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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

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

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

Canadian Business Working Capital Financing

Accessing Purchase Order Financing In Canada

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Purchase Order Financing? Is it your solution to growth, cash flow, and working capital challenges? Canadian business owners and financial managers are always challenged when they are required to fulfill customer orders or new contracts where prepayment of a significant amount of goods is required to ultimately complete a large order or contract. Many times these new orders or contracts represent the potential start to a large relationship that has the ability to grow large revenues and profits for your Canadian firm.



Is there a solution? One that you might want to consider is purchase order financing. Under this type of financing, (also referred to as ‘P.O.Financing') payment by the finance firm is made directly to your suppliers for your order or contract. It is a very unique form of working capital financing in that it allows your company to fund goods that have been manufactured or sold by a supplier. Many companies sustain a substantial burden when they have to allocated valuable cash and working capital to supplier payments.

' P O Financing ' is a solid mechanism to finance sales when you have decent gross margins to sustain the financing cost. Purchase Order finance also works well because many transactions involve extended payment terms based on supplier delivery and your own customer's final payment. That can easily in many cases be anywhere from 60-90 days, significantly increasing your ' cash conversion cycle '.

Why Would Your Company Choose TO Utilize Purchase Order Financing - Canada?

In many cases companies taking on larger orders and contracts have a significant overhead attached to the sale/project/contract. That issue, coupled with the entended payments we have already referred to drains operating cash flow for your day to day operations.


This allows you to complete the order, generate receivables from the P O Order, and of course collect from your customer. The financing charge is typically in the 3=5% range, so there needs to be a clear indication that your firm has the gross margins to support an additional cost in that range.

Firms with higher gross margins are great candidates for purchase order contract financing, and they are less so if they are in a low margin commodity type business. It’s all about the gross margin!

REASONS WHY YOUR FIRM MIGHT NEED TO ACCESS ORDER/CONTRACT FUNDING :

It is not hard to imagine why suppliers are asking for upfront payment. The typical reasons that we hear from our customers are:

1. They have reached their credit limits with suppliers of their bank

2. Many suppliers are overseas these days and do not want to commit capital to companies in other countries

3. Your firm is not a mature firm and is in early-stage or start-up mode and does not have the capital resources to commit to larger revenue opportunities via order financing.

Therefore the simple financing process around paying your supplier via a letter of credit from the P O lender and then monitoring for delivery and acceptance and payment to your firm is an attractive potential financing solution.

KEY POINT - As a technical point related to Purchase Order financing business owners /financial managers should note that payments made by the P O Funding source do not include any taxes that may be charged to your order or deposits you have already received from buyers.

PREREQUISITES FOR A SUCCESSFUL PURCHASE ORDER TRANSACTION:

Transactions are based on the reselling of manufactured products and finished goods

Your firm has the ability to generate reasonable profit after financing costs

Suppliers are bona fide and legitimately verifiable

End-user client has a good commercial credit history

The actual purchase Order must be non-cancellable

At 7 Park Avenue Financial many new clients enquire about P O 's that require financing for less than 100k. While this is possible it is generally accepted in the marketplace that orders over this amount are somewhat more financeable and benefits all parties to the transaction re profits, deal size, etc.


Remember also that your firm has what we called that 'cash conversion cycle' (every firm has one). There is a large of often 2-3 month from the time you receive orders, build and ship inventory or product, and then wait 30 days (or longer!) to collect from your customer. Purchase order financing is a solid solution to your cash conversion cycle.



At 7 Park Avenue Financial when we put together a purchase order financing facility we stress to clients that this is very much an alternative financing scenario, but it is clearly one that offers you a solution that traditional Canadian banking or lending would not offer.

Therefore your firm should be able to ensure that you can demonstrate the viability of your customer and that you can fulfill the order or contract via this method of alternative financing.

One of the other advantages of supplier financing/purchase order financing is simply that from start to finish it can be set up in approximately 14-21 business days, assuming your full cooperation on application forms, backup info, etc. Most Canadian business people recognize that financing of a certain size in a traditional banking or term lending environment might take significantly longer to complete.

BENEFITS OF PURCHASE ORDER FINANCING: HOW DO PURCHASE ORDERS WORK IN LOCAL / EXPORT FINANCING?

