Asset Finance – Asset Based Lines of Credit in Canada

Asset Finance continues to be a priority for Canadian business owners and financial managers. One of the ways to achieve this is via an asset based line of credit In the context we are referring to it is a non-bank line of credit, via an independent finance firm, not a bank .

Over the past couple years as we head into 2010 the business of asset based financing and asset based lines of credit has become increasingly complex for business owners. When you enter into or entertain such a facility you should consult with your accountant, or more importantly a trusted and credible and experienced financing advisor in this area of Canadian business finance.

The most important thing you can do in contemplating such a transaction is to both understand the financial offering, and at the same time ensure you understand how the Canadian marketplace works.

Asset finance, or asset based lines of credit provide your Canadian firm with maximum utilization of asset values related to 3, possibly essential components of your firms asset base. Those components are inventory, accounts receivable, equipment, and, as we have noted, in some cases, real estate.

So why does this facility work differently than a more traditional chartered bank line of credit? The answer is simply higher margining. What is meant by that? Well is simply the ability of your firm to leverage higher borrowing, when and if you need it, against those asset classes which we have just mentioned. In the case of receivables it tends to be 90% of receivables less than 90 days, and in the case of inventory it’s a case of understanding in advance the true value of your inventory on an ongoing basis re your costs and ultimate marketability of that inventory.

The beauty of an asset finance and asset based line of credit facility is that you use the facility when you want and to what extent you want – from a cost perspective that equates to paying for only what you use.

Asset finance and asset based lines of credit tend to traditionally be more expensive than banks lines of credit. Let’s just understand the basics of that. Currently banks pay between one or two per cent, perhaps three per cent to depositors in Canada. If they can lend out those funds at 2-300 basis points more – i.e. 5 or 6% rates to your firm the banks consider that a winning proposition . But they want to be secure on that transaction, so that involves your personal guarantee, lower margining of the asset, and strict rules and covenants around ratios, operating performance, etc.

Independent finance firms borrow from banks, or raise capital themselves – they therefore mark up those funds so in general, asset finance and asset based lines of credit cost your firm more .

But if your firm can grow revenues and increase profits with a higher borrowing cost is that not ok. We think the weight of evidence suggests that proper consideration of an asset finance and asset based line of credit warrants significant merit.
The Commercial Finance Association, which is a trade association of asset based lenders, has just reported (June 2010) that 30% of asset finance lenders have increased commitments to their customers and business continues to improve. The bottom line is as follows:

The economy is getting better
Bank lending is still difficult to access for many small and medium sized firms
Asset based finance and lending continues to have significant appeal to small and medium sized firms.

Investigate asset finance, determine your needs, and work with a credible advisor to ensure your Canadian asset facility can help your firm grow revenues and profits.

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Heavy Equipment Financing – Used / New Lease Options

Canadian business owners and financial managers are sometimes unaware that used equipment can be financed. There is categorically used heavy equipment financing options available for your business. One of the ironies of financing used heavy equipment is that the type of asset that is being financed often has considerable value versus its original price. Most assets in other categories depreciate much more quickly in value – think cars or computers!

There is a broad range of assets in this category that qualify for excellent rates, terms and structures. Some of the assets in this category of Canadian lease financing are:

Heavy Construction Equipment
Machining assets
Trucks
Backhoes
Concrete Equipt
Bulldozers
Excavators
Scrapers

Other assets are included and can be financed, but these are some of the main ones.

When you are looking to finance equipment of this nature it is important to understand your lease financing options. In most cases, depending on your firms overall credit quality you have a choice of either a full payout capital lease to own or perhaps you might want to consider an operating lease strategy. Under this lease financing option you have use of the equipment, but no intention to own it at the end of the lease. We point out to business clients that this operating lease strategy generally has lower rates and a lower monthly payment, which is appealing to many clients that are striving to save cash flow and working capital for their daily operations.

The best advice we can give clients is to work with someone in this field who has credibility, trust and experience, and who can maximize on the unique benefits of leasing that are important to your firm.

The application process for financing of heavy used equipment is relatively straight forward. Either on your own or with lease advisors assistance you should ensure you have a package that includes a basic credit application, your financial statements, and information on the owners of your firm, who in most cases will be asked to partially or fully be a co lessee on the lease application.

Depending on the nature of the equipment you are financing, and the amount an appraisal might be required, but that works in your favor, as you will have a clear understanding of the true value of your equipment that is being financed.

