Inventory Financing In Canada: Solving The Working Capital & Cash Flow

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YOUR COMPANY IS LOOKING FOR CANADIAN INVENTORY FINANCING! 

INVENTORY FINANCING LOAN 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?

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 Inventory Financing and Working Capital   Loan Solutions In Canada | 7 Park Avenue Financial

 

 

 Inventory Financing Working Capitals Loan Solutions

 

Introduction

Canadian business owners and financial managers focus on the term ‘inventory loan' when addressing this balance sheet component for additional working capital and cash flow.

 

While it is possible to get an inventory loan to finance and purchase inventory, the reality is that, more often than not, inventory financing is a critical component of additional working capital facilities or a business line of credit or non-bank asset-based loan in conjunction with receivable financing.

 

 
The Significance of the Cash Conversion Cycle  & Asset Turnover In Inventory Loans 

 

Let’s examine some key aspects and types of inventory financing for the business owner and determine how to access this and how the inventory financing loan solution is often used as additional funding for business expenses.

 

For starters, when you are successful in financing inventory, you are in essence freeing up the cash that is tied up in that critical part of your balance sheet.

 

When we talk to clients about working capital and cash flow financing in general, the term ‘cash conversion cycle’ is one on which we place critical importance. It may sound like a textbook finance definition, but the reality is that it’s simply the formula for determining how one dollar of capital flows through your business. And that dollar of capital usually in fact comes from the initial purchase of inventory. This is in turn, converted into accounts receivable, which are (hopefully!) collected and turned into cash. The time that dollar stays on your inventory line is a key part of the cash conversion cycle.

The Importance of Inventory in the Balance Sheet

 

It would help if you focused on inventory financing when in fact, your investment in this balance sheet category is significant, often only rivalled by accounts receivable. We have worked with many firms that have to carry more inventory than A/R. That becomes a financing challenge.

 

The Challenge of Traditional Inventory Financing

 

Naturally, traditional financing institutions such as chartered banks don’t place a lot of reliance on their lending or their ability to secure and dispose of this type of asset.

 

The reality is that your inventory might be in the form of raw materials, work in process, or finished goods. Depending on the lender's knowledge of inventory, the ability to margin or finance that inventory becomes limited. In order to get a bank loan to secure inventory financing firms must demonstrate clean balance sheets, profitability, and cash flow. These facilities from banks are often accompanied by accounts receivable financing facilities for firms with good business credit history.

 

Small firms not qualifying for conventional/traditional bank loan financing often consider a merchant cash advance to generate cash for inventory, as well as other purposes.

Optimal Inventory Financing

 

Inventory financing on its own tends to be challenging – it is not impossible in some circumstances. The reality is though, that inventory financing works best when it is tied to a full working capital or asset-based financing facility that covers the inventory itself, your receivables, and in some cases, supplemental assets such as equipment or real estate.

Key Considerations for Financing Inventory

 

As a cautionary note, we must add that for your inventory to be financed, you should be able to demonstrate that it ‘turns' and that there is only a small percentage of obsolescence attached to this asset category.

 

You can quickly determine how fast inventory turns by going to your income statement, taking your ‘cost of sales' line, and dividing it by ‘inventory on hand'. So, what is a good turnover number? The answer is that it depends on overall industry benchmarks for your type of business. A grocery store might turn over its inventory many times more often than a manufacturing company with a complex build process.

Importance of Efficient Inventory Management

 

We should also add that inventory becomes more financeable when you are running a perpetual inventory system and you can demonstrate you have a solid handle on what is on hand and provide reporting in that regard.

 

Key Takeaways

 

1. Inventory Financing: At its essence, inventory financing is a loan or line of credit that business owners get using their inventory as collateral. The main aim is to provide working capital to businesses to continue their operations smoothly, even if funds are tied up in inventory.

2. Cash Conversion Cycle: This is how capital flows through a business. It begins with the purchase of inventory, which is then sold, turned into accounts receivable, and eventually collected and converted back into cash. The quicker this cycle moves, the better it is for the business's cash flow. Inventory financing aims to optimize this cycle by providing funds when cash is tied up in inventory.

3. Traditional Financing Challenges: Traditional financial institutions, such as banks, often see inventory financing as riskier compared to other forms of lending often requiring personal assets and personal guarantees.  This is because the inventory value can fluctuate, and in the event of a default, selling off merchandise might not recover the total loan value. Understanding this challenge is crucial to knowing why alternative inventory financing solutions are sought.

4. Working Capital & Asset-Based Financing: Beyond just existing inventory financing, a holistic solution often ties in the inventory, receivables, and other assets like equipment or real estate. This combined approach can often offer better terms and greater flexibility for businesses.

 

Conclusion

 

Speak to 7 Park Avenue Financial,  a trusted, credible, and experienced financing advisor in this very specialized area of business financing for SME's and small businesses – that will allow you to determine if your inventory is properly financed and, if not, what financing options are available. Working capital loans and business financing that make sense for your business needs.

 

  

 FAQ   

 

What are the 4 components of inventory?

Inventory can be broadly categorized into four primary components based on the stages of production and the purpose they serve:

1. Raw Materials: These are the essential components or ingredients companies purchase to produce finished goods. Raw materials are not yet processed and are used in the manufacturing process. For instance, a furniture manufacturer might purchase timber as a raw material to produce wooden chairs.

2. Work-in-Progress (WIP): These are goods that are in the process of being manufactured but are not yet complete. They represent a middle stage in production, between raw materials and finished goods. For the furniture manufacturer, chairs that have been assembled but not yet stained or varnished would be considered work-in-progress.

3. Finished Goods: These are completed products that are ready for sale. They have undergone the entire manufacturing process, from raw materials to final product, and are waiting to be sold to the end customer. Using the previous example, a fully assembled, stained, and varnished chair ready for sale would be a finished good.

4. MRO (Maintenance, Repair, and Operations) Inventory: These items aren't directly used in production but are essential for the production process. They support operations and help maintain the production equipment and facilities. Examples include lubricants, tools, spare parts, gloves, etc.

 

Why is the ‘cash conversion cycle’ mentioned to be of critical importance?

The 'cash conversion cycle' is critical because it is the formula for determining how one dollar of capital flows through a business. It starts from the initial purchase of inventory, which then gets converted into accounts receivable and eventually collected and turned into cash. The time this dollar stays within the inventory is a pivotal part of the cycle.

How do traditional financing institutions typically view inventory financing?

Traditional financing institutions, such as chartered banks, often don't rely much on their lending or their ability to secure and dispose of inventory as an asset versus non bank inventory financing lenders.