It is clear that utilizing this alternative funding method for certain sales allows you to take on orders and contracts, even in other geographics that otherwise might not be able to be considered as part of your growth strategy. Many opportunities are ' seasonal ' in nature and must be seized upon with confidence to avoid not losing the sale or a client relationship.

The ability to foster good relations with suppliers re your payment history is key in any business relationship. Because of the ' specialty finance ' nature of P O Funding you benefit from lender expertise in this very niche part of Canadian busienss financing, and that includes flexibility around customized situations that might be unique to your order/contract.

KEY POINT - Business owners should be proactive in planning their financing around any significant addition in new business - this avoids the proverbial cash crunch and allows you to avoid reactive processes that to say the lease can be stressful for the business owner.

Use the services of an expert or advisor to determine if PO Finance works for your transaction. In certain cases, in lieu of a business line of credit, a combination of receivable factoring and Purchase order finance might be best suited to finance the transaction in combination with each other given that a receivable if created out of your order and the factoring fund method of non-bank financing is less expensive than purchase order funding.



In summary, a purchase order loan/financing is a unique niche within the area of business financing. If you are new, or not knowledgeable about this type of financing speak to a credible and experienced and trusted business advisor who will guide you through key areas of P.O. Financing including such things as minimum amounts that can be financed, credit application information, and the standard industry fees/rates.






7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

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

Asset Based Credit Line : A Working Capital Alternative

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Time For Some Fancy Footwork Around Your Business Financing  & Line Of Credit Needs?


An asset based line of credit is an emerging financial alternative in Canada for companies of all sizes that wish to maximize working capital in terms of their growth needs. This type of lending revolves around loans to your business where the collateral of your assets and your ability to generate sales provides all the liquidity you need to operate and grow.

More often than not asset based lending is associated with companies who are unable to arrange or qualify for what most business owner’s term as a bank operating line of credit.



Asset based lending is known as ' ABL financing ' and has risen to great popularity, first in the U.S. where it originated, and now to the Canadian marketplace. Although occasionally Canadian banks choose to participate in Asset Based Lending through separate units within the banks the vast majority of providers of asset finance are commercial finance companies that are independent of the banks.

Why Do Companies Consider ABL Finance And The Asset Based Loan

Asset based credit lines and loans are used for a variety of purposes - we can make the case they are an ' all-season ' Canadian business financing solution. They are used for:

Non-bank asset based revolving credit facilities

Companies that are growing quickly and can't access all the capital they need

Structuring a merger or acquisition or a management buyout

Seasonality in business financing needs - example - Xmas retailer, etc

Companies that have high debt/equity ratios who are ineligible for traditional finance solutions

Turnaround and restructuring facilities/refinancing of existing debt

Financing The Purchase Of A Business

How Is Asset Based Lending Different From Bank Borrowing?

New clients of 7 Park Avenue Financial want to know the difference in bank borrowing versus alternative lending solutions such as ABL. In banking it's all about traditional corporate credit quality and that boils down to profits and capital structure design around a solid balance sheet with solid owner equity. Those elements historically define a great company poised for continued success. Asset based lending on the other hand revolves around shorter-term focus around converting current assets in cash flow and an understanding around the true value of the collateral of the company.

That latter ABL focus doesn't require that a company be doing as well as a bank financed company. So sales turnover and the liquidation value of assets are essentially what the ABL loan is about when it comes to corporate finance.

In accessing asset financing via an asset based credit line for working capital and cash flow your focus should be on the short term liquid assets of receivables and inventory. That will allow your borrowing facility to fluctuate and lower overall financing costs. That constant turnover of sales into cash will make the ABL solution even more beneficial, and, important to know, these facilities can very easily be increased as you generate higher revenues.




Credit types vary, and traditional bank financing places a heavy emphasis on the overall financial position of your income statement and balance sheet. Therefore, if that is the focus then firms such as yours with either balance sheet issues, or experiencing temporary financial losses or other negative circumstances do not quality for margined lines of credit with institutions such as Canadian chartered banks.

HOW IS THE ASSET BASED CREDIT LINE LIMIT CALCULATED?