Financing can normally be approved in a matter of a day or to if you have all the information required, and rates vary with respect to your overall credit quality and the nature and amount of the asset being financed. Once you have obtained an acceptable offer then standard lease documents can be prepared and executed by your firm.

Consider the lease financing options for all manner of new and used heavy equipment – it’s a great cash flow and working capital strategy for growth and profit through the use of assets.
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Leasing Financing and Equipment Financing Canada

Your firm is looking to finance new equipment or potentially to purchase used equipment that still have value and production capabilities for your Canadian company. What is the best financing option, or is it actually better for a firm to pay cash for these types of asset acquisitions?

Certainly outright ownership has its benefits, but at the same time valuable cash resources are drained from your business when you buy an asset for cash, especially an asset that is depreciating in value. For that reason the majority of business owners seek out equipment financing / lease financing solutions for capital asset acquisition.

The obvious benefits of lease financing are touted often - there are other hidden benefits also. One of those aforementioned obvious benefits to equipment financing is simply the ability of your firm to save cash flow and working capital – if cash flow and working capital are ‘ king ‘ as they say, then clearly in the challenging business environment of 2010 they have been re crowned !

You can further augment your cash flow and working capital by giving consideration to a sale leaseback strategy. In this scenario you are maintaining the use of assets you already own and have paid for outright – the strategy completes itself by your firm selling the equipment back to a lease company and paying for it over time again, usually 3 years as an example. Cash proceeds from the sale of the asset you are using go into your company for working capital needs. Many business owners and financial managers in Canada overlook this strategy.

We mentioned some of the lesser known and perhaps less obvious benefits of lease financing. One of those relates strictly to your ability to understand your options at the start of the lease. If you find that you might not want to own, or continue to use the equipment at the end of the lease term you should opt for what is known as an operating lease. This type of lease simply allows you to use the equipment and return it at the end of the lease. But wait, there is more! In a true operating lease you can negotiate with the lessor at the end of the lease to purchase the equipment for its value at that point in time. (Quite often an appraisal is done so the lessor and your firm can agree on the value)

Could there actually be even another benefit to the transaction we have noted above. Yes, because under a true operating lease your overall payments and actual cost of borrowing will be significantly lower – sometimes by 10 – 20 %, versus if you had chosen a lease to own strategy.

Equipment financing can be complex, and the ability to negotiate a proper rate, term, and structure for your firm can be a daunting task. The challenge is further exacerbated when business owners are not knowledgeable enough to relate the pure acquisition to the balance sheet, income statement and other benefits that relate to a properly structured lease. We therefore recommend you seek out the expertise of an experienced , credible and trusted lease financing advisor who can assist you in that regard , often at no charge.

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Factoring and Accounts Receivable Financing In Canada

Most Canadian business owners and financing mangers often seek out factoring as a quick way to get out of a cash flow crunch when other more traditional methods of financing have been exhausted.

Typically clients tell us that sales or revenue generation is not the problem, with the bigger challenge simply being how to convert those sales into cash flow and working capital. Factoring comes at a higher price than traditional bank financing but most Canadian business owners recognize that other options are limited.
When you recognize that a cash flow crunch often comes as a result of your success it is often much easier to rationalize factoring as a solution.

Factoring in Canada is slowly catching on as a true financing option – many parts of the economy now view this financing method as a traditional method of financing the business – and the reality is that the big boys use it also , which many are not aware of .
When you utilize factoring you are in effect selling your receivables as you generate them (at your option of course) and receiving immediate cash for those funds. Don’t let the literature fool you though – you actually receive approve 75-90% of your invoices (depending on who you deal with) and the balance is held back and then remitted to you when your customer pays. Naturally from this final holdback amount there is a financing fee or a discount fee. Many business owners view this financing or discount fee as an interest rate, when in fact the factor finance firms always refer to this as a discount fee.

The prerequisites for factoring your receivables often revolve simply around the nature of your receivables and customers. Your final pricing or discount fee depends on several key factors. They are:
- Overall risk profile of your firm – i.e. how you are doing!
- The quality of your customer base
- The size of your receivables portfolio
- The geographical scope of your invoices - foreign, i.e. U.S. receivables can be financed also.

What do you need to know about factoring financing in Canada as it relates to the U.S. and U.K. approaches to this type of financing ? Well in Canada there are two types of invoice discounting/factoring. Under the most commonly used method the factor firm you engage works with you to invoice the customer, collect the payment, and monitor the overall credit quality of your customer.
If you view this overall business model and way of financing as somewhat intrusive and undesirable then seek out the services of a trusted, credible and experience advisor who can provide you with a factoring facility which allows you to bill and collect your own receivables.

