On Top of the Latest Trends In Canadian Growth Financing? Working Capital & Purchase Order Finance Alternatives

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Growth Financing: Your Secret Weapon for Business Expansion

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Decoding the Growth  Capital Financing Puzzle for Business Success

 

Staying on top of any aspect of your business is important, including ensuring you understand some of your alternatives when considering growth financing and working capital solutions versus debt financing solutions. We're talking about everything from standard solutions such as working capital term loans out to the end of the spectrum, the new kid on the block: purchase order financing for your business growth and business financing needs.

 

 

INTRODUCTION 

 

Growth financing, a term often thrown around in boardrooms and investor meetings, refers to the capital sourced to fuel the expansion of an organization, either through the launch of new products, market diversification, acquisition of smaller entities, or the enhancement of production capacities. Businesses seek the financial backing when they are ready to spread their wings and soar higher.

 

WHY IS GROWTH FINANCING IMPORTANT?

 

 

The importance of growth financing can't be overstated. But scaling a business isn't a trivial matter; it requires capital - capital for research and development, marketing and sales, acquiring new equipment or personnel, and so on. That's where growth financing steps in, bridging the gap between your aspirations and substantial growth.

 

THE FINANCING CHALLENGE FOR SMALL AND MEDIUM-SIZED BUSINESSES  ( SME'S ) IN CANADA

 

When the SME sector (small and medium-sized businesses in Canada) can't meet the requirements of a Canadian chartered banking solution, then what are some of the alternatives? The last couple of years have been somewhat brutal on manufacturing companies, balance sheets have been hit, and breakeven, let alone profits, have been tough for many.

 

ASSET-BASED LENDING - A VIABLE SOLUTION FOR BUSINESS FINANCING IN CANADA

 

A solution for many firms is to utilize a Canadian asset-based lender to address numerous challenges simultaneously. Let's examine a typical situation many clients have encountered over the last couple of years. They might have secured debt via a bank revolver or term loan, coupled with challenges around CRA arrears and accounts payable, which have ballooned due to an overall working capital shortage.

 

As profiled above, the growth financing comes from an all-encompassing working capital facility to replace the banking solution in this type of case. This type of financing margins receivables to 90%, providing a healthy margining of previously unavailable inventory (anywhere from 30-70%). In rare cases, a straight cash flow loan might be added to the facility to enhance the working capital. further

 

 

THE ASSET-BASED LENDING SOLUTION - A VIABLE FUNDING SOLUTION  

 

The asset-based lending approach empowers businesses to utilize their current assets to access the funding they require. In this context, assets can span a wide spectrum, including accounts receivable, inventory, and even tangible physical assets such as machinery and equipment.

Financing business assets offers a powerful tool for businesses to unlock the necessary financial resources to initiate or maintain rapid growth.

 

HOW DOES ASSET-BASED LENDING WORK?

 

But how does this function in a practical scenario? Let's delve into the mechanics of asset-based lending to understand better.

 

In asset-based lending, the business assets serve as collateral for the loan. The process begins with the lender thoroughly evaluating the company's assets. These can include accounts receivable, which are the unpaid invoices or money owed by customers to the business; inventory, which constitutes the raw materials, work-in-progress, or finished goods; and tangible assets, such as machinery and equipment owned by the company.

 

Once the lender has determined the value of these assets, a  business line of credit or, in some cases a term loan is extended to the business, typically a percentage of the appraised value. The loan terms are generally flexible, with the credit line's size fluctuating based on the value of the collateral and the company's financial needs.

 

This method of financing is especially beneficial to businesses that have significant assets tied up but are facing cash flow issues. By leveraging their existing assets, they can unlock liquidity without resorting to equity financing or incurring substantial debt.

 

Asset-based financing, therefore, serves a dual role - it allows companies to leverage their assets while providing them with the financial fuel to navigate the growth path. This method of growth financing is an effective way for businesses to capitalize on their existing assets and convert the potential value into real, tangible growth.

 

The bottom line is that the asset-based growth financing solution solves several problems around collateral, the size of the facility, and the general health of your firm.  Most importantly, it addresses your company's ability to grow again and fund that growth simultaneously. In effect, we've achieved a hybrid-type solution that many small and medium-sized firms sorely require.

 

THE PURCHASE ORDER FINANCING SOLUTION

 

And what about that purchase order financing concept? It’s not a concept; it’s a viable solution that gains more daily traction.

 

The P.O. finance solutions bridge the gap between fulfilling your contract or purchase orders from the time you receive them to your ability to get the final payment from your end-user customer. In some cases, purchase order financing involves a foreign supplier in the U.S., Europe or Asia.

 

Your P.O. financier pays your vendors on your behalf, taking the products, inventory and receivables from that transaction as security. It is a more expensive form of financing but provides a valuable bridge to sales growth success.