The calculation of your borrowing limits under your credit facility has some basic formulas attached to it . Accounts receivable and inventory are the two key drives, but fixed assets and any real estate can play a key role also.

The formula and final limits of your facility are called a ' borrowing base ' and this number is reviewed, typically every month to determine what your new limits are based on the value of your a/r and inventories. This is the revolving part of the facility, and often the fixed assets and real estate part of the facility are under a separate term type of loan. Usually the advance rate on your sales/receivables is higher than the inventory part of the facility, but it should be recognized that asset based lenders are experts in understanding the true value of inventory and are in a position to generate higher advance rates than chartered banks.



Typically A/R under 90 days is an essential part of the borrowing formuls. Typically funds are advanced a 85-90% of the a/r portfolio under 90 days. As you collect receivables your reduce the advances that have been made under the facility, not dissimilar to a bank LOC. The ABL underwriter will look at your overall DSO/COLLECTION period and also look at individual issues such as any one client being a large percentage of yoru sales ( 'concentration' ) or any set-offs you might have in place with suppliers or customers .

KEY POINT - It is essential that your firm is up to date on provincial and federal taxes, as CRA arrears can destory your lenders security on the facility. If you do have CRA arrears they can be paid out at the start of the facility, or you can ensure you have a documented payment plan in place on those arrears.

Inventory advances are where Asset Based Lenders shine. They understand the different components of inventory such as raw materials, work already in process, and finished goods. Their ability to underwrite and advance against inventories is a key differentiator in asset based lending. To you the borrower it's simply more borrowing power!



Asset based lines of credit take the reverse position from banks, simply that you have the assets, let's finance your firm on the strength of your assets, with minimal, if any, in fact, focus on ratios, covenants, outside collateral, operating metrics, personal guarantees, etc.



An asset based line of credit partner will tend to work through with your unique challenges in your industry or your business model. Some of those challenges might be the seasonality of your business or the special ‘one-of' situations we referred to. Some of those circumstances might be making an acquisition, restructuring your firm, or being in the receipt of large new contracts or purchase orders that are out of line with your traditional financing arrangements.



Operating capital financing, or rather the lack thereof(!) can often be the reason your firm is unable to take advantage of strong market opportunities to maintain your competitiveness.



One of the largest parts of an asset based lending facility is receivables financing. In small firms this is often taken care of by a factoring facility – your invoices are sold to the lender, you receive immediate cash, and you can structure facilities around such issues as credit insurance, non-recourse to your firm, etc.



The asset based line of credit, in a true sense, offers all of the advantages of factoring but operates instead like a true bank facility – your receivables, and inventory, are highly margined to the maximum value, and your access to cash availability is directly commensurate to your sales growth – in other words, you have no real cap on your operating facility – you receive cash for receivables and inventory as fast as you can sell and move our product and services!



Your firm will probably find that anyone in the asset based finance area has a stronger knowledge of your business model and assets. If your company has a strong focus on understanding the true collateral value in your business, and is focused on asset turnover in a/r and inventory your firm will be a true beneficiary of the asset based credit line. The general attributes of ABL financing

What Does Asset Based Lending Cost? Factors To Consider

Asset based lending credit lines and facilities usually are higher cost than bank financing when it comes to credit in the capital markets. The low interest rate environment has allowed asset based lenders to become more competitive and in a small number of cases asset based lenders can be competitive or on par with banks on higher quality deals. From a borrowers perspective clients need to weight the access to significantly more business capital versus the cost, more so when your company cannot in fact access bank credit.

Other tradeoffs are the requirements for more regular reporting on your receivables and payables and inventories and any miscellaneous audits or appraisals that might be required by the asset based lender to justify the higher borrowing levels. As we have stated the ability to access cash without the typical bank covenants and operating metrics is always top of mind with borrowers utilizing asset based lending. The overall flexibility in an asset based credit line tends to work well beyond traditional finance when all the options of each type of financing are considered.



While determining your borrowing strategy should be individualized based upon each business and tailored to your business’s specific needs, borrowers seeking working capital financing need to seriously consider the benefits of working with an asset-based lender, as it can provide greater flexibility and options for businesses seeking to look beyond traditional bank lending. Share which lending strategy has worked best for your business in the comments below.






