How To Decide if Financing Receivables Is a Solution for Your Working Capital Funding

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The R R Factor: A New Approach to Financing Receivables & Working Capital Funding in Canada

 

 

Understanding the Receivables to Revenue Ratio (R R Factor) 

 

We call it the Receivables to Revenue Ratio or simply the R R factor. Unlike rest and relaxation, the R R factor will guide Canadian business owners in recognizing the right time to explore advanced methods of accounts receivable financing and working capital funding.

 

The receivable-to-revenue ratio is a financial metric that provides insight into a company's ability to turn its accounts receivable into cash. It measures how effectively a company manages its credit sales and collections and helps alert to negative working capital.

 

Here's how you can calculate it:

 

Receivables to Revenue Ratio = (Accounts Receivable / Sales Revenue) x 100

 

 

Interpretation: What does the Receivables to Revenue Ratio Tell  Business Owners 

 

• Accounts Receivable: This is the amount of money owed to the company by its customers for goods or services that have been delivered but not yet paid for.

• Sales Revenue: The total amount of money the company earns from its products or services sales.

 

Measuring Your Receivables Revenue Ratio

 

• High Ratio: A higher ratio could indicate inefficiency in collecting and converting payments into cash. It may mean that a company is extending credit to customers who are not paying their bills promptly, which can impact cash flow and liquidity.

• Low Ratio: A lower ratio could indicate that a company efficiently converts its credit sales into cash quickly. It may imply strong credit policies and collection practices, ensuring that the money owed is collected promptly.

•  

In short, a receivable-to-revenue ratio is essential in assessing a company's liquidity and cash flow management. It offers insight into how well a company manages its credit policies and how quickly it's turning credit sales into cash. If mismanaged, it could lead to potential cash flow problems and increased risk, mainly if a significant portion of sales are made on credit.

 

The Importance of Calculating the R R Factor

 

Here's a powerful tool that's straightforward and potent in assessing cash flow challenges. It's called the receivables to revenue ratio, and by examining your year-end balance of A/R and translating it into weeks of sales, you'll have a historical perspective on your cash flow and working capital needs.

 

Tackling Working Capital Funding Challenges with Receivables Financing

 

But what does a company do when traditional borrowing for working capital seems daunting? Increasingly, Canadian firms are turning to factoring or accounts receivable financing. This method might seem complex, but it's quite simple once you comprehend the pricing and day-to-day functioning.

 

  

The Simple Solution -  Invoice Factoring / Financing Accounts Receivables  

 

Choose daily, weekly, or monthly intervals to sell your receivables on the company's balance sheet. When you make a sale, you receive immediate cash, transforming accounts receivable into an ATM for Canadian entrepreneurs and finance managers. Discovering this ultimate cash flow solution can be a game-changer for small businesses and companies of all sizes. But what are the downsides?

 

   

The Two ‘Catches’ of Financing Receivables

   

While accounts receivable financing might seem attractive, there are two 'catches' that businesses need to understand and address.

 

Cost of Financing

The first is the cost compared to a traditional bank loan / unsecured financing, which typically ranges from 9%  per month in Canada and in some cases, 1.15%/mo, referred to as a discount fee. Though this might seem expensive many business owners do not consider the carrying cost of the receivables and the 'opportunity cost' – the potential for higher profits using cash flow from receivable financing.

 

Why Isn’t Every Canadian Business Using Receivable Financing?

 

The reality might surprise you; large Canadian firms often utilize this financing method for funding a company's sales revenue. Their financial strength allows for more flexibility in managing this facility daily, often enabling them to bill and collect their receivables - something rarely found in the Canadian market. 7 Park Avenue Financial's recommended solution is Confidential Receivable Financing, allowing a business to bill and collect its receivables while achieving all of the cash flow benefits of A/R financing.

  

Conclusion  

Seek out the unique 1% solution that allows this flexibility. Your business can secure competitive working capital funding and virtually limitless cash flow growth.

Call 7 Park Avenue Financial,  a trusted,  credible, and experienced Canadian business financing advisor who will ensure you have the best and lowest cost capital funding solution tailored to your business, allowing you to unlock growth solutions and profits.

 

  

 FAQ:   

 

What is the Cash Conversion Cycle?

The Cash Conversion Cycle (CCC) is a critical metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It encompasses three stages:

1. Days Sales Outstanding (DSO): Time taken to collect payment after a sale.
2. Days Inventory Outstanding (DIO): Time  taken to sell inventory.
3. Days Payable Outstanding (DPO): Time taken to pay suppliers.

The formula for calculating the  company's cash conversion cycle 'CCC ' is:

$\text{CCC}$$<span\; style="font-size:\; 16px;">=</span>\text{<span style="font-size: 16px;">DSO</span>}<span\; style="font-size:\; 16px;">+</span>\text{<span style="font-size: 16px;">DIO</span>}<span\; style="font-size:\; 16px;">-</span>\text{<span style="font-size: 16px;">DPO</span>}$$\text{CCC}=\text{DSO}+\text{DIO}-\text{DPO}$

Keywords related to CCC include working capital management, liquidity, operational efficiency, cash flow management, inventory turnover, and accounts payable/receivable.

 

What is Debt Financing Versus Equity Financing?

 

Debt Financing: This involves borrowing money, typically through loans, bonds, or other debt instruments, to be repaid with interest. It's a way for businesses to raise capital without giving up ownership. Keywords include interest, principal, creditors, leverage, and fixed obligations.

Equity Financing: This entails raising capital by selling shares or ownership in the company. Unlike debt financing, there's no obligation to repay the funds. Instead, shareholders may receive dividends and have a say in the company's operations. Keywords include shareholders, dividends, ownership, dilution, and capital structure.

 

3. What is the Impact of Currency Exchange Rates in A/R Financing?

Currency exchange rates are vital in accounts receivable (A/R) financing, particularly for businesses dealing in multiple currencies. The fluctuation of exchange rates can:

• Affect the value of receivables, leading to currency risk.
• Impact on the cost and availability of A/R financing.
• Create complexities in managing international trade credit.

