Working Capital Sources In Canada : Tracking Different Business Credit & Finance Solutions To Grow Your Business

 

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Customized Financing Solutions: A Guide for Canadian Entrepreneurs

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Introduction: 'Made to Measure Approach to Canadian Business Finance

 

Working capital finance options can provide customized solutions for most Canadian businesses for a company's short term operational needs.

 

Despite misconceptions that they lack real choice in business credit solutions, business owners and financial managers have the means to find the perfect cash flow solution - whether that is permanent working capital from commercial banks or cash-flowing business assets such as receivables and inventories.

 

Here's how to navigate to the ideal financial structure.

 

Identifying Working Capital Needs and Challenges

 

Understanding the business credit needs requires firsthand experience in handling working capital difficulties. Most businesses will face this challenge at some point, as it's a day-to-day reality for many around the challenge to raise funds.

 

Working Capital Explained: Investments, Assets, and Goals

 

Working capital, essentially your operational capital, involves your company's investments in receivables and inventory. It's all about managing these current assets effectively, aiming for the optimal monetization of receivables and inventories.

 

The Importance of Assets, Profit, Liquidity, and Turnover

 

The complexity of working capital often arises from understanding the nuances of assets, profit, liquidity, turnover and the relation between internal and external sources of financing.

Grasping these concepts will lead to a clearer understanding of working capital solutions.

 

The four main components of working capital are accounts payable, accounts receivable via trade credit extended, inventories, and cash & cash equivalent.

 

 Strategies for Managing Working Capital

 

Working capital management focuses on short-term assets like A/R and inventory. Realizing that liabilities, like payables, can be an asset in net working capital management is essential for progress.

Measuring Working Capital: The Cash Conversion Cycle

 

A perfect way to gauge your working capital needs is by checking the 'cash conversion cycle.' This method measures the time a dollar takes to flow through your company, providing valuable insights into gross working capital and business performance.

 

Advantages of Working Capital

 

• Solvency of Business: More working capital than current liabilities ensures a company's solvency, allowing for flexibility in various purposes.

 

• A good working capital position will help secure financing from a lending institution or commercial finance company -  Having cash on hand makes it easier to secure loans, even if the company's credit rating is poor. This is vital for small and medium-sized businesses.

 

• Regular Supply of Raw Materials: Adequate working capital ensures a steady supply of raw materials, potentially reducing production costs.

 

• The exploitation of Favorable Market Conditions: Positive working capital allows a company to take advantage of favourable market conditions, boosting profitability.

 

• Ability to Face a Crisis: Good working capital provides the financial cushion to navigate crises and implement necessary changes in the business. Many companies face seasonal variable working capital in their business.

 

 

Enhancing Working Capital through Different Financing Sources

 

Increasing turnover can be accomplished by accelerating cash flow through borrowing against receivables or utilizing a factoring process to solidify working capital.

 

Some key working capital finance sources include:

 

• Asset-based non-bank credit line  -  a revolving credit facility - borrowers only pay interest on funds drawn down on the facility - allowing the business to access funds for operating expenses. An asset-based credit line, also known as an asset-based loan or asset-based line of credit, is a type of financing secured by a company's assets. These assets could include inventory, accounts receivable, machinery, or other tangible assets. The credit line is typically set up as a revolving line of credit, meaning the borrower can draw funds up to a predetermined limit and pay them back on a continuous basis.

 

• Sale-leaseback strategies - A sale leaseback strategy is a financial transaction where a company sells an asset it owns (such as real estate, machinery, or equipment) to another party and then immediately leases it back.

 

• A/R factoring/Confidential Receivable Finance -  Accounts Receivable (A/R) Financing, also known as factoring, is a financial transaction where a company sells its outstanding invoices (accounts receivable) to a third party, called a factor, at a discount. This allows the company to receive immediate cash rather than waiting for the customers to pay their invoices, thereby improving liquidity and cash flow. A/R Financing can be an attractive option for companies that need to manage working capital more efficiently.

 

• Working capital term loans

 

• SR&ED Tax Credit Financing - SR&ED tax credit financing is a financing solution around  the process of obtaining a  bridge loan or advance based on the anticipated value of an SR&ED claim

 

• Merchant Advance/ Short Term working capital loan - the business owner's credit score is essential to the business lender. -
  

  A Merchant Cash Advance aka " (MCA) " is a form of financing that provides a lump sum of capital to a business in exchange for a percentage of future sales, plus a fee. It's a popular financing option for businesses, especially in the small business area for firms not qualifying for traditional bank loans.

 

• Vendor and trade sources -

• Extended Payment Terms: By negotiating longer payment terms with vendors, a business can delay cash outflows. This delay allows the company more time to generate revenue from sales before paying its suppliers, providing more flexibility in managing cash resources.

• Aligning Receivables and Payables: Vendor trade credit can help a business align its payables with its receivables. If a business has payment terms from customers that match or are shorter than the terms with its vendors, it can use the revenue from customer payments to cover the vendor payments, smoothing out cash flow.

• Reducing Need for Short-Term Financing: By effectively utilizing trade credit, a business might reduce its need for short-term borrowing or lines of credit. This can save on interest and fees, allowing funds to be used elsewhere in the business.

• Leveraging Vendor Financing for Growth: Vendor trade credit can act as an interest-free short-term loan, providing a business with the ability to invest in additional inventory or other growth opportunities without the need for external financing.

• Enhancing Supplier Relationships: By consistently meeting payment terms, a business can build trust with its vendors. This relationship may lead to more favorable trade credit terms in the future, such as longer payment periods or even discounts for early payments.

 

Long-Term Solutions: Asset-Based Lines of Credit and More

 

Working capital solutions in Canada are focused and practical. These solutions may include working capital term loans or asset-based lines of credit.