Many business owners we meet are concerned with the perception that comes from suppliers and customers when they find out you are factoring. That comes out of the issue that in the past many firms that factoring generally was viewed as companies with financial problems. However, the new reality of financing a business in Canada in the year 2010 is that factoring is in fact a great way for healthy businesses to generate much needed cash flow and working capital.

In summary, consider the cash flow benefits of financing your receivables when you are unable to obtain the total amount of financing you need. Determine if you are eligible (most firms are) and seek out a facility that meets your business financing needs.

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Film Finance Canada – Tax Credit Film Financing

Producers and owners of Canadian content in the areas of film, television, and animation credits are not always aware that they have the ability to monetize or cash flow their Canadian tax credits in Canada.

The three types of productions that we have referenced are provided with solid financing assistance from the federal and provincial governments in Canada.Your ability to monetize these tax credits, and turn them into cash flow at time of filing, (or in some cases before) can make or break the overall financing success of your venture.

Successful results can be achieving by working with a credible, trusted and experienced finance partner for your tax credit financing in Canada.The financing of these tax credits creates, in effect premium additional cash flow to allow you to enhance your initial equity and debt and gap financing strategy.

Let’s use a simple example wherein a Canadian produce in film, TV, or digital animation is financing a venture through equity and debt, and let’s say it’s a 50/50 proportionate relationship. The non equity portion of these ventures is often balanced with some sort of distribution agreements in Canada or elsewhere in the world. One strategy you could consider is to of course ensure prior to commencement and production that you qualify for and are eligible for the maximum amount of tax credits related to your venture. Let’s say our example consists of a 1 Million dollar independent film, and there is a 500k equity and debt component respectfully. In our example, if properly qualified and document the film owner, producer, etc can qualify for a tax credit that might easily come into the 200k-250k range.

Is that the end of our example? Absolutely not – what we are saying is that you can immediately finance that claim, either at time of filing, or in some cases earlier, and utilize that cash flow for all sorts of purposes related to your venture / production.

As Canadian production and content continues to play a hefty role in the producing of Films, direct to video, pay per view, and digital products the ability to finance these ventures is always a challenge. Very few of Canada’s banks and large financial institutions play a role in this type of financing; we therefore recommend to clients that they seek out the expertise of a credible, trusted and experienced advisor in this area. Maximizing your claim value and eligible cash flow are of course the rewards of working with the right party.

Larger and well known studios require financing also, but the true challenge is for independent producers and their investors who have budgets that are often ten million dollars and under, sometimes quite significantly under that threshold we just referenced. The reality also is that the industry seems to be breaking all records in areas of growth and economic activity and new forms of content and distribution. The bottom line is that as demand increases and distribution structures improve the need for financing and tax credit financing in Canada is also increased.

If a production can be properly pre-sold and distributed, and tax credit financing utilized as an integral role in initial production cost financing – well, that simply creates a perfect formula for financial success.To be successfully financing a production must have the proper amount of leverage, different exit and distribution strategies, and the proper utilization of tax credit and tax credit financing.

Working with the proper parties can often achieve50-75% immediate financing of your tax credits in Canada. The remainder is of course simply a buffer for the lender to allow for financing costs themselves, and any time lapses in the final approval and cheque from federal and provincial players that regulate the new generous tax credits.

Tax credits are increasingly generous in Canada – just in the last year or so a number of enhancements have been made to the various programs at various levels of government. Take advantage of these credits, and further investigate monetizing those credits at time or filing of prior to maximize the cash flow and overall financing strategy of your film, TV, or animations projects.

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SR&ED Sr ed Tax Credit Financing in Canada

SR&ED (SRED) tax credit financing is a solid strategy used by more and more Canadian business owners and financial managers who wish to accelerate the benefits of Canada’s Sr Ed program.Cash flowing, monetizing, or factoring ( they all mean the same thing!) your Canadian Sr edclaim can accelerate cash flow and working capital for your privately controlled Canadian business that is utilizing SR ED credits under the governments program .

In many ways the financing of your Sr ed credit actually allows you to maintain your competitive edge, as the combination of your non repayable tax credit and the immediate financing of it are a ‘ double whammy ‘ in the face ofyour competitors who might not use this strategy .A banker we deal with recently told us that current industry statistics show that many companies who are in fact eligible for the SR ED credit aren’t even applying for it, let along financing it. Therefore when your firm maximizes on the total value of your claim, and then generates instant cash flow on that claim you are clearly leading the pack in this regard.

