Working Capital And Factoring Solutions In Canada – Considered The The Plus And Minus Scenarios?

What’s The Difference? A Factoring And Working Capital Term Loan Primer


Information on working capital financing and factoring solutions in Canada . How does the Canadian business owner evaluate the positive and less than positive aspects of each cash flow solution?



When business owners and financial managers think of ‘cash flow ‘two terms are almost synonymous, 'factoring', and 'working capital'. Is there a difference? Yes, a major difference. It kind of comes down to a ‘plus’ or ‘minus’ situation – a term that’s universal in any language.

We believe that when Canadian businesses think in terms of working capital that is often in the context of permanent working capital. This can be in a couple forms, a term loan, a mezzanine loan, or subordinate debt. These are the key terms of ‘high finance’ for working capital loans! With loans such as these businesses typically use the working capital derived from the loan to invest in sales and marketing, implement new products and strategies, and purchase inventory and materials for further corporate growth.

There are numerous advantages to a working capital term loan. Repayment of the loan is typically in the 5 -7 year range. As such that clearly frees up cash flow. Let’s do a quick example – If a Canadian business borrowed $ 150,000.00 and was successful in getting a term loan in place the monthly payments over a 5 year period would be approximately $ 3000.00 per month. (We used an interest rate of 8% just as an example).

Depending on the flexibility of the lender payments can be structured, or even potentially deferred, based on the nature of the customer’s needs and overall financial situation.

Naturally any financing scenario as positioned above is long term permanent working capital, which is generally viewed positively by business owners and their lenders. It is in effect a form of ‘patient working capital ‘.

Long term working capital loans in effect ‘compliment ‘your existing secured creditor relationships. For the purposes of this article we won’t dwell too much on the aforementioned subordinated debt and mezzanine debt – we will simply say they are unsecured ‘ cash flow ‘ loans, long term in nature, with rates substantially higher than chartered bank rates due to the general unsecured nature of the loans . The lender is simply taking a position that your firm will be able, based on historical and present financials, to repay the loan out of cash flows.

We’ve discussed the ‘permanent ‘ working capital loan and have seen its characteristics, i.e. term loans, longer repayment schedules, fixed rates, terms and structures .Now lets look at totally immediate working capital/ cash flow, which many customers in Canada are achieving by a factoring or working capital cash flow facility .

The factoring solution is immediate. Transactions and facilities can usually be approved in a much shorter time frame. Every customer is different of course, and in many different industries, but based on a review of your financials and your business customers receive immediate significant advances (typically 90%) of their sales invoices.

Since the heart of any business cash inflow comes from collected receivables business who ‘struggle’ with the collection process often face cash flow shortages due to slow paying customers. Conversely, as receivables and inventory build up for good reasons (good reasons = more sales) the companies investment in receivables and inventory grows.

Factoring, or receivable discounting as it is also known, is based on the overall size, quality, and collection experience related to your billings. It is very safe to say that current invoices are more easily factored (sold) than 65 day unpaid invoices from slower paying customers.

Many factor firms assume the role of your collection department, some business owners actually welcome this as they have in fact utilized the very popular concept of ‘outsourcing‘re their collections . We're not a fan of these type of facilities and we prefer CONFIDENTIAL INVOICE FINANCE. Here the Canadian business owners bill and collects and administers their own receivables and client relationships.

So is factoring all goodness. Certainly not, what type of financing is. In factoring there is a usually a higher cost to finance your A/R portfolio. In Canada there are tens and hundreds of nuances and administrative procedures around the factoring process that many business owners struggle with. Factoring should be used for growth, not survival, and other strategies can be explored at a lesser cost and less intrusiveness to your business.

In summary, business owners considering the ‘ working capital/cash flow ‘ conundrum can consider long term working capital loans or short term receivable financing strategies for growth . There are a number of options around both of those financing, and in fact other options (example: a sale/leaseback of your assets or a real operating margined facility with a Canadian chartered bank) should also be potentially explored.

Review alL options, and work with trusted, credible, and experienced business financing advisor to find your optimal working capital solution.


Stan Prokop - founder of 7 Park Avenue Financial –

CANADIAN BUSINESS FINANCING

Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details :

WORKING CAPITAL FINANCING AND FACTORING



7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Phone = 905 829 2653
Fax = 905 829 2653

Email = sprokop@7parkavenuefinancial.com















Stan Prokop