 

Small businesses also can access the Canada Small Business Financing program for working capital and lines of credit, given that amendment to the  federal loan program in 2022 added increased financing capability under the program

 

BENEFITS OF GROWTH FINANCING

 

The advantages of leveraging growth financing for business expansion are manifold:

1. Capital Infusion: Growth financing endows businesses with the necessary funds to allocate towards critical sectors such as research and development, marketing, recruitment, and infrastructure enhancement. This capital injection allows businesses to magnify their operations, penetrate fresh markets, and boost their competitive edge.

2. Talent Acquisition: Growth financing aids businesses in drawing in exceptional talent. With healthy financial backing, companies can propose competitive remuneration and benefits, luring and retaining top-tier employees. This amplifies the business's overall competence and cultivates a positive workspace promoting innovation and growth.

3. Credibility and Validation: Growth financing can also bestow businesses with recognition and confirmation of their potential. By securing funding from respected investors or financial entities, companies emit a strong message to the market - that they hold promise and are a worthy investment. This can pave the way for beneficial partnerships, collaborations, and other growth prospects that might not have been accessible previously.

 

  

CONCLUSION  

 

Business expansion calls for balancing daily operations and strategic investments for long-term profitability.

 

Growth financing is instrumental in maintaining this balance and avoiding cash flow issues that could hamper crucial investments. It serves as an essential resource for businesses aiming to grow, enabling them to unlock new growth avenues, add value for stakeholders, and enhance their industry presence.

 

With careful planning and strategic foresight, businesses can successfully leverage growth financing to drive their expansion journey despite its complexity and potential challenges. 

 

The 7 Park Avenue Financial team is committed to offering tailored growth financing solutions to aid businesses in reaching their goals.

 

So, is staying on top worth it? We think so. Therefore, you will want to investigate all solutions available for growth financing in Canada thoroughly. Speak to 7 Park Avenue Financial,  a trusted, credible and experienced working capital financing advisor who can assist you in identifying solutions and financing options that make sense... for your business!

 

 

 FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION  

 

 What is growth financing?

 Growth financing is a strategy that involves raising capital for a small business or medium-sized firm via various financial tools to fund the growth and expansion of a business. This might include launching new products, entering new markets, hiring more staff, or making acquisitions. Sometimes, it can fund strategic acquisitions a company may wish to make to increase sales and profits.

 

 

 Why might relying solely on equity for growth financing be a disadvantage?

 While equity financing can provide significant funds for growth, it can come at a high cost, as it often means giving up a portion of ownership in the company. This dilution of ownership can reduce control over business decisions. It can also drain necessary working capital, the necessary funds for day-to-day operations and short-term obligations. Mezzanine financing is a hybrid debt that ranks lower than senior debt in repayment if there is a default..

 

 How does asset-based financing work?

Asset-based financing is a method where a business uses its existing assets like receivables, inventory, machinery, and equipment as collateral to secure loans or lines of credit. This strategy allows companies to access capital based on the value of their assets, providing a flexible source of funds to drive or sustain rapid growth.

 

How can growth financing contribute to a competitive advantage?

Growth financing can provide a competitive advantage by enabling businesses to seize opportunities more swiftly and effectively. For example, with the right funding, a company can invest in new technology, hire skilled employees, expand its product range, or enter new markets, thereby gaining an edge over competitors.

 

What role does working capital play in growth financing?

 Working capital, which is essentially the funds available for the day-to-day running of a business, is crucial in growth financing. A well-managed working capital structure allows companies to seize growth opportunities while ensuring smooth operations. Growth financing methods like asset-based financing help to preserve and optimize working capital, thus ensuring the business is well-positioned for sustainable growth.

 

What are some Tips for preparing a strong growth financing proposal?

 

To increase the chances of securing growth financing, businesses should consider the following tips when preparing their financing proposal:

 

1. Thoroughly research potential investors or lenders**: Understand the investment criteria, preferences, and track record of potential investors or lenders. Tailor your proposal to align with their interests and showcase how your business fits their investment thesis.

2. Demonstrate a compelling value proposition**: Clearly articulate your business's unique value to the market. Highlight your competitive advantage, market opportunity, and growth potential to capture the attention of potential investors or lenders.

3. Provide a comprehensive business plan**: Develop a detailed business plan that outlines your growth strategy, financial projections, and key milestones. Show how the growth financing will achieve your expansion goals and generate returns for investors or lenders.

4. Prepare a solid financial forecast**: Present a realistic and well-supported financial forecast demonstrating your business's revenue and profitability potential. Use market research, industry benchmarks, and historical data to validate your projections.

5. Build a strong management team**: Investors and lenders often emphasize the management team. Showcase your team member's skills, experience, and track record to instill confidence in potential investors or lenders.

 

 

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