Since asset-based loans don’t rely on the borrower’s operating performance, but on the quality of the collateral, fewer financial covenants are required of the borrower, and as compared with traditional bank lending, ABL lenders typically require a much more limited degree of reporting back to the lender.

KEY POINT - ABL facilities usually start at a minimum of 250k relative to the approved sized of the borrowing facility. This is the lowest end of the scale and there is no real upper limit to a company borrowing if the firm satisfies assets and sales revenue size.


If a company is too small, or for some reason is not eligible for abl lending then a factoring/ receivable financing facility should always be considered. Even startups or very early stage and smaller firms can consider the factor funding solution. Access to cash flow is fairly quick and easy for firms looking to just finance receivables. Providing your financials, aged payables and receivables and some other general info on your firm will typically get you started and approved quickly.

7 Park Avenue Financial recommends a CONFIDENTIAL RECEIVABLE FINANCING facility for firms considering just an a/r solution, outside of the asset based credit line.

This type of facility allows you to cash flow all your sales immediately, and your firm is responsible for all the billing and collecting very similar to a bank facility. In lieu of an interest rate commercial factoring firms chared a fee for discounting the invoice, and this is typically in the 1.5-2% range , so if your firm absorbs that fee and has good margins your cash flow problems are certainly solved.



We recommend that you seek out and talk to an experienced and credible advisor in Canadian business financing to determine if the advantages of an asset based line of credit work for your firm! It is a business loan with collateral that works.




7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

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

Business Credit Line Needs ? ABL Is The Bank Alternative

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The business credit line in Canada. Clients we meet to can visualize it... they sometimes just can't access it - it's almost as if it’s an ancient art they haven’t quite perfected. As a result... cash flow and working capital challenges. Does it have to be that way? We think you know the answer already... it doesn't and here's why. Let's examine the ABL bank alternative.

Clients at 7 Park Avenue Financial find asset based lending is the perfect credit line when traditional financing is not a good alternative or an alternative at all! This type of business credit line has some cost benefits to is, as well as having a large amount of flexibility. Additionally you self manage the facility to a large degree with no intrusion required into your suppliers or clients. Many companies have a measure of seasonality to the business, so ABL, ' asset based lending ' addresses that very well as limits are quite flexible and can be adjusted to your needs. 

 

Alternative funding  via ABL  asset based loans is clearly becoming the bank alternative and is widely used in the United States where this type of business financing originated. Focusing on the liquidity of key current and fixed assets these credit facilities have become the business finance alternative for borrowing for operating facilities. Some business owners will be surprised to know that ABL LENDERS can also be banks, as these unites operate as smaller boutique financing lenders within the traditional banking system, both in the U.S. and certainly in Canada.

We can make the business case that ABL Lenders are more comfortable in lending to many firms when banks either won't or cannot simply because they are experts in collateral value and have the ability to adjust the line against the credit lines they have set. One expert has called it ' real-time ' lending!

Business credit lines via  ABL finance lending are attractive to Canadian businesses seeking financing for a variety of reasons in almost any economic time, pandemics included. In fact, asset based lenders for the most part continue to fund business which has significant value to firms looking to access cash flow or to achieve more financing than they could otherwise achieve through traditional sources. Even companies that are restructuring are able to source business credit line arrangements based on assets.

The ability to have a source of credit that is creative and flexible will almost always provide greater liquidity to your company, with less reliance on the banking covenant based lending championed by Canadian banks. That's the business lending that 7 Park Avenue Financial clients tell us they want. The trade-off to the typically higher cost of an ABL line is increased access to capital, notwithstanding your obligation to be in a position to report more regularly on asset values such as a/r and inventory, which most firms should be looking at anyway, right?

For this type of business credit line to be successful your company has to have the ability to create the usual management reports that highlight your asset accounts so that typically would be aged receivables, payables, and inventory lists. That allows you to successfully manage and access this creative way of financing your business.




Part of the challenge of those business credit lines is simply the fact that the majority of business owners and financial managers are fairly focused only on one solution - which is of course the commercial bank line of credit.



