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Mastering Business Credit & Working Capital Solutions for Growth | 7 Park Avenue Financial

Bridging the Cash Flow Gap: Business Credit Strategies Revealed!

Read on to navigate the complexities of business credit because understanding these strategies is pivotal to bridging your cash flow gaps effectively

The Importance of Business Credit Requirements

Business credit requirements involve securing external additional business capital for your company. That involves a working capital type loan, as well as appropriate finance for a business that might come from traditional Canadian chartered bank financing line of credit, or alternative lending solutions.

The Importance of Cash Flow:

Cash flow represents the net amount of cash being transferred in and out of a business. Positive cash flow means a company is adding to its cash reserves, allowing it to reinvest in the business, pay off debt, return money to shareholders, or save for future challenges. Consistent cash flow is essential to meet payroll, pay rent, purchase inventory, and essentially keep the business operational.

Business credit needs are anything if not... consistent! In many cases the access to capital/ loans/ financing is one of the biggest obstacles to growth for a large section of companies constantly searching for SME COMMERCIAL FINANCE solutions. So how does the owner/manager ensure they have access to commercial financing needed to grow the company? Let's dig in.

No secret that every business, even larger corporations, eventually finds itself in a situation where it needs to secure additional capital. It doesn’t matter if it’s a startup trying to get itself off the ground or an established company looking to cover a cash-flow gap. The point is that having reliable access to working capital is crucial to your business and its success.

Traditional vs. Alternative Lending Solutions

Solutions might come from working capital loans or for larger businesses term loans can mezzanine type cash flow loans. Another key focus for many growing companies is to monetize current assets, typically A/R and inventory, that will allow you to cash flow your sales as you grow revenues.

Entrepreneurs, Business Owners and their financial managers looked to alternate lending sources when a traditional banking solution won't deliver on your 'cash flow gap'. That is whey alternate lenders have become increasingly popular in times of crisis or economic uncertainty.

Understanding the Different Financing Options

Thankfully business needs can be nicely broken down into several categories as follows: day to day operating capital, immediate growth needs for new opportunities, equipment and asset acquisition, hard asset refinancing via business credit.

Business Credit Lines

Business Credit Lines - These facilities aren't necessary emergency facilities, they should be sought after and used by every business. Whether it's business credit cards for smaller businesses or bank credit line revolving facilities or non-bank asset based lines of credit it's all about a day to day operating facility that works for your company. Approval lead times for these facilities are much shorter than when your firm contemplates longer-term loans from a senior lender.

Receivable Financing

Receivable Financing - The ability to finance your invoices as you generate sales is a very attractive option for most SME firms in Canada. There is literally a renaissance of A/R financing solutions that allow you to cash flow sales as you generate revenue. Typical advances against your sales are in the 90% range. At 7 Park Avenue Financial, we recommend Confidential Receivable Financing as the most effective solution.

Short Term Working Capital Loans

Short Term Working Capital Loans - These loans have exploded onto the Canadian marketplace and are a popular borrowing option. The loans are typically in the range of 10-20% of your firm's annual sales and are repaid according to your business cash inflows, so that might be weekly or monthly as an example. These are unsecured loans with no external collateral required, although the lender might choose to register a financing statement against your business under Canada's PPSA laws. Important to note also that this type of business finance should not be considered if your firm is in a downward sales spiral.

Unsecured Cash Flow Loans / Mezzanine Financing

Unsecured Cash Flow Loans / Mezzanine Financing - This funding option requires no external collateral or pledging of business assets. Naturally, your company must demonstrate it has a history of solid cash flow performance, with the loans typically tied to a 3-5-year maturity.

Other Financing Alternatives

The common 'go-to' solution in the eyes of owners/managers is to solicit chartered bank financing in Canada. If your firm has a strong balance sheet, profits, established history additional collateral etc. you'll find all the financing you need from our chartered banks who have virtually unlimited financing potential.

Navigating Through Financial Challenges

When the going gets tough, the tough get going goes the expression, so it is a case of getting somewhat 'creative' in your search for working capital. If your firm has assets and growth prospects we firmly believe you can get most, if not all the financing you need.

Key Takeaways

Working capital is the difference between a company's current assets (like cash, accounts receivable, and inventory) and its current liabilities (like accounts payable). It represents the short-term available resources a company has to run its day-to-day operations. A positive working capital indicates that a company can pay off its short-term liabilities with its short-term assets.

Business Credit Importance:

Business credit is the ability of a company to obtain borrowed money. It can be in the form of bank loans, credit lines, or other financial instruments. A strong business credit profile allows a company to secure financing under favourable terms, which can be crucial for growth, managing cash flow, or handling unexpected expenses.

Sources of Working Capital Financing:

Businesses can leverage multiple sources for working capital business loans, including:
Traditional bank loans/business loan or lines of credit.

Asset-based financing uses assets like accounts receivable or inventory as collateral.