 

What are Alternative Financing Options for Receivable Financing in Addition to Factoring?

In addition to factoring, alternative financing options for receivable financing include:

• Invoice Discounting: Selling invoices to a third party at a discount but maintaining control over collections.
• Asset-Based Lending: Utilizing assets like receivables and inventory as collateral for a loan.
• Supply Chain Financing: Collaborating with suppliers and financial institutions to optimize working capital across the supply chain.
• Peer-to-Peer (P2P) Lending: Leveraging online lenders and their platforms to match borrowers with individual lenders.

 

 

What is a working capital loan?

 

A working capital loan is a specialized type of loan designed to finance the daily operational expenses of a business. Unlike traditional loans, often used to finance long-term investments or capital expenditures, working capital loans cover short-term needs like payroll, rent, inventory purchases, and other day-to-day expenses.

This type of loan is particularly beneficial for businesses with cyclical or seasonal revenue patterns, where there might be gaps in cash flow. It helps companies maintain smooth operations when expenses or income are high.

There are various types of working capital loans, including:

1. Line of Credit: Offers flexible access to funds up to a specific limit, allowing businesses to draw and repay as needed.
2. Term Loans: Provides a lump sum of capital paid back over a set term with interest.
3. Invoice Financing: Advances funds based on unpaid invoices, enabling businesses to manage cash flow without waiting for customer payments.
4. Trade Credit: Involves obtaining goods from suppliers with a deferred payment agreement.

The primary goal of working capital loans is to ensure liquidity and financial stability in the short term, allowing businesses to continue operating smoothly regardless of fluctuations in revenue or unexpected expenses.

 

What is the difference between a working capital loan and financing receivables?

 

Both working capital loans and receivables financing are essential tools in managing a company's cash flow and liquidity, but they serve different purposes and function in distinct ways. Here's an outline of the key differences:

Working Capital Loan

1. Purpose: Aimed at funding the day-to-day operational expenses of a business, such as payroll, rent, utilities, and inventory. It's a tool to smooth out cash flow fluctuations.
2. Structure: This can be a term loan, line of credit, or other forms of short-term financing. The structure is often flexible, catering to the general working capital needs of the business.
3. Collateral: May or may not require collateral, depending on the lender's requirements and the borrower's creditworthiness. If needed, collateral can include various business assets.
4. Approval & Terms: The lender assesses the overall financial health of the business, including credit history, profitability, and financial stability. The terms can vary widely based on these factors.

Financing Receivables (e.g., Accounts Receivable Factoring or Invoice Discounting)

1. Purpose: Leveraging unpaid invoices or accounts receivable (A/R) to generate immediate cash. It helps bridge the gap between invoicing a customer and receiving payment and avoids the need to borrow money via term debt.
2. Structure: Selling or using the A/R as collateral to get an advance from a financial institution or factoring company. The advance is typically a percentage of the invoice's face value.
3. Collateral: The collateral is the receivables themselves. The lender's security is tied to the quality and collectibility of the financed invoices.
4. Approval & Terms: The lender's focus is often on the creditworthiness of the invoiced customers rather than the company seeking financing. The terms are closely tied to the receivables' value, age, and risk.

While working capital loans provide a more general form of financial support for daily operations, financing receivables is a specialized method tied to leveraging unpaid invoices to improve cash flow. The former takes a broader view of the business's financial health, while the latter is closely related to specific transactions and the creditworthiness of the company's customers.

 

Click here for the business finance track record of 7 Park Avenue Financial

SR&ED Financing in Canada: Turning R&D into Cash Flow How Canadian Businesses Boost Cash Flow with CRA SRED

 

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From R&D to Cash Flow: SRED Financing and CRA SR&ED Tax Incentives Funding in Canada

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        Financing & Cash flow are the biggest issues facing business today

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Canadian R&D's Secret Weapon: An Insider's Guide to SRED Financing

  

 

  

 

Introduction   

 

Looking to cash flow your claim under Canada's  Scientific Research and Experimental Development (SR&ED) program tax incentives, a massive program under the Canada Revenue Agency (CRA) that distributes around 3-4 Billion dollars annually in non-repayable SRED grants to privately-owned Canadian firms. Ready to explore cash flow funding for your investment tax credit? Let's dig in!

 

Understanding the SR&ED Program: A Boon for Canadian Businesses Investing In R&D

 

Basics of SR&ED Program

There's a head start for Canadian business owners and financial managers well-versed with the SR&ED program. This initiative, technically called the Scientific Research and Experimental Development Program, offers billions of dollars through non-repayable grants across all Canadian business sectors. The claim refunds support innovation, development, and technological advancements in the Canadian economy.

 

The Importance of Claim Size For Financing

 

While we often hear that size doesn't matter, in the case of your CRA SRED claim, it indeed has significance. The claim size affects the overall ability to finance your application, which brings us to the decisions you must make as a claimant. Typically any reasonable claim size can be funded.

 

Financing the SR&ED Claim: Options and Considerations

 

Financing Options: Bank vs. Private Sector

 

Is SR&ED financing achievable? And if so, who finances these claims? Though some chartered banks in Canada finance SR&ED claims, it's subject to many bank-specific criteria. The reality is that 99% of the time, SR&ED claims are financed by private-sector boutique firms. Seeking the expertise of a credible and experienced SR&ED financing consultant such as 7 Park Avenue Financial can be the right path to navigate the process easily and quickly!

 

 Selecting  SR&ED Financing - The 7 Park Avenue Financial Solution

 

Choosing your SR&ED partner wisely is crucial if your Canadian claim exceeds a reasonable amount for financing. Claims are generally financed more efficiently at 75% of the 'loan to value' (LTV) relationship. Thus, on a 250k claim as an example, you could net 75% of the combined federal and provincial claim, enhancing your working capital and financial position.

