Working Capital Business Financing Sources

Working Capital and Business Financing in general is available to Canadian business owners and financial managers in a number of ways. When we speak to clients about their needs and answer their questions in this area it is simply a case of pointing out all the alternatives available, and discussion what features and benefits of each type of facility make the most sense for their own particular firm and industry.

The majority of working capital loans and financing alternatives are on a secured basis, but that is not the case 100% of the time. With reasonable good financial health and equity in your firm a cash working capital loan can be achieved at solid rates, terms and structures. This is general, is not the norm though, as most lending to small and medium businesses in Canada is in fact secured in some manner.

For larger corporations unsecured cash flow loans are more often than not called ‘ subordinated debt ‘ and they are term loans structured around the analysis of the company’s ability to repay based on future cash flow forecasting . For smaller firms it is simply a working capital loan that might have some covenants attached relative to ongoing profits and cash flow metrics. Again, we can summarize these offering by saying that cash flow unsecured loans are generally only available to firms that have very reasonable financial health and prospects.

In certain cases the working capital and cash flow loans we have described above often relate to the acquisition of a business, with the funding provided to acquire the business.
A more common ‘working capital loan ‘is in effect not a loan but the financing of receivables and inventory. In effect your firm leverages these assets and turns them into ongoing working capital as you create inventory and receivables on an on going basis.

Many business owners come to us and ask if there are ‘government loans ‘for working capital. The reality is that there is not anything available in Canada in that regard. The most common, successful and popular government loan program is called the CSBFL program; thousands of businesses utilize this loan. However, as we have noted, it does not provide working capital, and some business owners are dismayed when we advise them that this loan program only covers three items – equipment, leasehold improvements, and real estate.

When looking for a working capital solution there are some critical factors to assess and address. Many firms we meet can in fact cure their own working capital solutions by affecting a better turnaround in their receivables and inventory. Those are the key working capital components of any firm. If your firm has been self financing then you should consider a working capital or an invoice discounting facility. This injects immediate working capital into your company, and is not treated as a loan on your books, you are simply converting A/R, and in some cases inventory, into immediate cash.

Many business owners we meet simply don’t do even basic cash flow planning. A very simple template you can set up can easily show you what cash is coming in over the next three months, for example, and you already know your fixed and variable expenses, it’s as simple as that.

Working capital needs can be either short term or longer term in nature. The cash working capital term loan we spoke of earlier is a long term solution for permanent working capital. On the other hand the conversion of your receivables and inventory via a working capital facility via a non bank is immediate short term cash flow.

Work with a trusted, credible, and experienced advisor in this area. Assess your needs, evaluate the solution, and focus on implementing a facility based on the benefits that are derived from that type of financing. That is cash flow and working capital planning 101!

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