That is definitely one solution. The other (What? There's Another?!) is a non bank asset based credit line facility. Both facilities monetize your receivables and inventory... the difference then? ... The Asset based credit line often monetizes and equipment and real estate also; as part of your overall borrowing power. The big difference is the real key point here - lending is more generous in a non bank asset credit line. Receivables and inventory are margined more aggressively, and in bank scenarios rarely are your unencumbered fixed assets monetized into credit lines.

Why Should Your Company Consider An Asset Based Lending Business Credit Line?

Most small and medium-sized companies in Canada recognize that Canadian banks cannot meet all their borrowing needs. This might be for a variety of reasons which include profitability, an industry being ' out of favour ', or the actual financial results of a company which might not have the balance sheets and income statements they require to lend against, given the banks are both regulated and somewhat risk-averse relative their fiduciary responsibility to shareholders and depositors. It is a true irony of Canadian business that banks generally do not like a firm growing, for example at 25% per year, which then requires constant working capital needs.

Because non bank business credit lines have your borrowing against sales and assets there is not the concern of higher growth, which is in fact: Encouraged ! More cash availability than standard bank offerings is the cornerstone of borrowing against your sales and core assets. It's not about the financials, it's about sales/assets.

As we have noted the thousands of companies using asset based credit lines in Canada use it for different purposes. Some companies might be early stage, some might be in high growth mode, while other companies that are in fact bank worthy utilize it because rates in the case of high quality companies can be very competitive to low bank rates. Naturally, the current low rate environment for business borrowing in Canada is a plus for all borrowers. 

 

Some firms that are experienced a level of distress might be using the facility simply based on the amount of their assets that still qualify for borrowing under a credit facility. These companies might find themselves in the ' Special Loan ' category of the bank. This can be a stressful transitionary period on the road to business financial recovery - asset based financing works very well to correct the financing and allows a company to get back on track. 

At this point customers would already be reporting on their financial more often and assessing a workout plan that might get them back into traditional banking, or on the other hand, transition their senior lending facilities into asset based business credit lines. They might still well be 100% financeable with having to raise additional equity or outside collateral. It allows troubled firms to protect the company with a workout refinancing that makes sense, often paying out the bank in the process.



The options and financing flexibility alternative your firm now has allows you to successfully operate on a daily basis. As your revenues grow your receivables and inventory will always fluctuate relative to business grwoth and how you manage your current assets. Those daily changes drive the ABL credit line. Many firms that are in high growth / hyper-growth find they cannot satisfy traditional bank requirements, with the asset based facility focusing on your sales and assets, not financial statement ratios within your balance sheet or income statement.

By allowing your financing partner to properly assess asset values and growth potential, allows you to borrow effectively on the true market value of your sales and assets. As an example receivables are typically financed at 90% and inventories are margined based on the type of inventory your firm has. It should be noted that many industries are different when it comes to quality and type of assets, your facility will resemble the industry norms around types of assets. Both banks and asset based lending firms recognize specific aspects of your industry.

The two main sources of borrowing in this type of credit line are your receivables and inventory. They are the main drivers that determine the amount of your facility but there can easily be a fixed asset/equipment component to the borrowing for all the hard assets your firm owns.

The true strength of this type of revolving credit is that it can grow as your sales revenues and other assets grow - they in fact determine the amount of the credit line. There are some very simple formulas around how these assets are margined for lending. As your sales grow and you collect your receivables the ABL business credit line fluctuates, allowing you to borrow less .. and finance less, or, more importantly, borrow more if you need it!

We have referenced those other assets you can borrow against within your credit facility, with those two asset categories being equipment and, if applicable, real estate. Those amounts have a value assigned to them at the start of your facility working, which might include an outside appraisal to determine maximum borrowing power. Naturally these two categories of assets are typically not in Canadian chartered bank business credit facilities, so they highlight the benefit and flexibility of revolving ABL facilities.

Many companies that are unable to satisfy bank covenants, ratios, outside collateral etc find they can easily double their borrowing power using the high borrowing leverage of a/r, inventory, and equipment/real estate. That becomes the ABL business credit difference, a business finance solution that is tailored to your company's specific needs. Your credit line availability is calculated on an ongoing basis, allowing you to plan for your business cash flow needs - at the end of the day is ' quicker borrowing '.