 

No payments are made during the loan term - When CRA processes your claim, you receive the remaining 25%, less financing fees, for the short-term sr&ed bridge loan. Simple as that!

 

 Conditions for Financing Your SR&ED Claim

 

 

To finance your SR&ED claim, certain conditions must be met, including confidence in the preparation by an experienced party, the need for cash flow, and consideration of SRED rates. The timing is also crucial as SR&ED financing can usually be achieved within 2-3 weeks, given due diligence around the claim and related applications. Talk to the 7 Park Avenue Financial team about achieving the best-sr&ed loan rates in Canada.

 

  

What are the Benefits Of Financing SR&ED Claims in Advance Of Filing  Your Claim With CRA?  

 

• Equity and Control:

  • No need to give up equity, board seats, or Personal Guarantees

• Cash Flow and Growth:

  • Extends runway before an equity round.
  • Facilitates hiring talent for growth.
  • 7 Park Avenue Financial offers financing up to 75% of the quarterly accrued R&D expenditures to early-stage, pre-revenue, and of course, high-growth businesses.
  • Provides advanced funding as early as three months into the tax year.

• Capital Structure and Financing:

  • Optimizes capital structure by minimizing the cost of capital.
  • Secures enough money for expenditures.
  • Offers secure financing options

• Positive Impact on Business Growth:

  • Dramatically and positively impacts the growth trajectory.
  • Non-dilutive capital that extends cash flow runway.
  • Enables financial flexibility for better scaling decisions.
  • Adding sales, marketing, and development resources 12 months early can lead to a 1.5x higher valuation over 24 months.

 

 

  

KEY TAKEAWAYS : SR&ED / SR&ED LOANS  

 

• SR&ED Program Overview:

  • Provided by the Canadian government.
  • Funds new or improved technologies, products, and materials.
  • Available across industries, including life sciences, manufacturing, software, and agriculture.
  • Open to various company sizes and ownership types.

• Complexity and Requirements:

  • Requires both technical and financial justification to CRA.
  • Statistics show that about 25% of claims get audited.
  • Inadequate documentation and time tracking may lead to the denial or reduction of claims.

• Refund Timelines and Financing:

  • Standard refund time is 18+ months after the fiscal year start.
  • Quarterly cash advances against accrued SR&ED for quicker capital access.
  • SR&ED financing provides an immediate cash injection without giving up equity.

• Eligibility Criteria For SR ED Expenditures:

  • Technological Advancement: Enhancing technical knowledge under the tax incentive program
  • Technological Uncertainty: Facing technical challenges or uncertainties in areas such as new or improved material and basic research
  • Technical Content: Iterative process to overcome challenges or uncertainties.

• CRA’s Evaluation Questions:

  • Presence of scientific or technological uncertainty.
  • Effort in formulating, testing, and modifying a hypothesis.
  • Procedure aligned with the scientific method.
  • Resulting in technological advancement.
  • No existing solution was found.
  • A record of tested hypotheses and results.
  • Areas such as sales promotion and quality control do not qualify

• Refund Rates for Small-medium sized Canadian controlled private corporations (SME CCPCs):

  • ~64% of eligible salaries.
  • ~32% of eligible sub-contractor fees.
  • ~42% of materials consumed or transformed.

• Tax Credit Rates for Public or Foreign-owned Companies (or CCPCs over the SME limit):

  • ~36% of eligible salaries.
  • 18% of eligible sub-contractor fees.
  • 24% of materials consumed or transformed.

 

 

 Conclusion: Utilizing SR&ED Financing for Growth 

 

If your company seeks to retire term debt, manage payables, increase sales, or reinvest in R&D, SR&ED financing can be essential. By leveraging this unique financial opportunity, Canadian firms can unlock their potential and pave the way for innovation and growth in various sectors.

Call 7 Park Avenue Financial, a trusted, credible and knowledgeable SR&ED financing expert who can help your firm navigate this valuable avenue successfully - and quickly!

 

  

 FAQ: FREQUENTLY ASKED QUESTIONS  / PEOPLE ALSO ASK /  MORE INFORMATION   

 

What is SRED Financing?  

SRED (Scientific Research and Experimental Development) Financing is a Canadian program that offers non-repayable grants to privately-owned firms investing in R&D. It aims to foster innovation, technological advancements, and economic growth.  

 

How can companies invest in R&D benefit from SRED Financing?

 

SRED Financing allows companies to accelerate their working capital and cash flow by financing their eligible R&D claims to advance scientific knowledge in their industry. It provides an immediate funding source, allowing businesses to reinvest in further research, retire debts, or manage payables.

 

 Who is eligible for CRA SRED Refunds?

 

CRA SR ED investment tax credits are available to Canadian privately-owned scientific research and experimental development firms. It includes companies across various sectors that meet specific scientific or technological advancement criteria for tax credits as defined by the Canada Revenue Agency.

 

How do I apply for SRED Financing in Canada?

 

Applying for SRED Financing involves preparing a claim detailing your eligible R&D activities and expenditures. Many companies seek the expertise of a knowledgeable SRED financing consultant, such as 7 Park Avenue Financial to guide them through the process.

 

What is the role of CRA in SRED Financing?

The Canada Revenue Agency (CRA) administers the SRED program, evaluating claims and distributing grants. The CRA's SRED guidelines outline the qualifying activities and expenditures, ensuring transparency and fairness in the distribution of funds.

 

 

Click here for the business finance track record of 7 Park Avenue Financial.

How To Finance A Business Acquisition in Canada Seize the Opportunity: Innovative Financing Methods for Acquiring a Business

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Demystifying Business Purchase Finance: Canadian Options - A to Z!

How to finance the purchase of an existing business

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        Financing & Cash flow are the biggest issues facing business today 

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT  BUSINESS FINANCING OPTIONS?

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THE BUSINESS ACQUISITION LOAN SOLUTION  

 

Business owners and entrepreneurs should know there are many ways to finance an acquisition when it comes to a prospective business purchase. Still, not all options will work for every buyer.

