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Business Financing: Exploring Debt Financing and Cash Flow Solutions
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?
CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
The Path to Financial Freedom: Exploring Debt Financing and Cash Flow Strategies
Business financing in Canada has never been as important as in recent times. A company can fail in the best of times, whether it's poor finance practices around your existing financing strategy or simply the inability or lack of knowledge around business capital, cash flow, and working capital solutions. At 7 Park Avenue Financial, we believe any firm can benefit from a better overall financing strategy.
INTRODUCTION
Business financing plays a key role in how your business grows and operates on a daily basis. One aspect of financing your business is taking on debt - Debt finance works in different ways and has implications around costs and pros and cons around balance sheet debt. We'll take a look at managing debt and costs and look at cash flow and asset-based lending solutions as well. The question of ' How much debt is right for your company is important - here is an article from the Harvard Business Review on the subject.
And boy, have things changed! Long gone are the days when funding a company simply revolved around low-interest long-term bank loans, when approval seemed cumbersome but ultimately successful.
HOW DEBT FINANCING WORKS
Debt financing is a business financing mechanism that allows companies to raise capital - and requires repayment of a combination of principal and interest. It differs from equity financing which requires giving up partial ownership in the business. Debt financing is generally regarded as a less expensive form of financing than equity.
THE COST OF DEBT FINANCING
Taking on debt financing that requires principal and interest payments has a substantial influence on a company's cost of capital - Ensuring the business owner understands the relationship between the cost of debt and how this capital is deployed is key to ensuring ongoing profit of the business. Also, lenders and owners measure the relationship between debt and equity and the amount of debt relative to the company's capital stack- Lower debt is preferable and helps the company ensure future funding will be available for growth and the financing of day-to-day operations.
7 Park Avenue Financial's vision was founded specifically on that landscape that changed. No secret that these days, not all business borrowers fit the mould of traditional financiers such as the Canadian chartered banks.
DEBT FINANCING AND THE COST OF FINANCE / INTEREST RATES
Safe to say that interest rates play a key role in taking on debt in your business. Overall business creditworthiness will always affect the cost of financing and the lowest rate that can be achieved. The ability of the company to ensure it can maintain appropriate covenants and balance sheet ratios is key to how lenders view debt financing.
The right combination of debt and equity will ensure access to capital and the ability to grow cash flow and maintain ownership and control of the business.
PROS AND CONS OF DEBT FINANCING
Debt financing has several advantages including the ability to use capital for accelerated growth of the business - Interest payments are a business tax deduction and the lower cost of debt financing is preferred over the owner having to give up equity ownership to raise capital.
The challenges of debt funding include the business risk associated with cash flow not being sufficient to make payments which have several negative consequences.
CASH FLOW VERSUS ASSET-BASED LENDING SOLUTIONS
Many cash-flow financing solutions are available withing the asset-based lending business landscape in Canada. These solutions differ from cash flow-based financing and don't rely heavily on projected cash flows - instated they focus on monetizing the business assets on the balance sheet - accounts receivable, inventories, fixed assets, commercial real estate, etc. Each business will have to determine which option may be preferred over the other.
THE ONLINE LENDER OPTION - BUYER BEWARE!
Many businesses try online lenders - yet while the applications and loan process is viewed as online, there is a distinct lack of personalization that your company and industry might need. Even worse, the multitude of online lenders confuses the business owner, if not downright deception, in a few circumstances.
In the case of the short-term working capital industry, which evolved out of the U.S. Merchant cash advance loans, many Canadian borrowers have found they can approach and get approved by several lenders.. in effect, they ' stack ' new loans on top of each other
When investigating online solutions, we encourage clients to ensure they are dealing with a trusted, credible and experienced Canadian business financing advisor with a track record of business financial success to eliminate any disastrous financing.
A proven solution towards the path of solid business financing is to analyze short and long-term cash flow needs ( a cash flow plan ) that allow your company to understand where liquidity is needed.
An ' informed ' business borrower armed with proper knowledge of the types of financing and the cost of their financing needs is the best scenario to strive for. In many cases, your industry will typically benefit from many of your competitors' financing types, which can assist your own firm's funding journey.
While many owners/ managers and entrepreneurs in general focus on sales revenue growth as the key metric to success, that motivation has to be complemented with good cash flow management & financing solutions geared to your cash flow and asset monetization needs.
Sales will drive a lot of your financing choices and will, in many cases, dictate or suggest what type of debt finance or asset monetization you will utilize. While it's important to be optimistic about sales growth, that same revenue issue can be a source of stress regarding cash flow.
One reason why? Simply because building inventories and receivables and investing in new assets are cash uses, not sources, as our good friends accountants would say.
While cash flow and sales budgets are important and reflect good management the real world dictates that Murphy’s law will often kick in, which might mean:
Large New Sales or Contract Opportunities
Seasonal cash flow needs
Loss of a major customer
WHAT IS THE BEST SOLUTION TO FINANCE SALES GROWTH
ANSWER: A traditional or alternative business line of credit ( traditional = non-bank)
1. Canadian Chartered banks
2. Non-bank commercial finance asset-based credit lines
It often takes new/used assets to build and grow a business, i.e. equipment, machinery, rolling stock, technology a la computers, software, etc. In that case, equipment lease financing is your best bet as it conserves cash flow and matches the benefits of the asset in question to cash outflows. From start-up to mega-corporations, 80% of all-size businesses utilize lease-based asset financing.
