Wednesday, February 22, 2023

Working Capital & Business Lines of Credit and Loans To Optimize Cash Flow





YOUR COMPANY IS LOOKING FOR CANADIAN  BUSINESS FINANCING SOLUTIONS!

 

HOW TO MASTER BUSINESS CASH FLOW VIA WORKING CAPITAL AND LINE OF CREDIT SOLUTIONS

 

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS  FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com


 

 

WORKING CAPITAL LINE OF CREDIT SOLUTIONS 

 

 

" If you can't manage your cash you can't manage your business " - Grant Cardone 

 

Business lines of credit & the right loans for your business deliver on working capital, cash flow, and growth for your company; they can come at a painstaking price it seems sometimes.

 

We're exploring the strategies that allow you to have business financing success in this area. Let's dig in.

 

 

WHAT IS WORKING CAPITAL? 

 


Working capital is all about the amount of cash a business can generate to fund day to day expenses and operations of the business. Business lines of credit allow a company to borrow up to predetermined limits and repay as cash flows come into the business. Working capital lines of credit loans and other monetization strategies give a company the flexibility to cover short-term obligations as sales revenues and expenses fluctuate.


 
 
FUELING  BUSINESS GROWTH-  WORKING CAPITAL AND A LINE OF CREDITS BOOST THE GROWTH OF YOUR BUSINESS  

 

 

When business owners and financial managers have successfully negotiated working capital facilities or term loans it should not be the end of the story. By that, we mean that the business owner and financial managers must continually focus on what the bank or other financial institution requires, and more importantly, how lenders view the customer from a control point of view. So how does the lender exert control over your business?

 

 

USING THE BALANCE SHEET TO FUEL BUSINESS GROWTH 

 

Knowing the balance sheet must be a top focus for the business owner - once a firm is over-leveraged, i.e. borrowing too heavily, the bank or commercial lender generally starts positioning around their overall security or your ability to de-leverage.

 

Balance sheet accounts in the working capital equation include inventories, accounts receivable, and pre-paid accounts - Short term liabilities include payables, emergency repair costs,  and fixed costs around items such as rent, utilities, etc, Some businesses must balance deferred revenue and accrued expenses in their day-to-day cash management of everyday business expenses.

 

UNDERSTANDING YOUR CASH FLOW  'TRIGGERS '

 

Borrowers must be comfortable and knowledgeable about the use of 'triggers '. Triggers are the implied actions the bank or institution will take when things aren't working out. This can include everything from general poor financial performance to very specific pre-agreed-upon financial ratios. And the business owner must remember that he or she agreed to and concurred with these ratios.

 

 

BANK FINANCING FOR BUSINESS NEEDS 

 

Banks want to see cash flow ' flowing ' - flowing to repay their debt - so there may be triggers put in place by the bank to ensure that minimum cash flow standards are kept, and also that owners and shareholders do not withdraw excess funds.

 

Over time business owners will probably find, in our experience, that the bank and business credit union restrictions either tighten up or loosen, depending of course on the overall comfort level the bank has with the firm. Clearly, firms that seem temporarily challenged in profits and balance sheet quality will receive much more scrutiny when it comes to approval for working capital lines.

 

Business owners can do some very solid and valuable preparatory work in the negotiation of bank triggers. If they have a solid long term history of earnings this should be a very strong negotiating point with the institution.

 

WORKING CAPITAL IN BANKING

 

Simply by self-introspection of the firm can the owner or financial manager focus on what is going to go wrong regarding sales, pricing, forex, etc? The owner needs to be able to talk about these issues and show how he could address them. Also, remember that traditional lending sources such as banks are not the only way to finance a business these days.

 

WORKING CAPITAL FINANCING OPTIONS

 

Other solutions in the alternative sector for SME/small business owners  include: Choosing the right type of financing for your business needs

 

A/R Financing/ Factoring

Inventory Loans

 Purchase Order Financing

Non bank asset based lines of  revolving credit

Tax Credit Financing

Sale leasebacks

 

Using 'what if 'scenarios help immensely and will position yourself as knowledgeable about your business.