Accounts receivable plays a major role in the asset based business credit line model. Your financing firm will focus on the type of receivables you have, average size, major account concentrations with any one customer, account contras with suppliers that might be in place, as well as your a/r days sales outstanding turnover and bad debt. 

 Businesses should also be prepared to demonstrate that CRA and provincial HST  is not in default, but borrowers in default will be happy to know that these type of debts are often paid out of the first advance in ABL business credit lines by  asset based lenders.

The use of your business credit line in Canada, whether it's a bank line of non bank in nature can be viewed as a ' replenishment ' of cash from funds your firm has invested in working capital and fixed asset accounts. That need becomes even more acute when your business is growing. The simple reason - you've got more sales tied up in still uncollected receivables, inventory, and the need for some fixed asset or technology replacement here and there!





Whether you disagree or not, all banks have very specific rules in Canada around business credit lines. Bank credit lines for start-ups or very new businesses in Canada essentially... Don't exist! That’s because of our strong banking system in Canada places a large emphasis on historical strong financial history, solid profits, and squeaky clean balance sheets. So while corporate credit risk at banks for the middle market companies in Canada at banks focuses on profit, cash flow generation and shareholder equity ABL  has a focus on asset turnover and turning business assets into cash. We can say that the shorter-term operating cycle of a business is what drives asset based loans.

Business owners if not familiar with The Cash Conversion Cycle would benefit from checking it out.It is really tied into the concept of cash flowing your working capital assets and how turnover affects liquidity and the need for more outside business credit. The continual revolving ability of a credit line works without your firm being tied to any type of installment and loan debt. Here the power of ABL kicks in because as sales revenues grow cash flow via the abl line increases and receivables and inventory are liquidated.

If your firm is offside on banking requirements it's still exceptionally very safe to say that you qualify for an asset based credit line from a non bank commercial finance firm. And that higher leverage and borrowing power is still there of course - it’s another major appeal of the ABL (Asset based Line)



By the way, if you are in fact 'off side' with your bank on their key metrics, ratios, covenants, and collateral issues the ABL line rides to the rescue more time than you think. So while your business may have temporarily stumbled the non bank asset based line of credit steps in to keep cash flowing and working capital working! Their are different credit types and credit risk and the asset finance underwriter is well positioned to take the time to understand your firms situation.



It's not pure roses and sunshine all the time with your business credit line. You should always be prepared to supply proper reporting and updates on your business assets, even more so with ABL type facilities which in some cases might even require due diligence visits, appraisals, etc.

There are several supplementary / complementary solutions to the asset based credit line - These can be used with or separate to your business credit line facilities in asset based finance .

One of these is Purchase Order Financing. This solution becomes extremely valuable if your firm is in a position to receive large orders or contracts that in the normal course of your business you would be unable to finance due to the working capital component of the transaction, namely having to pay suppliers, facilitate your order or service, and then wait for the collection of your receivable related to that order/contract. The financing works as follows - your supplier is paid directly by your P O financing firm asset based lender. The receivable that is attached to that order or contract can then be financed under your already in place asset based lending facility, or in some cases a separate P O Finance arrangement if you do not have either a bank credit line or an asset based line in place. Purchase order financing rates are  higher and your firm must have good gross margins to absorb the 2-4% fee on the order but can be invaluable to firms looking to grow larger with access to traditional finance,


If there is a bottom line here in corporate finance  its that the business owner/financial manager needs to understand both the alternative to credit lines, as well as the nuts and bolts of how and why they work best. That will lead to a better capital structure and a more guaranteed level of long term success.


If you want to consider revolving credit lines based solely on collateral value or new and replacement alternative credit facilities seek out and speak to a trusted, credible, and experienced Canadian business financing advisor. Your want a finance partner/advisor that has a solid knowledge of the ABL lending market and has the capabilities and expertise and track record of finance success to facilitate business credit line needs.

7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

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.






Stan Prokop
7 Park Avenue Financial/Copyright/2020

Purchase Order Financing Canada 101 ! P O Financing & Inventory Finance Solutions

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Generating profits Via Inventory & Finance Solutions

Purchase Order Financing Canada 101 ! P O Financing & Inventory Finance Solutions

What is Purchase Order Financing?