BUSINESS FINANCING FOR SMALLER/NEW COMPANIES IN CANADA
Newer businesses and smaller businesses, including startups, should consider the Canadian Govt Small Business Loan - aka the ' SBL ' loan. That loan is guaranteed by the govt and only requires a 10% personal guarantee against the loan, which can be anywhere up to 1 Million dollars depending on the asset you wish to finance. A good owner personal credit score is required.
Cash flow concerns boil down to liquidity. The 2nd most liquid asset you have on your balance sheet is receivables. Collecting them promptly and financing them properly is key to business success.
For those firms that can't access or get approval for the amount of business credit line, they need numerous solutions are available, the most popular often being A/R financing via a ' factoring' or 'Confidential Receivable Financing ' invoice financing program. This solution monetizes sales as you generate revenues - instant cash. Key advantages include instant liquidity and no additional debt on your balance sheet and the ability to forecast cash flow needs.
Businesses in Canada's SME sector (small to medium enterprises) will never have too much cash. Increasing sales, buying assets, and hiring people drain cash- sometimes slowly, other times not so slow!
Some other solid real-world solutions to cash flow and loan needs include:
SR&ED Tax Credit Financing
Sales Leasebacks
Unsecured cash flow loans
Short Term Working capital loans
Mezzanine Financing ( Unsecured cash flow term loans )
CONCLUSION - UNLEASHING THE POTENTIAL OF DEBT FINANCING AND CASH FLOW FINANCE SOLUTIONS
Debt financing of some amount is a critical tool for companies that want to grow - allowing the business to leverage business capital and maintain control of ownership of the business. Accessing business financing at reasonable rates is always more beneficial than equity financing - but the business owners must ensure repayment and debt load can be managed effectively.
Many cash-flow financial solutions and asset-based lending combined can help the business manage finance costs and ensure the relationship between debt and equity is optimal and can help sustain the company's growth ambitions.
Businesses can achieve these goals by managing cash flow on a day-to-day basis via cash flow planning and sales projections.
Financing a business in Canada, in ordinary or extraordinary times, takes some time, knowledge and access to funding solutions that are in your firm's best interest. Stay educated and ensure you are working with someone on your side when it comes to maintaining finance solutions tailored to your business health.
At 7 Park Avenue Financial, we call that ' Financing With The Intelligent Use Of Experience '!
FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is the difference between debt financing and equity financing?
Debt financing involves borrowing money that must be repaid, while equity financing involves selling ownership stakes in the company. Debt financing allows the company to retain ownership control without diluting ownership while leveraging capital.
What are the advantages of debt financing?
Debt financing allows businesses to leverage a small amount of capital for growth, the interest payments on business loans come with tax deductibility, and the company retains ownership control. It is also generally less costly than equity financing.
What are the risks associated with debt financing?
One risk of debt financing is that interest must be paid to lenders regardless of business revenue and financial performance via the company's expected cash flows. This can be particularly challenging for businesses with inconsistent cash flow. Additionally, taking on too much debt can increase the cost of capital and reduce the value of the company when wrong investment decisions are made.
How does cash flow-based lending differ from asset-based lending?
Cash flow-based lending relies on credit terms around projected future cash flows of a company to determine loan eligibility, whereas asset-based lending considers the balance sheet assets as collateral. Cash flow lending is suitable for companies with strong projected cash flows but limited physical assets, while asset-based lending is often preferred by companies with valuable assets but potentially tighter margins or unpredictable generated cash flows around cash flow projection.
What are the factors to consider when choosing between cash flow-based and asset-based lending?
When deciding between cash flow-based and asset-based lending to borrow money, companies should consider their future cash flow stability, availability of collateral, and their specific financing needs around sustainable growth Cash flow-based lending may be faster and require less collateral, but asset-based lending can provide access to larger loan amounts based on valuable assets. Companies with consistent cash flow and strong balance sheets may opt for asset-based lending, while those with strong projected cash flows but limited assets may prefer cash-flow-based lending.
How does debt financing affect cash flow
Debt financing can have both positive and negative effects on positive cash flow:
Positive Impact: Debt financing can provide a boost to cash flow in the short term. When a company secures a loan through debt financing, it receives an infusion of capital that can be used to fund operations, invest in growth opportunities, or meet immediate financial obligations. This injection of funds can help improve cash flow by ensuring that there is sufficient liquidity to cover expenses and maintain a healthy working capital position reflected in the cash flow statement
Negative Impact: On the flip side, debt financing requires regular interest payments and eventual repayment of the principal amount. These financial obligations can put a strain on cash flow, especially if the company's revenue streams are inconsistent or there are challenges in meeting the scheduled payments. The outflow of cash for interest payments can reduce the amount of available cash for other operational needs, potentially affecting the company's ability to invest in growth initiatives or respond to unexpected expenses.
Click here for the business finance track record of 7 Park Avenue Financial
