On paper an asset-based line and a bank operating line look similar: both advance money against receivables and inventory. In practice they behave very differently, and the difference shows up exactly when you need the money most.
How a bank operating line works
A bank sets the limit once a year based on the financial statements, with margining against receivables and inventory as a ceiling. The line is governed by financial covenants, usually debt service coverage and a leverage ratio. Breach a covenant and the bank can reduce or demand the line, often at the annual review, often in the spring when the statements land.
How an asset-based line works
An asset-based lender sets availability every month from a borrowing base: eligible receivables at an advance rate, typically up to 85 per cent, plus eligible inventory at a lower rate. As sales grow, availability grows with them. Financial covenants are light or absent because the lender is monitoring the collateral directly.
Where the difference bites
- Fast growth: a bank line stays flat until the next review; an asset-based line expands with the receivables ledger.
- A hard year: a covenant breach can cost you a bank line; an asset-based lender keeps lending as long as the collateral performs.
- Reporting: expect monthly borrowing base certificates and periodic field exams in exchange for the flexibility.
Asset-based lending costs more than a bank line, but for manufacturers, distributors, staffing firms and seasonal businesses in Western Canada it is often the difference between taking the order and turning it down.
Have a situation like this? Tell us about the deal and a principal will respond within two business days. Cascade lends to businesses only, in Canadian dollars, and every rate we quote is an annual rate.
