, the company's Vice-President, Finance and Controller. "RBC offered us a solution that was customized for our trade finance needs."
Even though Shandex already dealt with RBC Royal Bank, Shannon shopped around before going with the bank for his company's asset-based financing solution. He says that RBC was far less "intrusive" than other institutions - "They just let us run our business."
Without the limitations of conventional lending, Shandex has the freedom of capital to be able to go to suppliers and pay them off more quickly, receiving a discount in the process. That is translating into substantial savings.
"Owners like me are continually dealing with the entrepreneurial aspects of business, with seeing how far we can go, but we tend to not spend the time we should on the banking part of the business," says Shannon. "I can tell you that having the right type of financing in place is one of the most important things. And asset-based financing is the best type of product I could find to grow my business."
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