Many clients tell us that they utilize the Sr Ed funds that they finance to assist in acquiring new equipment that allows them to maintain a competitive edge in their markets. The reality is of course that these funds can be used for an general corporate purpose , which might be things such as equipment acquisition, advertising and marketing, reduction in payables or debt, or of course the continued investing of even additional research and developmentefforts .

So what is the cash flow and working capital potential in your SR ED, and how do you unlock that potential?If you are already filing for SR ED credits you are no doubt working with the assistance of your client, or, alternatively, someone that is known as a SRED consultant. Having a solid resource in one or both of these parties allows you to maximize on your potential claim.

Once you have filed you claim we recommend that you consider immediately financing the claim. Naturally you don’t have to do this, and can simply wait the3-12 months that it might take Ottawa and your particular province to review the claim, adjudicate it, and process it for payment. But, as we state, why not consider financing the claim.

Clients ask us how the actual process works. It is quite simple really. Your calim is generally financed at 70% of the total value of the amount you and your accountant and consultant have claimed. You can receive cash immediately after it is filed. In certain cases you can actually receive funds for the claim prior to financing – that whole process is called SRED accrual financing. Some of the basic criteria are simply that you must have filed a claim before, have a solid reputable party preparing it, and be prepared to demonstrate good records and accounting around those expenses you are intending to claim.

So how can we summarize in a ‘bottom line ‘manner. Its simply as follows – you should be filing Sr Ed claims if you are eligible. On filing you have the option of financing that claim, so you are bringing immediate cash flow and working capital to your firm on funds that are not repayable to the government. Funds can be used for any company purpose, and proper utilization allows you to maintain a competitive advantage on your competitors. That’s using research as a cash flow generator – a solid financing strategy!

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Financing a Franchise in Canada

Financing a franchise in Canada properly allows a Canadian entrepreneur to start a business that is established and is a proven business model based on the success of your franchisors system, number of units , and general brand recognition and success .

The financing challenge that you face is often quite simply based on the amount of full financing that you need for the purchase of a new or existing franchise .In Canada franchises that require financing range all the way from 25,000.00 to severalmillion dollars .

One of the positives of financing a franchise in Canada is that in general the overall concept of franchising is viewed as having in many cases a better chance of success as opposed to an individual start up . This may or may not be the case, but just the simple fact that the Canadian banks in general in Canada are favourable to financing a franchise is a positive statement . Most Canadians know that smalland mediux sized start up operations in Canada are difficult to finance from the get go .

Sois there an exact process or method in financing your franchise . The answer is that there is clearly no one proven method utilizaed by all parties to finance a franchise .But there are a number of both proven planning methods, as well as exact financing strategies that can be employed to complete a successful acquisition of a new or existing business .

The initial process you should focus on is some simplecash flow planning around the requirements of the business that would allow you to complete the transaction and open the door for business . However , any business ,even if it’s a ‘ cash ‘ business per se requires some level of working capital financing . If you business is going to have any level at all of inventory or accounts receivable that places a pressure and demand on cash flow .

Most franchisors will assist you in determine what the initial requirements are . In many cases they will actually stipulate or strongly recommend that you don’t enter into the business without a specific level of personal investment couple with the asbility to borrow additional funds .

A critical part of your overall cash flow planning is of course to allow for the ability to pay back royalties to the franchisor every month, as this is how the franchisors themselves generate revenue and utilize these funds for additional expansion of the chain .Naturally all franchisors wantyou to be successful, because you will then be ergo making them more successful . That’s the franchise fundamental business model .

Things you need to take into consideration in your financial planning and acquisition of a franchise are the basic cash flows, the‘ ins and outs ‘ we could call them, of the business . Things to consider are your operating expenses, advertsing you might undertake, the aforementioned royalty payments, and long term cash needs for things like equipment , etc.

Clients ask us if there is a simple or recommened manner in which to sit down and plan all this . There is of course, and its utilizing a basic cash flow or business plan template that will allow you to simply enter in projected revenues and expenses, and out of that will automatically fall out your cash flow needs .The-- things you need to consider are initial monies that you will put in personally as an investment, plus funds you will borrow , and the breakdown of how these funds will be repaid .

Once you have done the proper amount of planning and analysis sit down with your funding sources, or someone who has experience , credibility, and that you can trust for solid franchising advice . In Canada franchises are financed by a special government program that works well for this type of funding, as well as your own investment , plus additional borrowed funds from commercial finance or leasing companies .Carefull planning will allow you to cobble together the right amount of financing for both short term and long term needs .

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