The need for P O Financing is often viewed as a good news / bad news scenario Your firm has the ability to receive  customer orders or contracts but you are challenged with restrictions or unavailability of inventory and PO (purchase order) financing. Growing your business and financing a business based on assets such as inventory and orders in coming in has never been more of a challenge in Canada.

Benefits of P O Finance

The key benefit of purchase order contract is your ability to fulfill orders that might not have been made given finance limitations . That allows a business to grow and generate additional profits. The ability to fill your client order with no serious cash flow implications to your day to day operations is key .


When we speak to clients we advise there is no one method that seems to handle all inventory and po finance challenges. But the good news is that via a variety of effective business financing tools you can employ you are in a position to generate working capital and cash flow from these two asset categories. Let’s examine some real world strategies that have made sense for clients.
The attractiveness of this type of business finance is that it can be accessed quickly, typically in days, not months !

The root of the problem is simple, you have orders and contracts, but those will potentially be lost to a competitor. Conventional wisdom is that you go to your bank and ask for financing to support inventory and purchase orders. As you may have experienced, we aren’t big believers in conventional wisdom on that matter!

However, utilizing a conventional purchase order funding source does allow you to purchase a product and get your suppliers paid, thus facilitating your ability to deliver to your customers. In some cases more established firms may wish to consider EDC financing via the Government crown corporation, typically for international sales .

One of the main benefits that many clients don’t realize in purchase order finance is that inventory financing and purchase order contract financing doesn't necessarily require your firm to have a long or strong credit history; the focus on structuring the transaction is around the inventory being financing and the general creditworthiness of your client, who will be paying yourself or the inventory or P O financing firm

How Does Purchase Order Financing Work

The overall process is fairly simple and easy to understand when it comes to putting the transaction together successfully. On receipt of your confirmed purchase order your supplier is paid via cash or a letter of credit. Your firm of course completes the final shipment of the product, which typically involves some additional time on your firms part.

To qualify your firm must be able to prove you have a credit worthy supplier and customer . Because Purchase Order Finance is a more expensive form of financing you should ensure you have healthy gross margins in order to absorb the financing cost ; that should typically be at least in the 15-20% range . Tranasaction should always be a B2B ( Business to Business ) sale . Goverment purchase orders and contracts can be financed also ! It is safe to say that goods must be tangible in nature.

On shipment and of course payment from your customer the transaction is in effect settled. In a true pure PO financing scenario the P O funder is paid immediately on your invoicing of the product. That is facilitated by your firm selling the receivable via a factoring type transaction as soon as you have generated the invoice.

This type of financing works best when it can assist a smaller firm to increase revenues when normal cash flows can’t finance these sales . Smaller businesses obtaining large orders get immediate access to working capital

Many fast-growing businesses come to a point where sales outpace incoming revenues, leaving them without enough cash flow on hand to cover operating expenses or new orders. PO financing and invoice factoring help small businesses stabilize their cash flows and gain access to working capital.

There are always limitations to this type of financing - so things we look for early in the transaction are the ultimate remarket ability of your product in case there is a transaction risk. Naturally, as we stated, the overall creditworthiness of your customer is key, his receipt of goods and payment in effect closes the transaction.

Inventory financing and PO financing are generally more expensive than traditional financing, due mainly to the significant transaction risk that the lender takes. Therefore we strongly recommend that your firm has solid gross margins in the 25% range to cover the associated costs of a PO financing, inventory financing transaction that also factors in the time it takes to get paid by your client, as that typically adds 30-60 days on to the whole cycle of the transaction.

What Comes First? Invoice or Purchase Order

There is a key difference between purchase order financing and invoice factoring/invoice discounting , but both have the same goal in site, ensure you can cash flow your business revenues . Financing the receivable happens after you have sold your goods, the P O process is of course prior to the sale .


One of the best ways to ensure the maximum financing of your sales, p o’s and contracts is to consider an asset based line of credit for cash flow needs . Coupled with a facility that will finance your purchase orders this is the ultimate working capital tool that will allow you to grow business quickly and significantly. This type of facility is generally a non bank facility and is offered by independent finance firms.

Speak to a trusted, credible and experienced Canadian business financing advisor and financing company  with a track record of finance success  who will assist you putting together a working capital and cash flow solution that works!







7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

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.









Stan Prokop