 

Let's cover common and not-so-common methods to fund a business purchase via a business loan/debt financing and what they entail so you know which one might be right for your situation, given that financing an acquisition can be challenging without the right information or assistance.! Let's dig in!

 

INTRODUCTION

 

In today's competitive business landscape, acquiring an existing business is often a strategic move that can lead to growth and expansion.

 

While buying a business comes with many potential benefits, financing the purchase can be complex and challenging. Financing is critical to your transaction!

 

Let the 7 Park Avenue Financial team show you the standard and not-so-common methods of funding a business purchase through various channels such as business loans, debt financing, government loans, and even seller financing.

 

We'll explore the factors buyers must consider, including the amount of funding required, the difference in financing small versus large purchases, and the type of financing needed post-acquisition.

 

 

WHAT DOES THE BUYER OF A BUSINESS NEED TO KNOW?

 

 

How much funding do I need to buy this business?

Is there a difference in financing a small purchase or a larger one

What type of owner equity/down payment is required

Does the business need to have substantial assets

Can a purchase be completed with ' no money down '  ( Spoiler alert - it cant)

What type of financing do I need post-acquisition

When should I commence looking for financing, and what is a typical ' optimal financing structure.'

 

  

WHAT AMOUNT OF FUNDING IS REQUIRED TO BUY A BUSINESS?  

 

When you buy an existing business, the funds for this acquisition come from your cash and personal equity contribution and any external financing used to access competitive interest rates. The appeal to buying an existing successful business is that it is typically significantly easier to buy a company rather than start one! However, the ability to buy a business on an all-cash basis based on personal financing is often limited, even in smaller transactions.

 

The right financing makes a business purchase more affordable. Business owners will also recognize that additional funding might be required and should be planned for to run and grow the business post-acquisition.  The bottom line? Business buyers should focus on the right financing and ensure they will benefit from a return on their investment.

 

FINANCING YOUR BUSINESS ACQUISITION

 

Entrepreneurs have many financing options they can use to buy companies. The most common ones will include one or various debt/cash flow/asset monetization and equity components. Smaller private transactions don't consider IPO/Venture Capital firms, Private equity firms - it's as simple as that.

 

  

EXPLORING AND UNDERSTANDING SELLER FINANCING  

 

With seller financing, you can purchase a business without having to come up with all the funding if a seller note is part of your negotiation. The seller provides an allotted loan amount that might have different amortizations and repayment options.

 

When a business is sold, the seller prefers to get paid immediately. But sellers also have different perspectives on how much money should be offered as an incentive for someone else’s purchase of their business. Some might want more while others less, depending on their preferences or financial situation regarding a seller loan/note. Often tax considerations will be a part of that decision.

 

Many sellers want full payment as soon as possible and don't usually offer financing assistance -  However, on average most will often cooperate with finance between 5% - 20%. This amount varies substantially based on each transaction type -

Buyers should also be aware that :

Lenders view seller financing as positive

They will require that the seller subordinate to their security/loan

 

GOVERNMENT LOANS

 

Industry Canada, via the Canada Small Business Financing Program, offers government-backed loans, one of the best financing options for small business owners purchasing smaller businesses. The government-backed guarantees allow lenders such as Canadian banks and credit unions to provide capital with confidence that they will be compensated in case of a default.

The terms and rates on an SBL loan can sometimes even beat out traditional alternatives with competitive interest rates and monthly payments based on a term loan structure, so explore all your choices before applying and talk to our  7 Park Avenue Financial team about how this type of loan might make your purchase easier.

 

Government business loans can be an excellent option for financing small businesses under a purchase. The program provides lender guarantees and safety measures for acquisitions with firms of less than 10 Million dollars in revenue, along with those competitive rates and attractive financing terms under a standard term loan structure. Financing can also be augmented or sourced via the financial institution and  Canada's crown corporation business development bank, a non-bricks and mortar organization throughout Canada.

 

Buyers contemplating government loan assistance should know there are some minimum qualification guidelines. Still, participating financing institutions, as lenders, have the freedom to add their criteria for a small business purchase.

 

Basic qualifications under the program are good credit scores, the ability to put down some owner equity and disclose personal financial resources, and ensuring you have solid business experience in the target industry, as demonstrated by a solid business plan.

 

 

BANK LOAN  & NON-BANK COMMERCIAL FINANCE FIRMS 

 

While conventional loans / unsecured loans might be more challenging to achieve than government financing assistance for the purchase price of existing businesses, they come with more stringent requirements that can challenge some business purchasers under a business credit score review.

 

Here, the focus is often on assets, personal collateral, excellent personal credit, and good business and management experience - A solid and realistic business plan should often accompany this type of financing request. 

 

7 Park Avenue Financial prepares business plans for clients that meet and exceed bank and commercial lender requirements.

 

The most typical bank/finance firm loan for your acquisition will be a conventional term loan. Focus on ensuring you can meet the requirements of traditional financing institutions while limiting giving up personal assets for lender security. Also, goodwill and intangible assets are difficult to finance under most circumstances.

 

ASSUMING EXISTING DEBT

When purchasing a business, a prospective owner can finance part of the purchase by assuming some company's existing liabilities. These may include outstanding loans and trade payables, transfer of existing licenses, etc.

 

How these debts are considered depends on how much power sellers give up during their sale;  Also, note that certain debt assumptions require lender approval, so ensure all parties agree before moving forward!

 

  

FRIENDS AND FAMILY?  FAMILY OFFICES?  

 

Finding the proverbial ' friend and family ' investor,  or what is known as a family office, to participate in an acquisition is difficult.

 

Acquaintances and specialized networking events can be a source of information when you need to augment personal funds. Investors and family offices can be flexible, don't conform to conventional lending standards, and might consider equity financing. Third parties you don't know are also very selective in who they work with. They play a similar role as a private equity firm or venture capitalist would but for significant opportunities in acquisition financing.

