Working Capital Financing – Methods of Financing A Business

We hate to use an old cliché when we talk to clients, but ‘cash flow is the lifeblood of your business ‘is not the worst cliché you have every heard, especially when financing a business has become one of your biggest challenges. The downside of not having, or being able to arrange cash flow and working capital financing is simply that you have a lesser ability to grow sales, maximize profits and take advantage of new opportunities .

So sitting down with business owners is a great method of ensuring they know what their working capital challenges are, and what the real impact of that phrase ‘ cash flow ‘ means to their business . There is a bottom line here, which is a simple one, you have to know what working capital is, and you then have to know how to get or achieve it. To most business owners and financial managers in Canada the term working capital or cash flow simply means - ‘what cash do I have in the bank?’ But that’s a very weak definition, and that wont get you business financing success – you need to understand how your receivables, inventory, and other assets come together to drive working capital and cash flow.

Your business financing or working capital requirements are driven in a number of manners, it could involve solely the growing of your sales, but it also could mean a major expansion of your business. Most clients we meet cannot hardly imagine having too much working capital or cash flow, but the reality is that if that ever was the case you then cross the line and you are in a position of not being able to use those funds to grow your business – so, bottom line – it’s a balance act, which is as with most other areas of your business.

One of the main things you should focus on is your ability to pay your current debt – On the balance sheet your accountant shows that as ‘ current portion of long term debt ‘ – You always want to be in a position to meet these obligations as failure to do that means you are bordering on insolvency . All of that snowballs into major issues with your bank, your suppliers, and other creditors such as leasing or finance firms.

So as we have said, you need to be able to calculate, or measure working capital, and then address how you will satisfy the need that comes out of those numbers. There are some easy calculations you can perform in measuring your overall cash flow – it’s really simply understanding your inventory and a/r turns, as well as having a handle on your accounts payable days outstanding.

If it was a perfect world you could raise all the working capital you need internally. How would that work?! Well, using an extreme example if you collected your receivables in 45 days, and turned your inventory in 45 days, and were able to pay your payables every 90 days you would be very self financing. Sounds great, except you can hear your suppliers and creditors now I bet... Also, the profits that you generate out of your business obviously become a new additional part of the working capital component and would even further benefit your overall position.

But let’s get back to the real world, which states that if you have more current assets than current liabilities you 99% of the time need external working capital.

Canadian business owners achieve that additional working capital in a number of ways – the most beneficial is bank lines of credit, or in some cases, if your firm meets the criteria, a cash flow working capital loan. If you are unable to meet bank criteria, and are still in a challenged or growing position then we advise clients to consider a non bank working capital or asset based lending facility. If receivables tend to be your main current asset than a factoring or invoice discounting facility makes the most sense.

Most Canadian business owners don’t fully understand how factoring in Canada works, and are often confused by the costs and process – so we strong recommend you speak to a credible, experienced and trusted advisor in this area of Canadian business financing . In some cases you Canadian business owners and financial managers are looking for an interim or intermediate timeframe solution, so a short term bridge loan with using unencumbered assets has helped many clients get over the hump.

So whats our bottom line recap – its simple – a three point scenario : understand what working capital is and isn’t, know how to measure it for your business, and finally understand which cash flow solutions make the most sense for your firm at this point in time .

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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/working_capital_financing_financing_a_business.html