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Canadian Business Working capital financing challenges sometimes have business owners/managers feeling they're on the proverbial train to nowhere. What then are the issues and are there traditional or new innovative financing strategies available? Let's dig in.
Financing of working capital is required for a number of circumstances in business - the challenge is determining what type of working capital financing is best designed to meet your business goals. That might include growth opportunities or just funding day to day operating capital for business operations.
WHAT IS WORKING CAPITAL CASH FLOW AND WHY MUST IT BE ADDRESSED?
Your accountants will tell you that the definition of 'working capital' is simply the subtraction of current liabilities from current assets. Those great accountants though aren't necessarily the ones to address the actual challenge accessing cash to cover those shortfalls that fall in between that 'ratio calculation'. Our friends in accounting will also tell us that a ' good ' working capital ratio is 2:1 , namely two times more current assets than current liabilities. A company can of course have ' negative working capital ' further exacerbating the ' cash crunch '.
At 7 Park Avenue Financial we try and help clients instead understand the ' quality of earnings ' -namely how the financials look without accounting exercises around depreciation, etc and ensuring that true profits come from higher sales and better a/r and inventory turnover, where the real profit and cash should come from! Many business owners don't always realize they can avoid borrowing for cash simply by negotiating better terms with suppliers, thereby shortening their cash conversion cycle.
It's at this time that any commercial lender or bank will examine different types of information around your sales, credit profiles and background of owners, and the amount of financing you might require for a business capital need.
Many firms these days are taking the ' quick solution ' financing approach, which has some major benefits but comes with some level of risk also. They look toward short term working capital loans offered by many firms, including online portals ,sometimes called merchant lenders. Although rates are very high the loan formula is exceptionally simple - a loan for approximately 15-20% of your annual sales repaid on a basis that gives comfort to both the lender and the borrower on an installment basis. These loans are almost always 1 year in duration.
Most of the options above are supplied by big banks, which means that if you want to obtain a loan, you will need a good credit score and/or many years in business. Fortunately, there are alternatives for those who do not meet those qualifications. There are steps you can take to obtain business financing with low credit. For example, a merchant cash advance is one way to get the funds you need, and rather than considering your credit, lenders actually look at the amount of time you’ve been in business along with the amount of monthly credit card sales you process. If you can meet a few easy qualifications, you can get the money you need in just a few days, deposited straight into your business bank account. Repayment terms are based on a portion of your daily sales. The ability to pay off these loans from ' sales revenues ' allows many firms to qualify.
Some firms might have a business line of credit in place but need complimentary financing in addition to established facilities. Firms that rely heavily on the inventory component of their business might wish to add to inventory as well as on occasion take advantage of special pricing and supplier discounts. Other firms might have initiatives around new geographic territories or marketing initiatives.
Many early-stage companies require working capital for their investment in r&d capital. At 7 Park Avenue Financial we're big believers in FINANCING TAX CREDITS to accelerate cash flow.
Some companies are in industries that are not ' asset intensive ', but they of course still require cash and are unable to pledge large amounts of hard assets or other collateral such as real estate. Also, most business owners don't wish to have to raise additional equity which of course dilutes ownership. That is why a number of working capital solutions alleviate this problem, and at 7 Park Avenue Financial our experience tells us that companies with growth potential and experienced management who can demonstrate quality preparation of financials, or a good BUSINESS PLAN , etc will always be able to raise cash and access working capital loans.
HOW FAST CAN YOUR COMPANY GROW
The irony of the business owner's concern is, many times, that business is great. We hate getting technical with clients, but finance has a term called 'sustainable growth' - very simply put it's the growth rate your firm can achieve without increasing leverage or the amount of debt to equity in your firm. It's calculated as follows:
ROE X (1-dividends paid out)
ROE is of course return on equity, the amount of net income at the end of the year as a percentage of your firm's net worth.
Perhaps we have surprised some business owners by telling them the exact day that they will have to stop growing based on their inability or desire to borrow!
Anyway, our point is not that, it's simply that at a certain point you cannot grow your business anymore without debt. No one likes taking on too much debt.
WHAT IS AN ASSET BASED WORKING CAPITAL FACILITY ?
A better solution? An asset based working capital facility. This type of facility adds no additional debt to your firm but gives you maximum liquidity for receivables, inventory, and even equipment you already own.
