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Financing your optimal capital structure might sound like a bit of an esoteric or technical term for many Canadian business owners and financial managers - in actuality, it's easier to understand than you might think, and .. Important!
The general idea of capital structure is for the business owner/manager to have a strong sense of whether money is coming from, or could come from your suppliers, your bank and other lenders, or your own owner equity in the company. That is the debt and equity balancing act!It's those three that comprise your capital structure! As debt increases so do those interest payments! Using debt properly and the cost of debt should always be top of mind with a business owner / financial manager. As debt increases, leverage becomes a double edged sword.
The manner in which you finance your optimal capital structure makes you successful or drives you into bankruptcy with too much debt. At 7 Park Avenue FInancial we prefer the former by the way - which is why we focus on delivering proper corporate finance structures.
In some ways, you might be managing your capital structure quite uniquely and successfully already. Case in point - supplier terms. Just getting a supplier to allow you to pay anywhere from 60-120 days brings you a solid source of cash at minimal cost. Hopefully, the ultimate cost isn’t the relationship you have with your suppliers of course!
WHO ARE THE LENDER TO ASSIST IN OPTIMAL CAPITAL STRUCTURE / BUSINESS FINANCE
Canada's chartered banks, asset-based lenders, lessors, or working capital firms such as receivable finance and PO based finance firms are your short and long term lenders for capital structure as it pertains to debt. And that debt of course is short term, or long term, depending on the nature of the borrowing.
ISSUES AROUND COLLATERAL
Another point to be made is that the debt you undertaking within your capital structure has collateral attached to it -and there's only so much collateral to go around. A positive aspect of debt is that you can leverage it to maximize returns on capital and investment - if done properly. A great rule of them is that your long term debt is not greater than your shareholder equity. That the standard debt and equity relationship for many industries And when it comes to total debt a typical bank requirement is that it should exceed equity by no more than 2 or three to 1.Naturally the cost of capital has to be factored into your analysis , and financial experts agree debt is cheaper than giving up equity ownership.
BUSINESS ACQUISITIONS REQUIRE PROPER TIME SPENT ON OPTIMAL FINANCING STRUCTURE
If you are looking to purchase a business for example it's important to understand that financing will come from a combination of lenders, your firm or you personally, and potentially the seller - aka the Vendor Take Back.
BANKS AND CASH FLOW COVERAGE
In talking to a bank about financing your capital structure they are going to focus on cash flow stability. Banks and other lenders use a simple cash flow analysis tool called ' coverage ' and they like to see cash flow exceed debt coverage by 1.25:1 typically.
Lenders, i.e. banks and other commercial finance firms will at the same time look to the balance sheet for collateral - which typically is going to come from receivables, inventory and fixed assets and even real estate. In your search to find the optimal business capital for your firm your firms 'net worth ' / market value will always play a key role.
CONCLUSION
We have seen that capital structure is all about the proper mix of debt and equity - the goal is to enhance the value of your company while ensuring you are taking on the right level of risk to ensure the proper ' ROE ' - aka return on equity.
Getting a handle on today’s subject will help guarantee business success. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with financing solutions within your capital structure.
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
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