Their capacity to finance the inventory often becomes limited, depending on their knowledge and understanding of the nature and type of the inventory (raw materials, work in process, or finished goods).

What are the conditions that make inventory more financeable?

When business owners ask how inventory financing works it is important to realize that for inventory to be more financeable, a business should be able to demonstrate that the inventory 'turns' or gets sold and replenished via purchasing inventory regularly. Moreover, only a minimal percentage of obsolescence should be attached to this asset category. Another factor that aids in financing inventory is if the business runs a perpetual inventory system and can show that they have a firm grasp of what is on hand and can provide regular reporting.

Who should businesses consult to determine if their inventory is properly financed?

Businesses should consult a trusted, credible, and experienced financing advisor, especially one specializing in this specific area of business financing. Such an advisor will help them ascertain whether their inventory is currently adequately financed and inform them about the available financing options if it's not.

What is the Just-in-Time inventory system, and what benefits does it offer to businesses?

The Just-in-Time (JIT) inventory system is a management strategy that aligns raw material orders from suppliers directly with production schedules, aiming to reduce inventory holding costs by receiving goods only when they are needed in the production process. The benefits of JIT include reduced storage costs, minimized waste due to perishable or obsolete stock, improved cash flow, and the potential for quicker response to market changes. However, it requires precise forecasting and is vulnerable to supply chain disruptions.


How does RFID technology enhance inventory management processes?

RFID (Radio-Frequency Identification) technology uses electromagnetic fields to automatically identify and track tags attached to objects. When integrated into inventory management, RFID offers real-time visibility into inventory levels, allowing for accurate tracking, reduced human errors, and streamlined warehouse operations. This leads to efficient stock replenishment, reduced shrinkage, and the ability to seamlessly manage inventory across multiple locations. It also provides insights into product movement and behaviour, helping businesses make more informed decisions about stock rotation and sales strategies.

 

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

Financing A Business Purchase Ownership Transfer In Canada

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YOU ARE LOOKING FOR FINANCING TO BUY AN EXISTING  BUSINESS!

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

        Financing & Cash flow are the biggest issues facing business 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

 

Understanding Business Acquisition Loans : How to Buy a Business | 7 Park Avenue Financial

 

 

BUSINESS ACQUISITION LOANS

 

TABLE OF CONTENTS

    Introduction to Business Acquisition in Canada
    What is a Business Acquisition Loan?
    The Right Capital Structure is Key
    What Type of Financing Do You Need?
    Understanding What Lenders are Looking For
    Putting the Valuation on the Business You are Purchasing
    Buyer Commitment / Down Payment: Your Equity Contribution
    Senior Debt - The Most Critical Aspect of Your Financing
    Choosing the Best Business Acquisition Loan for Your Needs
    Vendor Financing: The Seller Note Solution via the Current Business Owner
    Closing the Gap - The Mezzanine Financing Solution
    Government Loans for a Business Purchase
    Check Your Eligibility
    Asset-Based Lending / Leveraging the Assets!
    Do...Your Due Diligence!
    Post-Acquisition Financing Needs?
    Conclusion - Business Acquisition Financing: Talk to the Experts
    FAQ

 

 

INTRODUCTION

Buying a business in Canada is the perfect way to quickly a client base, increase the existing capacity of an established business or company, or gain access to new markets. Some entrepreneurs even focus on acquiring a competitor or supplier!

 

 

 

WHAT IS A BUSINESS ACQUISITION LOAN? 

 

 

A business acquisition loan is a specialized form of financing explicitly designed to purchase an existing business or franchise. These loans can be sourced from traditional bank loan solutions, credit unions online lenders, or specialty finance institutions. They can be secured or unsecured, and the structure, terms, and rates can vary widely depending on the lender, the financial health of the business being acquired, and the buyer's financial situation.


Acquisitions are a part of business life, but how does financing the business purchase work? Sometimes, a company is too small for some lenders to consider an acquisition deal, but that doesn’t mean a business financing solution exists.

Combining an existing company with another to expand is also a great way of increasing your current business’s success. However, if you want the acquisition to be successful, ensure you are working with a business financing expert.

Numerous critical issues around your financing need to be addressed, including appropriate funding for fixed assets and, in some cases, company-owned commercial real estate. Long-term financing of certain assets will be very beneficial in the long run - at the opposite end of the spectrum, if the business has intangible assets that can sometimes, but not always, be a challenge.

THE RIGHT CAPITAL STRUCTURE IS KEY

The right capital structure will position your business for continued growth and make the transition around the business purchase smoother while presenting more opportunities for success.


The proper financing structure can make all the difference.  When buying a company, it's essential to understand how each type of loan works and find the perfect mix for your needs to help guarantee future success.

 
WHAT TYPE OF FINANCING DO YOU NEED?

 

Financing will often come down to either term financing of some sort, or cash flow financing.

 

UNDERSTANDING WHAT LENDERS ARE LOOKING FOR

Cash flow financing allows businesses without sufficient tangible or significant intangible assets to finance an acquisition. This type of debt is based on the company's capacity for debt service and  interest coverage, which is essentially judged by its performance in past years as well as through projected future results.

A reasonable acquisition price based on the valuation method is vital to any business purchase. The company must also have proven capacity to generate enough profit to cover debt service obligations and the need for future capital expenditures as deemed by competent management!

PUTTING THE VALUATION ON THE BUSINESS YOU ARE PURCHASING

One of the first tasks when trying to buy a company is determining its value. This can be not easy because many factors determine how profitable a company has been or can be. To represent future cash flow and earning potential accurately, a buyer needs to carefully ' normalize ' the financials to reflect new ownership -

 

Here is where detailed 'micro analytics ' around your due diligence pays off! Often, averaging several years of cash flow generation is an excellent tool.


In many cases, particularly in larger transactions, sellers or buyers may enlist the help of a professional business valuator, commonly known as a chartered business valuator.  Anyone with proper experience will look at performance around operating cash flows,  rates of return, and return on investment, all of which can be tied to the business's growth potential.


Every industry or economic sector in Canada has issues around competitiveness, profits, and the need for additional assets or technology. Sometimes, a business may have recurring revenue, which is almost always considered a plus.


As a buyer, you want a recent return on your business at an acceptable purchase price/valuation.


There is no perfect way to determine the value of your target company, but you can often use cash flow as a starting point. Other areas to focus on are depreciation policies, taxes, and the timing of expenses. In some cases, significant investments made recently will have long-term benefits seen later on down the road.