 

Understanding and Choosing the Best Working Capital Solutions

Working capital management is about comprehending its core principles and assessing your firm's performance in key areas like turnover. It involves selecting the solution that fits your firm's long-term or short-term needs.

 

Key Takeaways:

 

Definition: Working capital is the amount of liquid assets a company has, minus any liabilities.

• Primary Purpose: Working capital loans and asset monetization strategies allow companies to finance and grow their businesses without relying on more expensive external funding.

 

• Use in Operations: Utilized to fund ongoing operations, such as bringing new products to market and paying for design, development, and distribution.

 

• Importance in Larger Companies: Emphasized in large companies that need to finance numerous staff and supplies and are thus more affected by changes in working capital.

 

• Relevance to Small Businesses: Small businesses require some working capital for smooth operations.

 

• Indicator of Financial Position: A company with high working capital is viewed as having a better financial position than one with insufficient working capital.

 

 

Conclusion:

 

Call 7 Park Avenue Financial, a trusted and experienced working capital business financing advisor. These professionals can help you determine the best financial choice for your Canadian firm, ensuring you stay on the right financial path.

 

 

FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

 

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

Working capital financing refers to various financial strategies that help Canadian businesses manage their short-term financial needs and liquidity. It includes managing assets like receivables and inventory to ensure smooth daily operations and growth.

How can working capital financing benefit my business?

Working capital financing and affordable working capital loans enable your business to maintain a healthy cash flow, invest in growth opportunities, and handle unexpected financial challenges. It helps efficiently manage inventory, receivables, and payables, contributing to overall business stability and a healthy temporary working capital position.



What are some common sources of working capital financing for small business / SMEs in Canada?

Common sources of funding for short term financial health include alternative sources of financing such as asset-based non-bank lines of credit, inventory finance,  A/R factoring,  purchase order financing working capital term loans, sale-leaseback strategies, and SR&ED Tax Credit Financing, among others.

 

These tools offer flexibility to tailor solutions to your business's unique needs. Companies seeking traditional financing via financial institutions who qualify via traditional lenders such as banks or credit unions will typically achieve the lowest borrowing interest rates.


How can I measure and manage my working capital needs effectively?

You can utilize tools like the 'cash conversion cycle,' which measures how long it takes for a dollar to flow through your company. Properly managing your A/R, inventory, and payables versus taking on long term loans, and seeking professional financial advice can also enhance your working capital management.


Should I consult a professional working capital business financing advisor?


Yes, a trusted and experienced working capital business financing advisor can guide you in determining the best financial options for your firm in generating and raising short term capital. Their expertise in the Canadian economic landscape can provide customized solutions that align with your business goals.



What is reserve margin working capital?

 

Reserve margin working capital might imply a business maintaining an additional buffer of working capital beyond what is required for day-to-day operations. This could be a risk management strategy to ensure that the company has enough liquidity to meet unexpected expenses or opportunities.

 

Choose Your Sources of Working Capital Finance for Business Credit

You have choices in sources of working capital finance and in business credit solutions.

It is all about understanding the problem and knowing where to go for the solution, so let’s look at those two key issues. Understanding the problem is not something you have to read about, as a business owner and financial manager in Canada you live the working capital ‘ crunch ‘ or ‘ challenge ‘ every day .

Working capital is best understood as your operating capital, and you have investments in receivables, inventory, that’s where your investment currently lies, and your goal is to monetize those assets in the best manner possible.
The textbook definition doesn’t really help us out – our accountants and analysts tell us to go to the balance sheet, subtract current liabilities from current assets, and , voila! That’s working capital!

One of the biggest contradictions in working capital that you need to understand is the issues of assets, profit, liquidity and turnover. Once you have a handle of those the concept of working capital and, more importantly, the solutions start making more sense.

We hate those textbook definitions we referred to, but we will agree that the calculation we shared needs to be positive – you do need more inventory and receivables combined as measured against payables and other short term liabilities. How you manage those short term assets of A/R and inventory is what working capital is about.

Many business owners quickly realize that one of their liabilities, i.e. payables, is actually a large asset in measuring working capital and managing it. That is because if you can continue to convert inventory into A/R into cash, and slow down payables you are achieving working capital progress.

Is there a perfect way to measure your working capital needs and progress? One of those methods is to check into the ‘cash conversion cycle ‘– It’s a tool you can use to measure how low a dollar takes to flow through your company. It simply takes your inventory and receivable days outstanding, subtracts your payables days outstanding, and there is your final number. It’s a great long tool to understand your working capital progress over long periods of time.

In order to achieve solid working capital you need to increase turnover – that can be done by accelerating cash flow by borrowing against receivables, or selling receivables via a factoring process.

Your working capital solutions in Canada are limited, but they are very focused and real. Your can increase working capital today with no ones assistance simply by accelerating turnover of your assets such as receivables and inventory. If you feel your challenge is more of a long term nature a working capital term loan (if larger these loans are called subordinated debt) is the solution.

You can also generate unlimited working capital by entering into an asset based lending or working capital facility with a non bank finance firm. Don’t forget that term loans for working capital add debt and obligations to your balance sheet, so we often suggest to clients that the best solution is in fact monetizing your assets, not borrowing more – that where asset based lines of credit work best.

So whats working capital all about – it’s a case of understanding what it is, looking at how your firm performs in key metric areas of turnover, etc, and then choosing a solution that works best for your firm, whether that is long term in nature, or a bulge type facility that augments your daily cash needs. Speak to a trusted, credible and experience working capital business financing advisor to determine what choice is best for your firm.
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Stan Prokop - founder of 7 Park Avenue Financial - http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 6 years - has completed in excess of 45 Million $$ of financing for Canadian corporations .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/sources_working_capital_finance_business_credit.html