Inventory Finance – Canadian Inventory Financing

Inventory Finance provides often much needed capital as an overall component of your working capital strategy . The challenge in Canada is to ensure you have the right mix of working capital financing for an inventory financing strategy, and that it compliments your other external financing.

In times gone by inventory financing was most often provided by Canadian charted banks as a product of the overall revolving line of credit, which of course usually included receivables also. The ability of a company to free up cash that is tied up in inventory is critical for a firm’s cash flow.

We recall recently reading a line as follows “If you working capital is positive you need cash flow financing ‘. The working capital definition referred to is of course the classic textbook definition of going to your balance sheet and subtracting current liabilities from current assets.

However, most of us operate in the real world, not the textbook world, so you do we financed inventory that we as business owners and financial managers know is good collateral?

What the Canadian business owner and financial manger must realize is that your bank or independent inventory financier is not interested in ever getting back your inventory. That should lead you to focus very strongly on your ability to project your inventory turnover, its overall marketability, and your ability to qualify the inventory into several categories – which include raw materials, work in process, and finished goods.

Success breeds challenges, because when you are turning over your inventory you need to replace it, and quite often the financial investment you have made in inventory is still part of your overall cash conversation cycle – which is of course : inventory, receivable, cash, in that order .

We tell clients that in our opinion the optimal inventory financing facility in Canada is a facility known as an asset based lending facility ; we have also called it a ‘ working capital facility ‘ in addressing these discussions with clients .

These facilities, when combined – i.e. inventory and A/R is powerful working capital drivers –simply because unless bank facilities that are ratio financial statement performance driven, they are in fact collateral and true value driven. So a proper facility, when set up, margins your receivables and inventory to their true agreed upon values .What we are of course saying is that if you have slow moving inventory and uncollectible receivables you will be a poor candidate for an inventory financing facility.
We caution all clients to ensure they seek out expert advice in this somewhat niche area of a Canadian business financing. Inventory finance is clearly a specialize area of the Canada’s business financing landscape.

In order to achieve a proper facility focus on maintaining adequate inventory reports and controls, ultimately a perpetual inventory system is the best method of securing inventory finance because it of course helps focus on the true picture of your inventory movement .

Your firm’s ability to produce valid purchase orders, contracts, and proper inventory accounting are a key plus in successful inventory finance. A solid proposal, prepared with the assistance of a business financing advisor perhaps, will include a financial and executive summary review, inventory records and control documentation, and you ability to show repayment of the inventory loan as well as good fluctuations.

You can also spend a lot of time in Canada searching out for inventory financing that doesn’t exist. It is highly specialized, and the number of firms is in the handful, so focus on working with the right parties so as not to waste your valuable time.
Inventory finance works best when you can clearly demonstrate a need, and the ability to show the inventory financing facility will generate additional sales and profits. If you have good margins that will help offset some of the additional costs of such a facility. Simply your ability to generate more cash from inventory and to purchase smarter should in fact be a new benefit that will reap additional profits.

Typical inventory financing arrangements tend to be on facilities that are 500k and up, but with the right combination of A/R and inventory a smaller facility is possible.

Ultimately, in assessing and inventory finance strategy you should know the costs, as well as the benefits that an inventory financing facility will bring to your business.
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Stan Prokop - founder of 7 Park Avenue Financial - http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 6 years - has completed in excess of 45 Million $$ of financing for Canadian corporations .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/inventory_finance_canadian_inventory_financing.html