BUYER COMMITMENT / DOWN PAYMENT: YOUR  EQUITY CONTRIBUTION

The equity portion you put into the business, of course, decreases the amount needed to be borrowed, demonstrates your commitment to your deal, as well as helping to lead to a  successful acquisition.

 
SENIOR DEBT - THE MOST CRITICAL ASPECT OF YOUR FINANCING 

The senior lender in any acquisition deal provides a loan secured on your company's assets. While specific items may not fully guarantee this amount, it's called senior debt because there is a first charge on all assets. In Canada, lenders typically register a ' GSA ' ( general security agreement ), giving them a first charge/priority on present and future assets via the loan agreement and its stringent loan requirements from traditional financial institutions.

CHOOSING THE BEST BUSINESS ACQUISITION LOAN FOR YOUR NEEDS

Senior lenders have priority over other creditors when liquidating a business. They will most often have in place specific restrictive terms and conditions of repayment - these are called covenants and often involve specific ratios in the financial statements.

VENDOR FINANCING: THE SELLER NOTE SOLUTION

It's not uncommon for sellers to help finance their purchase with a note, sometimes referred to as a seller note or ' VTV ' - Vendor take back from the seller.

The seller agrees that they will be paid back over time, and in many cases, this is done through an incentivized deal where bonuses or other incentives are offered.


This financing, also called an  ' earn-out ', is a popular way for buyers to compensate sellers of a business; it is sometimes based on how much profit or loss a company produces during the repayment period.


Vendor notes offer many benefits for buyers because they don't come with many conditions similar to senior lender conditions, and the interest cost is usually low. Plus, if purchasers face trouble repaying, the vendor will often cooperate.

CLOSING THE GAP - THE MEZZANINE FINANCING SOLUTION

Mezzanine financing, also called cash flow finance, can be a flexible option for those looking to fill any gaps in their finances of business purchase to achieve the optimal financing structure.


Mezzanine funding can be an excellent solution for bridging the gap between buyer investment and any available financing from bank loans, for example. The interest rates can be lower than those on traditional loans, which makes this deal more attractive in some instances. Typical structures are 3-5-year term amortizations.


Mezzanine financing is sometimes called  'patient financing, 'as the company needs to have its cash flow available for repayment to senior lenders while it executes a growth strategy.

GOVERNMENT LOANS FOR A BUSINESS PURCHASE

Borrowers will find that not all banks or lenders they might deal with for traditional bank loans will be keen on providing loans for business acquisitions - this will include a business-oriented credit union. -  Personal finances should be in order with a good credit history and credit score.

 


CHECK YOUR ELIGIBILITY

 


For smaller transactions, the Canada Small Business Financing Program 'CSBFP '  will finance existing business purchases, including franchise financing.  Talk to the 7 Park Avenue Financial team about how this program works, including eligibility criteria and info on loan payments tailored to your transaction size. This term loan is based on your historical and forecasted cash flow and your ability to make debt payments. A limited personal guarantee is required on the transaction - not for the full loan.

No personal assets are taken in government small business loan financing.

Financing options for government loans can include long-term loans based on the value of fixed assets such as land or buildings. Now, SBL Loans can finance working capital, intellectual property, or leverage existing resources, etc.  Talk to the 7 Park Avenue Financial team about the Business Development Bank solutions in this area. Many prospective small business owners will find government loans a suitable solution.

ASSET-BASED LENDING / LEVERAGING THE ASSETS!

Leveraged buyouts and asset-based financing solutions are quite common as business acquisitions for firms with substantial assets relative to financing needs. In this financing structure, you leverage assets (equipment or property, accounts receivable / inventory ) to finance the acquisition with a commercial loan, typically via a non-bank lender.

Seller financing can also be utilized in these types of ' ABL '  deals.

 
DO...YOUR DUE DILIGENCE! 

Due diligence means carefully examining a company's financial statements, income tax returns, and additional information to make an informed decision about your business purchase.


The value of tangible assets (equipment, inventory, buildings, etc.) should be properly adjudicated. As a buyer, you should request everything that has a material impact on the business before making an offer.  Focus on profits, the ability to forecast reasonable growth potential, and areas for potential improvement. Incorporate such ideas into a detailed business plan with proper financial projections that can be defended and are conservative and realistic.

 

  7 Park Avenue Financial prepares business plans that meet and exceed the requirements of banks, non-bank commercial lenders, and finance companies.


A proper level of due diligence will make your purchase offer more sound and appealing to a lender / lenders.

 
POST-ACQUISITION FINANCING NEEDS?

 
 

Financing Operations upon the Purchase:  The purchase of a business always comes with some level of future financial needs and consideration to obtain financing. You will have multiple options for financing operations after purchasing your new company: cash reserves or self-funding,  business lines of credit,  sales leasebacks, etc.  Business credit cards or a business line of credit are helpful for businesses with immediate access to funds at a set limit, and you only pay interest on funds you draw.


Invoice financing is an arrangement that allows a business to finance its business sales via the financing of invoice receivables. Small companies mostly use it to improve working capital and cash flow without a term business loan. There are two leading solutions - traditional factoring and Confidential Receivable Financing.

  


CONCLUSION - BUSINESS ACQUISITION FINANCING


TALK TO THE EXPERTS  

 

Let the 7 Park Avenue Financial team, a trusted, credible, and experienced Canadian business financing firm, want to be your partner in financing your loan application.

 

We will demonstrate customized solutions tailored uniquely to your business purchase needs and requirements around the target business credit score so that you can know that your investment and optimal loan structure will lead to business success without surprises. Guaranteed the ability to secure financing for the business acquisition you are contemplating.

 

 

FAQ

 

 

 

What criteria do lenders look at when considering a business acquisition loan?

Lenders evaluate several factors before approving a business acquisition loan:
    • Buyer's credit history and financial stability: A good personal credit score and solid financial background can increase the likelihood of approval.
    • Business's financial performance: Lenders will want to review the business's financial statements, including profit and loss statements, balance sheets, and cash flow statements, to evaluate its profitability and stability.
    • Down payment: Generally, lenders expect buyers to put down a percentage of the purchase price. The required down payment can vary, but it's often between 10% and 25%.
    • Experience: Lenders may favour applicants with experience in the industry or in managing a business.
    • Collateral: For secured loans, lenders will require some form of collateral, which could be assets of the business or other personal assets.

How do business acquisition loans differ from traditional business loans?