 

 

YOUR DOWN PAYMENT / OWNER EQUITY

Equity injections are common in all business acquisitions when you are looking to obtain financing. The buyer must put down some cash as collateral, and it can't come from just the seller's resources.

Depending on your purchase's size and credit risk, anywhere from  10% to 40 percent is usually required as an equity injection. For government loans, a smaller equity injection demand is typically required.

Owner equity usually comes from personal finances such as savings accounts and retirement funds- though it's important to note that other cash in kind, such as our aforementioned seller financing, can be viewed as an additional financing source.

 

LEVERAGED BUYOUT /ASSET-BASED LENDING 

Many buyers of a business looking to maximize their financing while limiting their equity injection overall often use the business's assets, like equipment or real estate, for other business collateral to complete an acquisition.

Leveraged assets in buyouts are becoming more common in Canada.

The structure can be simple at first glance; however, an intricately negotiated set of terms often makes it difficult without professional assistance from seasoned business financing advisors or a lawyer or accountant familiar with these types of transaction methods.

Many buyers assume that every leveraged buyout or asset-based lending solution requires no equity injection from the buyer. This assumption is incorrect. The misunderstanding is based on how transactions are described in popular business media.

Business purchasers like asset-based lending solutions and leveraged transactions as it helps limit new equity.

 

  

ASSESS THE NEED FOR FURTHER FINANCING POST-ACQUISITION WHEN BUYING AN EXISTING BUSINESS 

 

When a company is purchased, it should be recognized that further funds will potentially be required to run and grow the business under the constraints of the current financial statements and financial performance of the existing company.

 

Most businesses will require additional funding to cover the initial operations on an ongoing basis for a new business purchase.

 

Cash flow problems often arise because clients / existing customers will pay their invoices in a less than timely fashion - Balance sheet funding solutions such as factoring, business line of credit, asset-based lines of credit, equipment financing, and sale-leasebacks all can provide additional capital for the business you are acquiring.

 

KEY TAKEAWAYS

 

1. Diverse Financing Options: From traditional bank loans and non-bank commercial finance firms to government-backed loans, numerous financing avenues are available for purchasing a business in Canada.

2. Seller Financing Insight: Learn how seller financing can be part of your negotiation and what terms and considerations are often associated with this creative method of funding the business purchase

3. Importance of Timing: Understanding when to start looking for financing and recognizing the optimal financing structure can make a difference in the transaction's success.

4. Understanding Equity and Down Payment Requirements: Knowing what's required and what can be leveraged is crucial from owner equity to down payment structures. Acceptable Debt-to-equity ratios are essential to lenders!

5. Government Loan Assistance: Know how Industry Canada's Canada Small Business Financing Program can provide competitive terms for small business acquisitions.

6. Leveraged Buyouts and Asset-Based Lending: Learn how assets like equipment or real estate can be used as collateral to maximize financing and limit equity injection.

7. Assessment of Post-Acquisition Financing Needs: Recognize that additional funds may be required for growth and smooth operation in areas such as business lines of credit to support sales growth.

8. Friends, Family, and Family Offices as Resources: Explore unconventional financing methods through acquaintances, specialized networking events, or family offices.

9. Professional Guidance is Key: Whether it's seasoned business financing advisors such as 7 Park Avenue Financial,  or specialized lawyers, seeking professional assistance can simplify the process and help avoid common pitfalls.

 

 

 CONCLUSION: BUSINESS ACQUISITION FINANCING 

 

When buyers seek financing too late in their transaction, they are often left in the dark or behind. The best time to consider financing options is well before you are ready to submit an offer.

 

Make sure that your transaction is contingent on obtaining financing and ensuring you have adequate protection. Speak to  7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor with acquisition financing experience to assist you with a smooth and successful business transfer.

 

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION 

 

Can I finance the purchase of an existing business?

You may be surprised to learn that business financing can be a challenge. Bank loans can often take months before they're approved.

A more immediate solution for your capital needs includes potential combinations of seller financing, asset financing, non-bank asset-based lender solutions, and cash flow and asset monetization strategies. Non-bank solutions typically come with higher interest rates but are a more accessible form of capital.

 

What is Seller Financing in a business acquisition?

 

Seller Financing allows some business owners to loan buyers the money to buy their business, often reflecting the seller's confidence in the company or a need to incentivize buyers due to a limited market to sell the business.

 

The decision to offer such financing can be an essential negotiation point. Typically, seller financing won't cover the total purchase price, so buyers must make a down payment, possibly from other personal financing sources. Requirements can vary, but a good credit score is generally expected, though prime borrowing status is unnecessary.

 

What are the points to consider when buying a business?

 

When buying a business, these are the essential steps to follow to secure financing :

1. Conduct Due Diligence: Request and evaluate all critical company documentation on business credit history, including financial statements, tax returns, assets/equipment lists, client and supplier data, employees' records, and necessary contracts. Additionally, assess other elements with material impacts, such as licenses, patents, debts, and specific conditions like lease terms, renewal options, and personal guarantees from landlords, especially if the location is crucial to the business.

2. Structure the Deal: Negotiate the purchase price, agree on other terms, and determine the financing methods for the acquisition.

3. Finalize Legalities: Prepare and execute all necessary legal documents to ensure the transaction complies with the law and reflects the agreed-upon terms.

 

 

 

 What are the issues to consider When Buying a Business?

 

1. Assumption of Debt: Consider buying just assets or the entire business, including assets and liabilities (debt).

2. Financing Operations upon Purchase: Plan for the funds needed to operate the business after purchase, with multiple financing options:

   • Cash Reserve/Self-Funding: Utilize the business's cash reserves; bring in additional money if needed in addition to being prepared to provide a personal guarantee

   • Line of Credit: Borrow up to a specific limit, pay interest only on borrowed amount; provides immediate access to funds, similar to business credit cards.