 

Discussions with your bank need not be absolute and immediate on any time of loan negotiation - you can get a great informal sense of what the bank is thinking and work from that point forward. Try and read between the lines as to what is hot, and what a Vis is not with the bank Vis their perception of your firm, industry, etc.

 

In summary, business owners need to show maximum flexibility in working capital and loan negotiations. Negotiations should be from strength, accentuating the positive.

 

Example - strong forecast sales and profits can potentially offset a weaker balance sheet. That's when those alternative financial solutions should well be investigated. Trade-offs with the bank are also encouraged - and fewer triggers and covenants are better than more! Understanding the pros and cons of using a line of credit facility is key to effective business cash management.

 

 

 

' Never take your eyes off the cash flow because its the lifeblood of business ' - Richard Branson

 

 

 

 
CONCLUSION  - SECURE YOUR BUSINESS FUTURE VIA FLEXIBLE  WORKING CAPITAL SOLUTIONS 

 

And yes, there is more than one bank in the world for small businesses, although business owners should be cautioned that shopping around is not always optimal, and can in fact backfire, particularly for a small business. Business owners beware! Speak to 7 Park Avenue Financial,  a trusted, credible, and experienced Canadian business financing advisor who can help avoid those painstaking finance errors.

 

 
FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

What is working capital, and why is it important for businesses?

 

Working capital is the funds availability that a company has that allows it to cover day-to-day operations Maintaining effective cash flows in the business allows the company to operate effectively and manage current liabilities such as accounts payable - A positive working capital position allows a business to capitalize on short-term opportunities.

 

What is a line of credit, and how does it differ from other types of financing?

Business lines of credit are a type of loan financing that allows a company to draw down on funds - Unlike term loans these facilities allow a business to pay interest only on funds that are used and drawn down on the facility - In optimal situations, business credit lines fluctuate according to sales and cash inflows from collections.

 

 

How can businesses determine their working capital needs, and what factors influence the need for cash flow?

 

 

Businesses determine working capital needs by utilizing financial measurement techniques such as the current ratio formula which subtracts current liabilities from current assets on the balance sheet to provide a net working capital amount as an example.  Other factors include the size of the business and the asset turnover in key balance sheet accounts such as accounts receivable and accounts payable. Some businesses and industries have a seasonal business aspect to sales revenues which also impacts cash needs.

 

What are the benefits and drawbacks of using a line of credit for working capital?

 

Companies that utilize a line of credit for working capital need to benefit from the flexibility to access funds as needed when there is a cash flow shortage  - Drawbacks for business owners to consider include interest rates and costs of financing and the danger of overborrowing or over-reliance on the facility.

 

What are some alternatives to a line of credit for working capital, and how do they compare?

 

Alternative financing solutions to a line of credit for a company's working capital needs that are short term financing based include financing solutions such as business credit cards and invoice financing, aka ' factoring ', as well as merchant cash advances which are short-term working capital loans repaid on an installment basis based on a credit limit calculated around monthly revenue and owner personal credit score and credit history. This type of small business loan / working capital loan is easily accessible but more costly.

Many firms use invoice financing as an alternative to a traditional bank business line of credit when traditional financing is not available to the business. This also eliminates overreliance on lines of credit. This method of financing allows funds to be deposited into the business bank account as sales are generated.

 

What are some best practices for managing working capital and using a line of credit effectively?

 

Businesses can utilize best practices around working capital management that include maintaining regular cash flow forecasts and monitoring asset turnover utilizing calculations for days sales outstanding and inventory turnover. Cash flow facilities should not be used to fund long-term assets - these assets should be funded via the use of equipment loans and lease financing which allow a business to match cash flow to useful asset life.

 

Click here for the business finance track record of 7 Park Avenue Financial

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