 

 While both types of loans provide financing for business-related expenses, business acquisition loans are intended explicitly for purchasing an existing business or franchise. As such, the approval process for an acquisition loan may involve deeper scrutiny of the target business's financials, history, industry trends, and associated risks. In contrast, traditional business loans are generally used for various purposes, such as expansion, purchasing equipment, or funding day-to-day operations.


How can a potential buyer determine the right price for a business?

Determining the right price involves research, financial analysis, and sometimes professional assistance. Key steps include:
    • Financial analysis: Reviewing the business's financial statements to evaluate profitability, debt, assets, and liabilities.
    • Market analysis: Comparing the business's asking price with similar businesses in the market.
    • Projected earnings: Estimating the business's potential and growth prospects.
    • Intangible factors: Considering non-tangible elements like brand reputation, customer loyalty, and intellectual property.
    • Professional valuation: Hiring a business valuation expert can provide an unbiased assessment of the business's worth.

Are there any potential pitfalls to watch out for when using a loan to buy a business?


Yes, here are a few pitfalls:

    • Over-leveraging: Borrowing more than you can afford to repay can put both the business and your assets at risk.
    • Not conducting due diligence: Failing to thoroughly investigate the business's finances, operations, and market position can lead to overpaying or inheriting undisclosed liabilities.
    • Restrictive loan terms: Some loans come with stringent terms or covenants that limit business flexibility.
    • Focusing only on interest rates: While rates are essential, consider loan terms, fees, and the lender's reputation and customer service.

 

What's the difference between secured and unsecured business acquisition loans?

 

Secured business acquisition loans require collateral, such as real estate, equipment, or other tangible assets, to guarantee the loan. If the borrower defaults on the loan, the lender has the right to seize and liquidate the collateral to recoup their funds. On the other hand, unsecured loans don't require collateral but typically have higher interest rates due to the increased risk to the lender. Approval for unsecured loans is often based on the borrower's creditworthiness and the financial health of the business being acquired.

Are there any potential tax implications to be aware of when financing a business acquisition?

Answer: How an acquisition is structured can have tax implications for both the buyer and seller. For instance, buying the assets of a business as opposed to its stock might have different tax consequences. It's crucial to consult with a tax advisor or accountant to understand the potential tax liabilities and benefits before finalizing the acquisition.

How does due diligence for a business acquisition loan differ from the due diligence for other business loan types?

Due diligence for a business acquisition loan focuses extensively on the target business's financial health, operations, and potential risks. It involves deeply reviewing financial statements, asset valuations, legal matters, operational processes, and industry trends. For other types of business loans, the emphasis might be more on the borrowing company's creditworthiness, repayment capability, and intended use of the funds.

Can the terms of a business acquisition loan be renegotiated after the purchase?

Answer: It's generally challenging to renegotiate loan terms after the purchase has been finalized, as the initial terms were based on risk assessments and valuations at the time of approval. However, some lenders might be open to discussions if there are significant changes in circumstances or if the business performs exceptionally well. Maintaining transparent communication with the lender and providing valid reasons for any renegotiation is essential.
 

What happens if the acquired business underperforms after the purchase?

If the acquired business underperforms, it could jeopardize the buyer's ability to repay loan debts. The buyer should communicate any challenges with the lender promptly. Lenders might offer solutions such as restructuring the loan, adjusting payment terms, or providing additional advisory support. However, in the worst-case scenario, if the borrower defaults and the loan is secured, the lender might seize the collateral to recover the funds.




 

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

Asset Based Lending Canada - Reboot Your Business Credit Needs

Asset Based Lending Canada -  Reboot Your Business Credit Needs

Do Not Pass Go... Do Not Collect $ 200.00 Until You Have Looked At Asset Based Lending

 

YOUR COMPANY IS LOOKING FOR  FINANCING COMPANIES FOR ASSET BASED

LENDING IN CANADA!

THE ASSET BASED FINANCING 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

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

Unlocking Capital: Asset-Based Lending Financing Companies in Canada | 7 Park Avenue Financial

 

 

  

ASSET BASED LENDING / LINES OF CREDIT - CANADA  

 

 Table of Contents

    Introduction

    Understanding Asset-Based Lending (ABL)

    Comparing ABL with Traditional Bank Loans

    Asset-Based Lending in Canada: Meeting Diverse Funding Needs

    Assets Used in Asset-Based Financing

    Who Benefits from ABL Solutions?

    Understanding the Costs of Asset-Based Lending

    Lending Criteria and Transitioning Back to Traditional Financing

    Summary of the Benefits of Asset-Based Lending

    Conclusion

    FAQ

 

INTRODUCTION

 

Asset-based lending in Canada offers a wide range of options because when it comes to exploring alternative finance strategies for your business, it's time to 'REBOOT' your thinking.

 

What is asset-based lending (ABL), and how does it work in Canada?

 

Asset-based lending is a financial strategy where a business secures a loan using the company's assets, such as accounts receivable, inventory, or equipment and commercial real estate as collateral. In Canada, ABL companies provide loans to businesses based on the value of these assets.

 

Unlike traditional bank loans offering an unsecured loan that heavily relies on credit history, an asset-based loan solution primarily focuses on the quality and value of the assets used as collateral. While credit history may still be considered, it is generally not the sole determining factor for asset based lines of credit, making more flexible funding solutions from asset-based lenders more accessible to businesses with limited credit histories.

 

Consider asset-based lending for the business finance solution you're seeking. Let's dig deeper!

 

DO CANADIAN BANKS MEET YOUR FINANCING NEEDS?

 

Many business owners and financial managers, particularly in the SME sector in Canada,, find that all their financial needs can not always be met by traditional Chartered bank / Credit Union sources. While Canadian banks continue to have virtually unlimited capital to serve business needs in many cases, the borrower can't meet the requirements needed to attain those solutions.

 

So, while public companies and large, well-heeled corporations are borrowing at will, the challenge is much more difficult if you're not in one of those two categories.

 

COMPARING  ASSET BASED FINANCING WITH UNSECURED BANK LOANS

 

Asset-based lending (ABL) and unsecured bank loans are two distinct financing options with different characteristics. Here's a comparison between the two when evaluating business growth opportunities:

 

1. Collateral vs. No Collateral:

    Asset-Based Lending (ABL): An ABL revolving line of credit requires businesses to pledge specific assets, such as accounts receivable, inventory, equipment, or real estate, as collateral to secure the loan. The loan amount is typically based on these assets' value and requires fewer covenants.     Unsecured Bank Loans: Unsecured bank loans do not require collateral. These loans are granted based on the borrower's creditworthiness and financial stability and are not tied to specific assets.

