Working Capital Financing for Canadian Business

Canadian business owners and financial managers know that working capital planning and assessment are key any businesses growth. The term working capital is used in various contexts, and at the end of the day is simply a synonym for operating liquidity.

Text books tell us that there is a clear definition of working capital, namely going to your balance sheet and subtracting current liabilities from current assets. That’s a great textbook definition, but let’s visits the real world together on what that means.

Your working capital allows you to plan and pay for your daily operating needs, plus of course to reduce your long term obligations that you might have in leases or loans. The absolute number of dollars in your net working capital as defined by our definition above does not really matter. (Although positive working capital is better than negative working capital!)

What is important is the turnover and management of your working capital accounts – those accounts are:

Inventory
Receivables
Account Payable

Simple business logic tells us that if your inventory and receivables are turning over properly, and you’re managing your payables (by delaying them to the maximum amount possible per your terms with suppliers) you will be achieving working capital management success.

When you business is building up receivables and inventory the pressures on liquidity are increased. They can only be addressed by injecting permanent working capital into your business via a working capital term loan, also called “subordinated debt ‘when it’s a larger loan, or by implanting traditional or alternative financing strategies to increase cash flow turnover.

So what are those options to managing and improving your short term working capital and cash flow requirements? The most traditional one is of course an operating line of credit from a Canadian chartered bank or credit union. This type of facility has the lowest overall cost and can be accessed anytime on an ongoing basis.

Many clients tell us that they address some of their working capital needs through use of Business Visa credit cards. This clearly adds additional capital, you are paying for what you use, but in our opinion does a poor job of separating the owners personal credit from the business – as these types of cards are closely tied to personal net worth’s and credit scores of the owners.

Two other very viable solutions come into play for consideration of working capital gaps. They are the use of factoring, which allows you to generate same day cash flow for your invoices, although you pay a discount fee to get the money immediately. While somewhat unheard of in previous years this method of financing gains more traction everyday.

The other solution in a more traditional sense is to ensure you are using lease financing or sale leaseback financing to minimize cash flow out when you are considering purchases of assets. Solutions such as this save the business owner from committing additional funds into the business via owner equity which he may not be able to, or not want to do. It certainly isn’t unusual in Canada to see business owners ‘lend ‘their company money in times of need, often with no fixed repayment schedules. However, as we have noted, the better solution is effective turnover of receivables and inventory or accessing alternative working capital solutions such as factoring, inventory financing, as well as purchase order financing for large contracts.

In summary, business in Canada always has working capital challenges. Those challenges are diminished when you are focusing on proper turnover of A/R and inventory. When additional funds are required you should turn to operating facilities to meet your needs, which can be traditional or alternative in nature. Speak to a trusted and credible business advisor to understand which options make sense for your firm.

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Stan Prokop is founder of 7 Park Avenue Financial. Originating financing for Canadian companies, specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details :
http://www.7parkavenuefinancial.com/working_capital_financing_canadian_business.html