   • Invoice Financing: Finance business invoice receivables to improve working capital and meet short-term liquidity needs; includes solutions like invoice discounting and factoring, commonly used by small businesses who are unable to access all the bank credit they require to fund sales and growth

 

 

 

How hard is it to get a loan to buy an existing business, and can you get 100% business acquisition financing?

Depending on several factors, getting a loan to buy an existing business can be challenging. Here's what to consider:

 

Difficulty in Obtaining a Loan:

1. Credit Score: Lenders typically require a strong credit history from the buyer.
2. Business's Financial Health: If the existing company has strong financials, it might be easier to secure a loan.
3. Industry and Market Conditions: Getting a loan might be more challenging if the industry is considered high-risk or out of favour
4. Down Payment and Collateral: Some lenders often require a significant down payment or collateral.
5. Experience in the Industry: A lack of experience might make lenders hesitant.

 

Can You Get 100% Business Acquisition Financing?

While it is not common, 100% financing for a business acquisition might be possible but is very rare.

1. Strong Relationship with a Lender: If the buyer has a solid history with a lender, they may be more willing to provide total financing for the business venture
2. Exceptional Business Opportunity: A lender might consider full financing if the purchased business has solid financials and a proven track record.
3. Seller Financing: Combining traditional lending with seller financing might allow you to cover a portion purchase price in addition to your equity investment/down payment
4. Government Programs: Some government-backed loan programs may allow for a higher loan-to-value ratio- such as the Canada Small Business Financing Program

 

However, even in these cases, 100% financing is rare in the Canadian business landscape and typically comes with stringent requirements, higher interest rates, and closer scrutiny.

 

It is generally advisable to have a reasonable down payment and to consider a combination of financing options rather than relying solely on a loan for 100% of the purchase price.

Consulting with a Canadian business financing advisor such as 7 Park Avenue Financial, which specializes in business acquisitions, can provide insight into the available options for your particular situation.

 

 

Working Capital Financing Cash Flow Solutions In Canada

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YOUR COMPANY IS LOOKING FOR CANADIAN WORKING CAPITAL FINANCING & CASH FLOW SOLUTIONS FOR  GROWTH!

Navigating Working Capital Financing: A Canadian Business's Roadmap

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?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com 

 

 

 

Expand Your Business: Exploring Working Capital Financing Cash Flow Solutions in Canada 

 

 

 

INTRODUCTION 

 

Working capital financing in Canada has undergone major changes with the emergence of various traditional and non-traditional lending options.

 

Businesses looking to navigate short-term obligations around their company's financial health now have diverse solutions to explore. Let's dive into the details to understand what might be the best fit for your enterprise.

 

Who Provides Working Capital Loans in Canada?

Traditional Lenders

Canadian banks and business-oriented credit unions have been the go-to solutions for owners seeking positive cash flow in business lines of credit and term loans. However, in the wake of recent years, the landscape has changed, with various non-bank commercial lenders stepping into the scene.

Non-Bank Alternative Lenders in Canada

 

These non-traditional lenders often cater to SME COMMERCIAL FINANCE needs and demonstrate a greater understanding and risk appetite for sales growth, receivable financing, inventory loans, PO Financing, and equipment leasing under the general heading of alternative financing.

 

 

Government Loans And Grants: Are They Suitable For Your Business? 

 

While many seek government grants, it is crucial to note that most grant-type programs might not serve the average Canadian business owner's needs related to working capital.

 

The Canada Small Business Financing Program

The two notable exceptions are the government-guaranteed Small Business Loan, or CSBFL, and the federal SR&ED program. SBL government small business loans provide beneficial rates, terms, and structures but primarily focus on equipment and leasehold loans. The SR&ED programs provide billions annually for firms investing in r&d.

 

Is Your Company Investing in Research and Development?

 

If your company invests in R&D, the SR&ED program might be suitable. SR&ED credits can also be financed, turning them into a great source of initial cash flow.

 

 Working Capital Term Loans and Mezzanine Finance 

 

The less-known cash flow loans or mezzanine loans cater to accounts payable needs, reaching up to $250k for small and medium-sized businesses. These loans are often termed short-term working capital loans, providing quick access to cash, albeit at higher rates.

 

 

Non-Bank Asset-Based Lines of Credit / Unsecured Loans

 

These large-scale loans (often over $1 Million) from non-bank sources provide working capital and are generally unsecured. The more you invest in current assets, the more financing and focus will be required for daily operating activities. For more information on non-bank asset-based lines of credit and asset-based loans, click here.

 

KEY TAKEAWAYS

 

1. Traditional Banks and Credit Unions are often the first options, but alternative lenders are becoming popular.

2. Non-Bank Alternative Lenders may provide more flexibility for SMEs and offer numerous asset-based and cash-flow solutions without requirements such as collateral and guarantees often demanded by Canadian banks.

3. Government Grants and Programs can assist in specific cases. Talk to 7 Park Avenue Financial about grant financing solutions.

4. Asset-Based and Unsecured Loans offer flexible options for increasing working capital and liquidity.

 

 CONCLUSION  

 

Seeking to overcome negative working capital?

 

Working capital may hold varying interpretations for different entrepreneurs, yet the core principle of genuine cash flow and funding current business assets stays constant.

 

True working capital financing encompasses the funding of immediate assets like accounts receivable, inventory, and purchase orders. Asset turnover and current asset management are critical to business success.  Some government initiatives could suit your needs, including term loans, leasehold enhancements, etc.

 

With these perspectives, Canadian entrepreneurs can arm themselves with the knowledge and self-assurance to explore many options in working capital management and funding. The choices, from conventional bank financing to exclusive government schemes and asset-backed lending, are diverse and extensive.

 

Make well-informed choices and drive your enterprise forward by selecting the apt working capital financing strategy tailored to your situation.

 

Working capital may signify diverse things to various business owners, but the underlying truth of real cash flow and capital management is unaltered.

 

Authentic working capital management is linked with financing short-term assets like accounts receivable, stock, and procurement orders. In the Canadian context, numerous opportunities are available, and pinpointing the right solution can substantially boost business advancement.