2. Access to Capital:

    ABL: ABL provides quicker access to capital since the focus is on the value of assets, making it a suitable option for businesses that need funds promptly.
    Unsecured Bank Loans: Unsecured bank loans may take longer to obtain due to the rigorous credit evaluation process, making them less suitable for businesses in urgent need of funds.

3. Credit Requirements:

    ABL: ABL is often accessible to businesses with limited credit histories or lower credit scores because the primary consideration is the value of assets used as collateral in the due diligence process
    Unsecured Bank Loans: Unsecured bank loans typically require a strong credit history and a good credit score since they rely heavily on the borrower's creditworthiness.

4. Loan Amounts:

    ABL: The loan amount in ABL is determined by the appraised value of the collateral assets. It can be a percentage of the asset's value.
    Unsecured Bank Loans: Unsecured bank loans may offer higher loan amounts than ABL, but the actual amount depends on the borrower's creditworthiness and financial stability.

5. Interest Rates:

    ABL: Interest rates for ABL can be higher than those for unsecured bank loans due to the perceived risk associated with the collateralized assets.
    Unsecured Bank Loans: Typically, unsecured bank loans offer lower interest rates to borrowers with strong credit profiles.

6. Risk to Assets:

    ABL: Businesses risk losing their collateral assets if they fail to repay an ABL loan, which can impact their operations.
    Unsecured Bank Loans: Unsecured bank loans do not put specific assets at risk; however, defaulting can negatively impact the borrower's credit rating.

7. Use of Funds:

    ABL: ABL funds are often used for specific purposes such as working capital, expansion, or acquisitions, which are related to the assets used as collateral.
    Unsecured Bank Loans: Unsecured bank loans offer more flexibility in using funds, allowing businesses to allocate the capital as needed.

 

ASSET BASED LOANS MEET MANY FUNDING NEEDS

 

Enter... stage right... Asset-based lending in Canada.  Through a variety of, shall we call them ' subsets' of Asset financing your company can achieve the financing structure it needs to either grow your business or in certain cases even acquire a business?

 

WHAT ASSETS ARE PART OF AN ASSET BASED  FINANCING

 

Financing companies providing these solutions don't make it complicated either. They take all or certain of your assets (depending on the amount and type of capital you are looking for) and put them into a collateral pool you can borrow against. They can combine working capital/line of credit solutions or even term loans if that makes sense.

 

The assets in question? They include:

 

Accounts Receivable

Inventory

Equipment

Tax credits

Real estate

Large contracts/orders

 

And here's the good news. You can mix and match -  Classic flexible financing!

 

WHO USES ABL ASSET BASED LENDING SOLUTIONS

 

So who is this type of financing well suited for?  Typical clients we meet tend to be:

 

High growth

Start-Ups

Restructuring

Acquisition oriented

Management buyouts

 

A key attraction in Asset-based lending in Canada is that it requires less equity as the focus is all about those assets.

 

WHAT DOES ASSET BASED LENDING COST

 

In business financing, it's not always a perfect world, so funding typical/interest rate costs offered by financing companies that are in effect, non-bank lenders are going to be higher, one reason being those finance firms borrow the funds they need for you from the banks!  

 

LENDING CRITERIA  AND THE BRIDGE BACK TO TRADITIONAL FINANCING

We point out to our clients that if they can meet typical bank borrowing criteria, an asset-based line of credit will often be both competitive with the banks and, most importantly, give you a lot more borrowing power. The simple reason is that assets are more aggressively 'margined' or ' loaned against'. In many cases, companies that temporarily use Asset financing often migrate back to a traditional bank solution.

 

SUMMARY OF THE BENEFITS OF ASSET BASED LENDING

 

• Improved Liquidity: Asset-based lending provides immediate access to cash, helping businesses address short-term financial needs and improve their cash flow.

• Flexibility: It offers flexible financing solutions tailored to a company's specific requirements, allowing it to use the funds for various purposes, such as expansion, working capital, or debt consolidation.

• Accessibility: Asset-based lending is often more accessible to businesses with limited credit histories or lower credit scores since the focus is on the value of assets used as collateral.

• Quick Approval: The approval process for asset-based lending is typically faster than traditional bank loans, enabling businesses to secure funding promptly.

• Enhanced Borrowing Capacity: It allows businesses to borrow against a wide range of assets, potentially increasing their borrowing capacity compared to conventional financing.

• Asset Preservation: Businesses can retain ownership and use of their assets while using them as collateral, ensuring that operations continue uninterrupted.

• Tailored Financing: Asset-based lending can be customized to match a company's financial needs, providing a financing structure that aligns with its growth and operational goals.

• Potential Cost Savings: In some cases, asset-based lending may offer cost savings compared to other high-interest financing options, such as credit cards or unsecured loans.

• Debt Management: It can help businesses consolidate existing debts, simplifying their debt management and reducing the overall cost of borrowing.

• Seasonal Support: Asset-based lending is well-suited for businesses with seasonal fluctuations, allowing them to access capital during peak demand.

• Collateral Diversification: Businesses can use a mix of different assets as collateral, spreading risk across various asset types.

• Credit Improvement: Successful repayment of asset-based loans can positively impact a company's credit profile and potentially lead to better credit terms in the future.

 

 

 

CONCLUSION

 

Asset-based lending is suitable for businesses with valuable assets but limited credit histories needing quick capital access. On the other hand, unsecured bank loans are better for companies with strong credit profiles that can afford a longer application process and seek more flexible use of funds without collateral requirements. The choice between the two depends on a business's financial situation and its specific financing needs.

 

If your business is looking for innovative solutions for your firm's business assets and sales growth, then call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your needs. It's time to ' reboot ' your thinking on the financing solution you require and work with a financial services provider with your interests in mind!

 

FAQ

 

What types of assets can be used as collateral for asset-based loans in Canada?

 

In Canada, businesses can use various assets as collateral for ABL, including accounts receivable, inventory, machinery, equipment, real estate, and even intellectual property. The eligibility of assets may vary depending on the lending company's policies.

 

How do Canadian businesses benefit from asset-based lending compared to traditional bank loans?

 

Asset-based lending in Canada offers more flexibility and quicker capital access than traditional bank loans. It allows businesses with strong asset bases but limited credit histories to secure financing, making it an attractive option for growth and working capital needs.

 

What is the typical eligibility criteria for businesses seeking asset-based lending in Canada?

 

Eligibility criteria can vary among ABL financing companies, but businesses generally need valuable assets for collateral. Lenders may also consider the business's financial stability, industry, and repayment ability.