Short-term loans/merchant cash advances often with higher interest rates but quicker approval processes. A good credit score for owners is often required as well as info on the business owner's personal credit - This financing is structured as a lump sum installment loan with monthly payments

Alternate lenders or non-banking financial institutions versus a traditional bank loan

Receivable Financing (Factoring):

This is a method where businesses sell their accounts receivable (invoices) to a third party (a factor) at a discount. It allows businesses to get immediate cash without waiting for customers to pay their invoices, and when comparing working capital loans a/r financing brings no debt to the balance sheet

Conclusion:

Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your funding needs.

FAQ

What is the role of trade credit in working capital management?

Trade credit is an agreement where a supplier allows a business to purchase goods or services and pay for them later, typically within 30, 60, or 90 days. It's a form of short-term financing that can help businesses manage their cash flow by extending the time they have to pay for inventory, thus preserving working capital and minimizing debt payments

How can a business improve its working capital ratio?

The working capital ratio, calculated as current assets divided by current liabilities, indicates a company's short-term financial health. To improve this ratio, a business can increase its current assets (e.g., by collecting accounts receivable faster or managing inventory efficiently) or decrease its current liabilities (e.g., by negotiating longer payment terms with suppliers).

What are the risks associated with working capital loans?

While working capital loans can provide quick cash for short-term needs, they may come with higher interest rates compared to long-term financing. There's also the risk of over-reliance when you get a working capital loan or merchant cash advance, where a business continually borrows for daily operations rather than improving cash flow from operations. If not managed carefully, this could lead to unsustainable debt levels. The ability of small business owners to provide business bank statements is vital

Can startups with no business credit history secure working capital financing?

Yes, startups can obtain certain types of working capital financing, but it might be more challenging to take advantage of financing without an established credit history for a business line of credit. Lenders may look at other factors, such as the personal credit of the business owner, the business plan, projected revenues, or even to make sure to understand the industry the startup is in. Some alternative lenders or crowdfunding platforms might also be more open to working with startups with the business owner

What is a working capital line of credit for business?

A working capital line of credit is a financing solution available to businesses, allowing them to access funds to meet short-term operational needs. Unlike a traditional term loan, which provides a lump sum of money upfront that is repaid over time, a line of credit offers flexibility in borrowing and repayment. Here's a breakdown:

Purpose: The primary use for a working capital line of credit is to finance the day-to-day operational costs of a business. This can include purchasing inventory, covering payroll, addressing seasonality cash flow challenges, handling unexpected expenses, or taking advantage of sudden opportunities.
Flexible Access: With a working capital line of credit, businesses can draw funds as needed, up to the credit limit. This is particularly useful for businesses with fluctuating cash flow needs.
Interest: Interest is typically charged only on the amount drawn, not on the entire credit line. For instance, if a business has a $100,000 line of credit but only draws $20,000, they will pay interest only on that $20,000.
Revolving Credit: It's "revolving," meaning that as the business repays the borrowed amount, that portion becomes available again for future use. Think of it like a credit card: if you pay off a part of what you owe, your available credit increases by that amount.
Secured vs. Unsecured: Some lines of credit may be secured, meaning they require collateral (like real estate, equipment, or inventory) to back the borrowed amount. Others might be unsecured, which typically means higher interest rates because the lender is taking on more risk.
Qualification: To qualify for a working capital line of credit, lenders typically look at a business's credit history, cash flow patterns, the overall financial health of the company, and sometimes the personal credit history of the business owners.
Benefits: A working capital line of credit provides businesses with flexibility, allowing them to manage cash flow gaps without taking on long-term debt. It also provides a safety net for unforeseen expenses or opportunities.

In essence, a working capital line of credit provides businesses with a cushion, allowing them to continue operations smoothly even during periods when cash inflows might be unpredictable or inconsistent.

What is working capital credit?

"Working capital credit" typically refers to a credit facility or financing arrangement that provides funds to cover a business's short-term operational needs, which is synonymous with the concept of the working capital line of credit I mentioned earlier.

However, to understand this concept more broadly, it's essential to first understand "working capital."

Working Capital: It's the difference between a company's current assets (like cash, accounts receivable, and inventory) and its current liabilities (like accounts payable). In simple terms, working capital measures the short-term liquidity of a business, representing the funds available to cover day-to-day operations.

Working Capital Credit: It can be any form of short-term financing designed to boost or support a business's working capital. Types include:

    Working Capital Line of Credit: As previously described, this is a revolving credit facility that businesses can draw from and repay as needed, based on their operational requirements.

    Short-term Loans: These are lump-sum loans with short maturity periods (typically 12 months or less) that businesses must repay, often with interest, by a specific date.

    Trade Credit: This is a form of short-term financing where suppliers allow businesses to purchase goods or services and pay for them at a later date, effectively extending credit terms.

    Invoice Factoring or Discounting: This involves selling accounts receivable at a discount to a third party (the "factor"). The business receives immediate cash, and the factor assumes the responsibility for collecting the invoice payment.

    Overdraft Arrangements: Businesses can overdraw their bank accounts up to a certain limit, providing a buffer for short-term liquidity needs.

The key takeaway is that working capital credit refers to various financial tools and arrangements that support a business's short-term operational needs. The choice of which type of working capital credit to utilize depends on the specific requirements, financial health, and strategic objectives of the business.

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Friday, October 13, 2023