 

Prefer an  ‘expert ‘in business financing? Call  7 Park Avenue Financial, a trusted, credible and experienced Canadian business Financing Advisor with a track record of long-term success in helping companies with finance solutions for enhancing the growth of their products and services.

 

FAQ: FREQUENTLY ASKED QUESTIONS

 

What is a cash flow loan?

A cash flow loan is a good funding tool for entrepreneurs needing financial help. These loans are helpful to new businesses or companies that want to find salespeople and invest in marketing campaigns, product research and services; they can be instrumental when an entrepreneur faces low liquidity after the decline of funds from credit lines.

 

A cash flow loan can be the perfect funding tool for many entrepreneurs. This is especially true for companies growing quickly and have significant funds invested in receivables and inventories or limited assets to offer as collateral.

 

These loans are helpful after an unforeseen liquidity shortfall has occurred, preventing growth from happening because these events cause a company's finances to become strained. Quick business decisions need to be made oftentimes without all the necessary information on hand.

 

What are the primary sources of working capital financing in Canada?

The primary sources include traditional banks and credit unions, non-bank alternative lenders, government grant programs like the Canada Small Business Financing Program, and asset-based lines of credit or unsecured loans.

 

 How do non-bank alternative lenders in Canada differ from traditional lenders?

Non-bank alternative lenders often have a greater understanding and higher risk appetite for growth areas like sales, receivable financing, and inventory loans. They offer flexibility and cater more to SMEs compared to traditional lenders.

 

Are government grants suitable for working capital needs in Canada?

 Most government grants may not serve the needs of average business owners for working capital. However, programs like the CSBFL and SR&ED offer specific grants and loans that can support business financing needs.

 

How can the SR&ED program benefit companies investing in R&D?

Canada's SR&ED program is a non-refundable grant that covers around 40% of cash spent on R&D. SR&ED credits can also be financed into an 'SRED LOAN', providing a valuable source of working capital.

 What are the benefits of non-bank asset-based lines of credit for businesses in Canada?

These loans offer flexibility in providing working capital as they are often unsecured and have higher limits. They enable financing current assets like receivables, inventory, and equipment, enhancing business growth capabilities.

 

How are working capital and cash flow related?

Cash flow and working capital are vital elements in financial analysis and business valuation, sharing similarities but also having distinct differences.

• Cash flow focuses on money movement and operational finance.
•  A Company's Working capital position assesses short-term financial health by comparing current assets to liabilities.
• Both are essential in financial analysis and business valuation, with distinct but related roles.

Cash Flow:

• Summarizes the company's cash holdings (account balances, cash and cash equivalents, cheques, etc.).
• Indicates money flowing in and out of the company and the assessment of a company's ability to meet financial obligations and helps determine how much cash or financing is needed
• Positive cash flow: income is higher than expenditure.
• Negative cash flow: expenditure is higher than income.
• Operating cash flow refers to financing day-to-day operational business, including costs, investments in new equipment, etc.
• The cash flow statement shows annual cash flow and liquidity.

Working Capital:

• The difference between current assets and current liabilities in the financial statements creates net working capital - either positive or negative,  on the balance sheet - this calculation is known as the working capital ratio.
• The amount available to pay current liabilities.
• Positive working capital: current assets are higher than current liabilities
• Negative working capital: current liabilities are higher than current assets. How to calculate working capital movement in a business is vital to financial success.

Click here for the business finance track record of 7 Park Avenue Financial

Asset Based Credit Line Solutions In Canada: Your Assets Make This Working Capital Facility Work

 

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YOUR COMPANY IS LOOKING FOR A  CANADIAN ASSET BASED LINE OF

CREDIT AND WORKING CAPITAL FACILITY! 

Unveil the Secret: How Asset-Based Lending Transforms Canadian Businesses!

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

        Financing & Cash flow are the biggest issues facing businesses today

                              ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

 

WORKING CAPITAL FINANCE VIA ASSET-BASED LOANS

 

 

Unlocking Growth Potential: A Deep Dive into Canada's Asset-Based Credit Line Solutions 

 

 

INTRODUCTION 

 

Are you looking to give your Canadian business a boost in working capital? You might have heard of asset-based credit line solutions, for some, an unknown concept that has now become the go-to answer for many businesses.

 

Let's unpack this financial tool that could drive your sales and revenue growth with access to more capital.

 

It's a real problem. On the one hand, business owners and financial managers seem more optimistic about their future success and competitive edge. But here's the kicker: all that optimism must weigh against the practicalities of financing day-to-day operations and future growth based on the current credit worthiness of the business.

 

 

THE CHANGING LANDSCAPE OF CANADIAN BUSINESS FINANCING   

 

Remember the good old days when financial options were aplenty? At 7 Park Avenue Financial, we don't either -  The asset-based credit line was once this obscure, misunderstood entity. But guess what? Times have changed, and it's time we understand what this financing entails.

 

 

A NEW SOURCE OF CAPITAL FOR WORKING CAPITAL AND CASH FLOW 

 

 

We all know the struggle: working capital, cash flow, and managing capital expenditures while preserving business credit.

 

If you're a small or medium-sized business in Canada, it's like playing financial chess without the queens.

You're constantly strategizing but with limited pieces. Canadian banks talk a good game but leave many smaller businesses hanging for a loan or line of credit based on current financial standing and issues around growing rapidly or securing new customers or a new contract. Sound familiar?

 

  

THE ASSET BASED LINE OF CREDIT WORKING CAPITAL FACILITY SOLUTION  

 

So, what's a business to do when traditional bank loans fall through? Enter the asset-based line of credit, a.k.a; the ABL facility. It's like this handy toolbox for greater liquidity that doesn't add more debt but magically turns assets and sales revenues into a revolving line of credit. Unsurprisingly, this innovative solution is gaining traction in Canada's financial landscape as businesses focus on getting a better advance rate on current assets and other assets.