 

What risks should Canadian businesses be aware of when using asset-based lending?

 

While asset-based lending can provide financing solutions, businesses should be cautious about losing their assets if they cannot repay the loan. Having a clear repayment plan and understanding the ABL agreement's terms and conditions is essential.

 

What are the common industries or sectors that benefit the most from asset-based lending in Canada?

 

Asset-based lending can benefit manufacturing, wholesale distribution, retail, and service-based businesses. It's not limited to specific sectors and can adapt to the unique needs of different companies.

 

Are there any restrictions on how businesses can use the funds obtained through asset-based lending in Canada?

 

Generally, asset-based lending allows businesses flexibility in how they use the funds. Whether it's for working capital, growth initiatives, debt consolidation, or acquisitions, the utilization of the funds is often determined by the business's specific needs.

 

How does evaluating the value of assets for collateral work in asset-based lending in Canada?

 

The process involves a thorough assessment of the assets being offered as collateral. A qualified appraiser or valuation expert may be used to determine the value of assets like equipment, real estate, or accounts receivable. This valuation is crucial in determining the loan amount a business can secure.

 

What is the typical duration of an asset-based lending agreement in Canada, and can it be renewed or extended?

 

The duration of asset-based lending agreements can vary but often ranges from one to three years. These agreements can be renewed or extended based on the lender's policies and the borrower's financial performance. Renewal terms are typically negotiated before the agreement's expiration.

 

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

Getting The Most Out Of Canadian Lease Pricing and Best Lease Rates?

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YOUR COMPANY  IS LOOKING FOR CAPITAL EQUIPMENT LEASING AND THE BEST LEASE RATES AND PRICING!

Secrets of Lease Pricing for Smart Business Financing

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?

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Lease Pricing Best Rates Capital Equipment Finance  | 7 Park Avenue Financial

 

Understanding Lease Financing: Unlocking the Best Lease Rates in Canada

 

Exploring the Importance of Lease Rates and Terms

 

Leasing equipment and equipment loans are standard in Canada, but do you truly understand its intricacies when you purchase equipment or new technology?

 

Many business owners seek ways to secure the best lease rates for their business equipment and technology needs in Canada while effectively managing capital equipment financing. This article will delve into the significance of comprehending business loan lease pricing and terms, offering valuable insights, tips, and strategies for making informed decisions.

 

 

The Pitfall of Ignorance: End-of-Term Obligations 

 

One of the most significant threats to equipment financing in Canada is the lack of awareness regarding factors that can impact the advantages of a lease, particularly the often-overlooked 'end of term' option.

 

Astonishingly, numerous small and large businesses fail to grasp the importance of understanding and invoking their equipment financing options when their leases expire. Paradoxically, larger corporations often fare worse in this regard, as the complexities of managing numerous equipment leases can lead their systems to 'forget' critical details.

 

But how can an end-of-term option prove costly? Surprisingly, many leases are structured to obligate your firm to continue paying the monthly lease payment if the notice or obligation is not handled correctly. Failure to return, buy, or formally extend a transaction can leave you in a perpetual payment cycle, which is far from ideal.

 

Imagine leasing a $25,000 document copier, paying it off over five years with interest, only to find yourself paying for it again. To compound matters, the asset has depreciated and become outdated due to technological advancements. This situation is far from optimal.

 

Navigating Lease Pricing Options in Canada

 

In the Canadian capital equipment finance industry, lessors offer many pricing options, which can bewilder business owners and financial managers. To simplify the lease pricing process and secure the best rates, it is essential to perform fundamental research into the two primary types of leases: capital (also known as lease to own) and operating (also known as lease to use).

 

 

Choosing the Right Lease Strategy 

 

An operating lease strategy is prudent if your assets depreciate rapidly or require frequent upgrades to stay competitive. This approach, exemplified by computers and computer systems, presents benefits such as lower monthly payments, flexibility in returning and upgrading equipment, and the ability to effortlessly replace outdated technology at the end of the lease term. Operating leases often offer the most favourable lease rates compared to lease-to-own strategies. via a financial institution

 

Streamlining Lease Financing

 

Simple lease finance strategies can further reduce your monthly payment, with options like a bargain purchase at the end of the lease, effectively lowering your ongoing costs. Moreover, your interest rate on lease financing in Canada depends on factors such as your firm's credit quality, the type of asset you lease, and your choice of lessor. Given the segmented nature of the industry, partnering with the right lessor can translate into substantial cost savings throughout your financing relationship.

 

 Conclusion: Harnessing the Power of Lease Financing 

 

In pursuit of the best lease pricing and terms? Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor.

Their expertise can help you leverage the advantages of this potent capital equipment finance strategy, embraced by countless business owners daily. By mastering the nuances of lease financing, you can unlock the key to securing favourable lease rates and ensuring the long-term financial health of your enterprise. Don't leave your leasing fate to chance—make informed decisions and reap the rewards of right lease financing.

 

To achieve the best lease pricing and terms, speak to  7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can help you, the business owner, maximize the benefits of this powerful capital equipment finance strategy used by thousands of business owners every day.

 

 FAQ 

 

Why is understanding lease financing crucial for my business?

 

Understanding leasing equipment financing companies and lease financing helps you secure the best interest rates and terms for equipment purchases, potentially saving thousands of dollars. It empowers you to make informed decisions and effectively manage your needs around new or used equipment financing.

 

What are the risks of neglecting end-of-term obligations in leases?

 

Neglecting end-of-term obligations on a capital lease or fair market value lease can lead to continuous payments even after the lease ends. This costly oversight can leave you paying for outdated equipment, hindering your business's growth.

 

How can I choose the right lease strategy for my business?

 

The choice between capital and operating leases depends on your asset's depreciation and upgrade needs. Capital leases from financial institutions such as a commercial leasing company offer ownership while operating leases provide flexibility and lower monthly payments.

 

What factors affect my interest rate on lease financing in Canada?

 

Your interest rate is influenced by your firm's credit quality,  down payment, the owner's and the business's credit score,  the type of leased asset, and your lessor. Finding the right partner can result in substantial cost savings over the financing term.

 

Why should I consult a Canadian business financing advisor for equipment leasing programs?

 

A reputable advisor can guide you through the complexities of lease financing, helping you maximize its benefits. Their expertise ensures you make the best financial decisions for your business around the best equipment purchases and financing possible.

 

Are there tax benefits associated with lease financing in Canada?

 

Lease financing can offer tax advantages, such as deducting lease payments as business expenses. However, specific tax benefits may vary based on your business and the type of lease.