So, we promise, no more technical financial discussion lets discuss the financing you need and the challenges you have. As we stated it is ironic that many times the stress of managing working capital is related to success - you have new orders, contracts, the need to build up inventory, or perhaps you have granted special payment terms to new or existing customers.
At the same time your firm has its own obligations to suppliers and term creditors such as the bank or equipment lenders, etc.
We can say that the problem is very obvious when you have suppliers that want to get paid either upfront or in 30 days, but you have inventory buildup needs and your customers are paying you in closer to 60 days, despite your terms of 30 days.
The traditional solutions are always too obvious, Canadian chartered banks for term loans or operating facilities, or even consideration to giving up some equity in your ownership. That is why the appeal for an unsecured working capital loan is so desireable for many business owners.
Those are solutions that are either desirable by many of our clients. The reality? Financial conditions and lack of collateral prohibit in many cases traditional financing.
Therefore those non traditional, but getting less non traditional solutions look more and more attractive every day. By sacrificing one of two points of gross margin true working capital asset based lending facilities can provide you with all the cash flow you need when it comes to financing inventory at aggressive loan to value, 90% of receivables, and, as we said in some cases equipment and even purchase orders.
BENEFITS OF PROPER CAPITAL LOAN FINANCING
So what is the final effect of a true working capital facility - it's financially much better than taking on term debt or selling equity ownership, etc. We have just shown you that by maximizing a true working capital facility you have increased sales, increased profits, and have not taken on additional debt or given away any portion of your equity stake.
Many firms may choose to take advantage of working capital term loans via the crown corporation supported by the Canadian government. Their solutions are complementary to existing senior lenders and therefore are a good bridge between debt and equity. Larger transactions in this area are termed ' mezzanine financing and, in essence, are unsecured cash flow loans. Typical uses of cash flow short term or long term loans are reduction in accounts payable, or addressing the cost of additional investments in accounts receivable and employee costs including salaries, etc.
Your company might be a ' victim ' of the seasonal tendencies that occur in many industries, therefore requiring additional management focus on the proverbial cash flow credit crunch.
KEY POINT - Business owners must differentiate between long term capital needs and short term cash flow requirements. The concept of matching finance to the appropriate balance sheet asset is key.
Asset acquisitions should be financed through long term debt solutions such as EQUIPMENT FINANCING. Many firms looking to acquire owner-occupied premises should of course consider a commercial mortgage as the proper debt financing in this regard.
FACTORING / ACCOUNTS RECEIVABLE FINANCING / CONFIDENTIAL RECEIVABLE FINANCING
In many instances, either a new or amended BUSINESS LINE OF CREDIT will provide the cash flow your company needs. Either a traditional bank facility or an Asset based line of credit can provide your company with cash flow that matches sales growth and the covering off of the additional investment your firm must make to carry accounts receivable and inventories. For smaller firms a small business factoring service will often solve the problem.
Canadian businesses that cannot qualify for traditional bank credit facilities can easily access non-bank asset based lending facilities. These facilities will almost always provide more access to credit than bank margining of the balance sheet, and while more expensive, can provide your firm with the cash you need to cover the business operating cycle .
Factoring companies in Canada offer, under the umbrella of asset based lending, allows a company to sell receivables on an ongoing basis as soon as sales are generated. Our recommended solution in this area is Confidential A/R Finance, allowing you to bill and collect your own invoices as well as taking advantage of all the benefits of factoring.
The GOVERNMENT OF CANADA SMALL BUSINESS LOAN PROGRAM for capital loans is one of the best loans for business in Canada, and an excellent vehicle for the financing of three specific asset categories:
EQUIPMENT
LEASEHOLD IMPROVEMENTS
REAL ESTATE
Commonly called the ' SBL LOAN ' it offers attractive terms and rates and the large majority of the loan is guaranteed by the federal government of Canada, via INDUSTRY CANADA.
CONCLUSION
Canadian business turns to the working capital finance solution when cash is required to run and grow the business. Different available solutions will allow you to run and grow your company while sales are increasing and existing assets and internal resources won't fill the gap. Access to business capital is key to success and a number of specific financing solutions in alternative lending and traditional finance can offer the best business loan solution for your business.
Speak to a trusted, experienced, and credible business financing advisor for more information on how finance for working capital and true working capital asset based lending facilities can help your Canadian firm grow sales and profits.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Click Here For 7 PARK AVENUE FINANCIAL website !
7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant
.Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2020