 

 THE WHAT AND HOW OF ASSET-BASED FINANCING REVOLVING CREDIT FACILITIES 

 

 

Got assets? That's all you need for asset-based lending. It's not rocket science; it's just a practical way of securing cash flow and working capital against what your company already has. Imagine a bucket that's filled depending on what you put into it—your accounts receivable, inventory, even unencumbered equipment. It's an intelligent way to leverage what you have without over-complicating things.

 

  

ASSET BASED LENDING IS FLEXIBLE  

 

 

Why choose ABL? It's not just about higher advance rates or the ability to finance various assets. It's also about the freedom and control it offers. Imagine driving on a road with fewer restrictions and more open lanes.

 

Even Canadian banks are getting on board with ABL solutions, though some critics argue they still cling to traditional banking models.

 

 THE FOCUS IS ON BUSINESS ASSETS AS COLLATERAL 

 

ABL is like a spotlight that focuses solely on the collateral. It's simple, direct, and depends on your sales and business assets. Since this is relatively new terrain, grabbing a guide is wise - Let the 7 Park Avenue Financial team be your north star in navigating this unique aspect of Canadian business financing.

 

 MAXIMIZING ASSETS AND SALES REVENUES 

 

Here's a metaphor to chew on: ABL is like squeezing the juice out of an orange—you're getting every last drop of value out of your assets. Whether it's receivables, inventory, or unencumbered equipment, the strategy is leveraging these to the fullest. Even Bob Dylan's famous lyrics might resonate with the evolving image of ABL lending - ' The times they are a changing '!

 

7 KEY TAKEAWAYS

1.  
   • Asset-Based Lending (ABL) uses collateral value and liquidity of working capital assets as primary credit considerations for lines of credit.
   • Focuses on short-term asset liquidity, not long-term stability.

2.  

   • Originally a financing source of last resort but now used by thousands of private and public companies!
   • ABL has evolved as an attractive option for well-performing companies.
   • Dominated by independent lenders 20 years ago, now mainly controlled by banks.

3.  

   • Lower cost of bank capital passed on to borrowers via competitive rates
   • ABL credit spreads are comparable to middle-market bank loans due to surplus liquidity in the markets
4.  
   • Typical commercial lending focuses on operating earnings and equity balances.
   • ABL is concerned with converting assets to cash and potential impairments to that conversion.
   • Relies on liquidated collateral for repayment, regardless of business state.

5.  

   • Advances credit against the most liquid business assets like inventory and accounts receivable under 90 days old
   • Self-liquidating through the continuous turnover of the cash cycle as companies sell on credit and collect unpaid invoices
   • Credit expands with sales growth; excess cash flow reduces the credit line.

6.  

   • No set amortization schedule.
   • Robust monitoring of asset turnover.
   • Confidence in collateral value.
   • The capture of collateral proceeds in control accounts or lock boxes.
   •  
7. • Near real-time understanding of the borrower and loan state - ABL facilities increase almost automatically.
   • Allows risk metering by adjusting advances if the borrower stumbles.
   • Credit availability is formula-driven, often customized to specific assets and situations, mainly against accounts receivable and inventory.

 

 CONCLUSION - THE POWER OF ASSET-BASED FINANCING TO UNLOCK BUSINESS POTENTIAL 

 

Could ABL be the missing puzzle piece for your Canadian business? Why not explore and take advantage of the cash flow and working capital that can propel your growth? Call  7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor for business credit line solutions.

So, are you ready to step into the future of financing? Your growth path might be just an asset-based loan away!

 

 

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

 

What is asset based lending? How ABL works

Asset based lending facilities are a type of business loan where the credit considerations are based on the value and liquidity of assets. Asset-based lending is a business loan focusing on working capital assets' collateral value and liquidity.

ABL credit via asset-based funding is more concerned with asset liquidity and factors that may impair the conversion.

 

The ABL lender differs from normal commercial banking/lending because it relies on the asset being able to be converted into cash rather than the business's long-term stability. 

 

Understanding asset based lending is ensuring the borrower under how a  borrowing base is determined based on a business's ongoing sales and asset values, providing constant credit availability. Liquid assets such as a/r and inventory have higher values based on loan-to-value calculations.

 

Loans based on assets via ABL lenders are considered less risky, so the maximum loan will be considerably more than the assets' book value/face value. Interest rates charged vary widely, depending on the applicant's credit history, cash flow, and length of time doing business.

 

How does asset-based lending differ from traditional loans?

Unlike traditional loans, ABL doesn't add debt to the balance sheet, and the overall business credit rating and credit quality are less important than business assets as eligible collateral. It's a revolving facility that monetizes assets, offering greater flexibility and often faster access to funds.

 

Traditional loans often come with more rigid terms and covenants around creditworthiness, while ABL focuses mainly on the value of the collateral.

 

 Can small and medium-sized businesses benefit from asset-based lending in Canada? 

 

Absolutely! ABL appeals to small and medium-sized businesses that may have difficulty securing traditional bank loans. By leveraging existing assets, these businesses can access vital working capital to fuel growth, manage operations, and navigate financial challenges.

 

Are there any special requirements for securing an asset-based line of credit?

The main requirement from asset based lenders is for a company to have tangible assets that can be used as collateral. These might include accounts receivable, inventory, unencumbered equipment, and sometimes physical assets such as commercial real estate. The quality and liquidity of these assets, along with the overall risk profile of the business, will typically determine eligibility and terms.

 

 What makes asset-based lending an attractive alternative to other financing methods? 

The asset based lender offers an asset based credit line working capital facility with higher typical advance rates compared to banks and other types of loans, flexible terms, and often a quicker approval process.

Its "covenant light structure" and a minor emphasis on personal guarantees make it appealing to many business owners. Additionally, ABL can accommodate a broader range of financial situations based on a company's assets, making it a versatile tool for various business needs and growth stages.

Click here for the business finance track record of 7 Park Avenue Financial