 

What is residual value, and how does it affect lease terms?

 

Residual value is the leased asset's estimated worth at the lease term's end. It can impact lease payments and terms. A higher residual value typically leads to lower monthly payments.

 

Can I terminate a lease early if my business circumstances change?

 

Early lease termination can be possible, but it often incurs penalties. Review your lease agreement to understand the terms and costs of early termination for leases and business loans when purchasing equipment to finance the asset.

 

Are there industry-specific considerations for lease financing in Canada?

 

Different industries may have unique requirements and considerations for lease financing and loan terms. Tailoring your lease strategy to your specific business needs to finance equipment is essential. Almost any type of asset, from trucks to specialized medical equipment, can be financed.

 

How does lease financing compare to traditional bank loans for acquiring equipment?

 

Lease financing via equipment financing lenders typically requires less upfront capital on the purchase price than an equipment loan and offers flexibility. Bank loans and unsecured business loans involve ownership from the outset and may require substantial down payments. Choosing between the two depends on your financial goals and circumstances. Business owners'  personal credit scores and overall financial health are key to bank loan approvals. In contrast, commercial financing companies and online lenders have less stringent approval criteria to purchase the equipment required.

Companies using lease finance can conserve existing lines of credit. No minimum annual revenue is required when using an asset finance strategy.

 

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

Construction Invoice Financing & Contractor Loans Funding

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YOUR COMPANY IS LOOKING FOR  CONSTRUCTION INVOICE FINANCE!

CONSTRUCTION FACTORING  COMPANIES FOR SUB-CONTRACTORS

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Financing & Cash flow are the  biggest issues facing business today

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

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Oakville, Ontario
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Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

 

What Is Construction Invoice Factoring - Your Guide To Contractor Loan And Construction Invoice Financing

 

Construction invoice factoring contractor loans is all about the cash flow of your receivables outstanding from clients. This allows your business to fund payroll and operations successfully and consider working capital for growth projects and new clients while avoiding cash flow problems.

 

THE NEED FOR FUNDING IN CONSTRUCTION CREDIT

 

The construction industry presents unique challenges that can significantly impact a company's cash flow and financial stability.

 

One of these challenges is the complexity of managing subcontractor payments to improve cash flow, which often involves intricate billing structures and timing around invoice value. Additionally, construction firms must contend with the potential threat of mechanics liens.

 

These legal claims can be placed against a property when contractors or subcontractors are not paid promptly, causing disruptions in project timelines and financial setbacks. Furthermore, the industry is subject to various government regulations and compliance requirements that can further complicate financial operations.

 

Construction invoice factoring can be a valuable tool for addressing these challenges by providing immediate cash flow to navigate the intricacies of the construction business while allowing companies to focus on delivering projects efficiently and profitably.

 

Contractions and extraction companies, for example, need steady funds. The challenge is that traditional financing can rarely satisfy the needs of small construction companies due to their size and risk perception around their industry. An excellent example of that is contractor holdbacks and progress billings typically associated with the industry, with those holdbacks, of course, being government law! Naturally, the world done by your firm is also subject to mechanics liens, further complicating the matter.

 

The challenge for a sub-contractor and factoring for construction subcontractors is to ensure you have an experienced Canadian business financing advisor and a construction factoring company who can help you fund construction receivables.

 

Construction companies, large and small, play a key role in the Canadian economy. The industry's ability to secure cash flow and business financing to complete current jobs is key to its long-term success.

 

HOW THE RIGHT FACTORING COMPANY FINANCES CONSTRUCTION RECEIVABLES

 

The effective use of a factor/receivable type construction invoice finance allows a company to eliminate the wait time that otherwise might delay work if cash flow is not secure. Proper invoicing and financing assistance via a factoring agreement from a financing company allow the company to project cash flow needs for current and future projects. The ups and downs of cash inflows' timing is a key challenge to any firm in construction - cash flow might be plentiful today and less so tomorrow.

 

 

 

WHY CONSTRUCTION RECEIVABLE FINANCING WORKS

 

Those cash flow fluctuations, significant in nature, are why construction factoring and factoring construction receivables via construction invoice factoring companies work well for both startups and established firms.  It's safe to say the clients of construction companies big and small would prefer to work with companies such as yours, knowing your firm can meet its obligations.

 

TRADITIONAL FINANCING IS NOT ALWAYS AVAILABLE.

 

The whole issue of subcontractor factoring / factoring construction invoices,  and the type and nature of construction invoices vis a vis work completed, progress billing draws, application for payment, etc., make traditional financing challenging and seemingly inaccessible for many firms trying to get paid promptly while avoiding negative cash flow via a conventional bank loan.

 

  

BANK REQUIREMENTS FOR A/R CONSTRUCTION FUNDING  

 

That perceived risk, real or otherwise, forces many finance firms, banks, etc., to ask for additional collateral and the proverbial ' personal guarantee around a construction company's financing. Sometimes, ' credit insurance ' is one answer to the contractor finance challenge. Different types of firms within the construction industry have needs that vary as they assess the construction funding needed for larger jobs in their construction industry.

 

  

CONSTRUCTION COMPANIES TYPICALLY ELIGIBLE FOR  SALES FINANCING

 

  

Typical contractors eligible for invoice and receivable financing include electrical, floor, roofing, scaffolding, drywall, drainage, flooring, tiling, brick, and carpentry firms.

 

HOW INVOICE FACTORING WORKS?

 

Putting an a/r factoring facility in place for a new project for your business allows your firm to be paid promptly, and for a construction company, that cash advance is critical cash flow. Knowing you have guaranteed cash flow will enable you to complete current projects and consider the next job. Due to the seasonality and timing of cash inflows in the construction business, knowing you have predictable cash flow is the key to success. With good profit margins, businesses can lower their financing costs around factoring company charges.

 

EXAMPLE:

 

Let's consider a factoring cost analysis with an invoice value of $50,000 and an advance of 80%:

You choose a factoring company that provides an advance of 80% of the invoice value, totalling $40,000.

You will receive the $40,000 immediately  -The agreement clearly states a factoring rate of 2% over 30 days as an example

As your client makes the payment within the 30-day timeframe, the factoring company charges a 2% factoring fee of $1,000.

The balance of the invoice, i.e. the 20% holdback, is paid when the client pays the invoice.

 

A construction factoring company typically offers two types of construction invoice factoring:

 

1. Spot Factoring: This option comes into play when a company requires immediate cash and wishes to factor in a single invoice. Spot factoring is suitable for businesses facing a specific cash flow need due to an isolated invoice issue. It's worth noting that spot factoring can be pricier compared to contract factoring.

2. Contract Factoring: Similar to spot factoring, contract factoring involves a more extensive range of invoices. In this arrangement, the factoring company provides cash for each progress payment. Due to the higher volume of invoices involved, contract factoring often comes with more favorable rates.

 

 

IS CONSTRUCTION INVOICE FINANCING A GOOD IDEA?

 

Suppose your firm is in constant need of cash. In that case, you typically invest in accounts receivable that force you to wait for client payment - that's why construction invoice factoring works. By generating immediate cash as soon as you invoice a client, you have eliminated the challenge of cash inflows. Therefore, this type of financing allows you to complete jobs and, importantly, consider positions that might be out of reach from a size perspective. Your firm can't wait for 90 days to collect payment.

 

IS PURCHASE ORDER FINANCING A SOLUTION?

 

At 7 Park Avenue Financial, we always meet clients who require financing to take on larger contracts but need the financing to do so. Sometimes, a PURCHASE ORDER FINANCING facility makes sense, allowing your suppliers to be paid directly for your materials.  Any contractor or construction firm's general needs are typically general corporate functions such as payroll, supplier purchases, and ensuring your fixed costs and loan payments are current.

 

WHAT STAGE IS YOUR BUSINESS IN?

The construction industry is varied - your firm might be in its early stages or, as we have discussed, lacking financing to grow and take on larger clients. The Canadian chartered banks have typically 'underserved ' these firms, leaving them ' debunked. The financial term ' concentration risk ' must also be considered, as some companies tend to have only one client or have most of their work at any time in one client. Commercial lenders view this as 'a concentration risk. '

 

 

HOW DOES CONSTRUCTION FACTORING  WORK? 

 

Certain vital issues must be addressed to make construction invoice factoring and financing for construction subcontracts work. Typically, your invoice will have an advance made to your firm in the 75-80% range. The excellent news with construction finance factoring is that you are not obligated to finance all your receivables, although certainly, you can if you choose.

 

Your clients must pay the lender the full invoice amount, and your business still gets that additional balance owing to lower financing costs.

 

Contractors, sub-contractors, and small construction companies should demonstrate decent gross margins on their pricing to clients to absorb the financing costs.

 

Many firms are under the mistaken impression that this type of financing is a loan, thereby bringing debt to their balance sheet. That is not the case!  These are not contractor loans. You are ' cash flowing ' an asset on your balance sheet already.

 

When considering financing options for their construction business, companies often weigh the advantages of construction invoice factoring against various alternatives.

 

While construction invoice factoring offers quick access to cash based on outstanding invoices, comparing it to traditional financing sources like bank loans, lines of credit, and equity financing is essential. Bank loans and credit lines typically involve a lengthy approval process and stringent credit requirements, making them less accessible, especially for smaller construction firms.

 

Equity financing may require giving up ownership stakes in the company. Factoring, on the other hand, emphasizes the creditworthiness of clients rather than the company itself, making it a viable option for those with less-than-stellar credit or those seeking a faster and more flexible funding solution.

 

Choosing the right financing option depends on a construction company's specific needs and financial situation, making a thorough comparison crucial in making an informed decision.

 

 CONCLUSION  

 

At 7 Park Avenue Financial, we are focused on ensuring construction businesses like yours can release cash flow from their construction projects. We focus on providing you with the capital injections you need on a short and long-term basis. That might also be in acquiring assets to run your construction business. Regarding your unpaid invoices, the right factoring company is job #1 at 7 Park Avenue Financial.

 

The ability to have a partner that understands your business and can react quickly to your invoice discounting. We will consider how you do your work and bill clients, where your clients are located, your specific needs, and what type of sales growth you are currently experiencing and projecting. If necessary, we'll prepare your company's business plan and cash flow projections.

Knowing your estimated funding needs around the seasonality of your work and understanding when you might need additional ' bulge financing ' is the type of financing partner you should be focused on. Sometimes, your work might involve government contracts with unusual terms around completion, etc.

 

At 7 Park Avenue Financial, we will ensure you get the maximum available advance on all your invoicing - in any business, knowing who to work with on business financing is key to your larger jobs. Successful financing needs /Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who will assist you with your contractor invoice financing and other funding needs.

 

FAQ

 

What is construction invoice factoring?

Construction invoice factoring is a financial service where construction companies sell their outstanding invoices or receivables to a factoring company at a discount. In return, the construction company receives immediate cash, which can be used to cover expenses and finance ongoing operations. The factoring company then assumes responsibility for collecting the full invoice amount from the client.

Why would a construction company consider invoice factoring instead of taking a traditional loan?

There are several reasons:

    Speed: Factoring invoices can provide immediate liquidity, often within 24-48 hours, while traditional bank loans might take days or weeks to get approved.

    Credit Requirements: Factoring companies are typically more interested in the creditworthiness of the construction company’s clients than the company itself. This makes factoring a viable option for companies with less-than-stellar credit or relatively new ones.

    Flexibility: Invoice factoring doesn’t create debt on the construction company's balance sheet. The company is simply receiving an advance on money it's already earned.

    Cash Flow Management: Invoice factoring can bridge the gap between completing a project and receiving payment, ensuring uninterrupted operations for businesses with long payment cycles.

Are there any potential downsides or risks associated with construction company factoring?

Yes, there are potential drawbacks to consider:

    Cost: Factoring usually comes at a higher cost than traditional financing. The fees charged by the factoring company might erode profit margins.
    Dependency: Over-reliance on factoring can lead to a cycle where the company always needs advances to cover expenses rather than improving its cash flow management.
    Customer Relations: If the factoring company uses aggressive collection tactics, it might strain the construction company’s relationships with its clients.

How does the factoring company make money in this process?

Factoring companies earn money by charging fees or a percentage of the invoice. When a construction company sells its invoice to a factoring company, it typically receives a significant portion (e.g., 80-90%) of the invoice amount upfront. The remainder, minus the factoring fee, is paid to the construction company once the factoring company fully collects the invoice. The difference between the advanced and collected amounts, minus the reserved amount, is the profit for the factoring company.

Is construction invoice factoring suitable for all types of construction companies?

 While invoice factoring can benefit many construction companies, especially those experiencing cash flow issues or rapid growth, it's not a one-size-fits-all solution. Factors to consider include the company's profit margins, the creditworthiness of its clients, its typical payment terms, and its overall financial health. Before diving into factoring, a company should evaluate all financing options, consult with financial advisors, and carefully review any agreement with a factoring company.