Asset based Financing and Lending Canada – What is it?

Asset based Financing – Canadian business owners are asking us what this term means and how they can utilized asset based financing for their cash flow and working capital needs and purposes .

Asset based financing in our opinion and experience means different things to different people. For the purposes of sharing information here we will focus on asset based financing as being a non traditional (but clearly growing in popularity) means of financing Canadian business.

In many cases companies either have a temporary challenge or a unique special situation need. Some of the examples of these needs are strong sales growth, or perhaps due to market or competitive reasons you have experienced balance sheet erosion due to the somewhat difficult business environment of 2008 and 2009. Ironically, one of the greatest things that can happen to your firm - explosive sales growth – can actually become a huge financial and operational challenge, as many business owners have experienced.

The term ‘ asset ‘ of course more often than not refers to equipment, and that is a classic subset of asset based financing . Equipment of course covers a broad range of asset categories and our customers utilize this strategy to free equity in equipment and harness that into working capital and cash flow.

How does that work – its quite simple. Although business owners in many cases have a strong sense of what some of those assets are worth quite frankly that is not what counts. It all comes down usually to an appraisal being done on the equipment, and when the appraisal comes back a loan is made against the appraised value. Usually business owners can expect to receive a fairly high percentage of the liquidation value of the equipment, but this amount tends to be less than the fair market value of the asset .It is very important to understand that the asset has to be free and clear of any liens or charges. In cases where a small amount might be owing to another lender that amount can be paid out and bundled into the new loan transaction.

In the equipment area of asset based lending companies need to realize that these advances are structured totally on asset value, unlike a bank that places a lot of emphasis on your cash flow, balance sheet ratios, debt covenants, etc. There is a huge difference in how an asset based lender looks at your asset and advances funds against it, versus a Canadian chartered bank.

There is technically no limit as to the amount that can be advanced against equipment, although most transaction we see in the marketplace is certainly less than 5M dollars.

In summary, asset based financing means different things to different people. One of the key context areas of this type of financing is equipment financing – Canadian business owners can almost consider this a bridge loan to inject temporary working capital into assets that are unencumbered .

Whether your firm is growing quickly, has restructuring issues, or other unique situations you will benefit from talking to an experienced, credible, and trusted financing advisor in this area.
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Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/asset_based_financing_canada.html

Working Capital Financing Canada – Canadian cash flow solutions

Working Capital financing- Canadian business owners and financial managers often recognize the need for working capital and but are often challenge in two key areas - what solutions are available and are the working capital solutions temporary or current , or permanent .

If you are a Canadian business owner that is looking for long term working capital your needs revolve around future projected growth, expansion, or in some cases simply the hiring of additional marketing personnel is a solid long term cash flow need .

Generally speaking if you are looking to grow sales and profits working capital is the solution to that type of challenge. One of our clients sells textiles to major box retailers in Canada - sales have grown and the company actually had a great year in 2009 ( many firms did not!!) and feels they can grow business by 100% in the current year , based primarily on new product lines and customers . So you ask, what is the problem? The answer in two short words - working capital.

If you are carrying the additional inventory and receivables that come with that growth you have a working capital challenge. Therein lies the challenge of course - what type of solution do you need, and how do you find it. Naturally you want a facility that meets your needs, can grow with your firm, and is structured under the right terms and rates.

If you have a proper working capital facility that should generally require no additional working capital.

The key thing to remember when you are looking for working capital is the term ’benefits to cash flow ’ - What do we mean by that ? Simply that if you are looking at adding new personnel, or new computing power or technologies that you will receive the benefits of those assets over time - if that is the case why would you pay for them tomorrow . The bottom line is that it is extremely beneficial to match your cash outflows with the benefits of your new assets, over time! And in a perfect world you want the ability to ensure you can grow that working capital need.

Many business owners simply don’t know or understand where that cash flow comes from.

It comes from two areas, your ability to maximize on your current assets, i.e. receivables, inventory, and purchase orders, or new debt that you are willing to take on in the form of a cash flow working capital loan.

If we refer to the former solution Canadian chartered banks offer the best rates, terms and structure for maximizing working capital. The challenge simply is that you are not always able to get the capital you need for growth in the Canadian chartered banking environment.

The key to understanding your needs is your ability as a Canadian business owner or financial manger to understand your working capital cycle - i.e. how fast do you collect your receivables, how does your inventory turn, and what are your payment terms or pressures from suppliers. By having a clear understanding of those numbers you can determine working capital needs, and also assess what the proper solution is. In short term working capital that means several things - a new or better banking facility, financing your receivables through a more aggressive non bank working capital facility. This could be either a factoring arrangement for receivables only, or a more extensive

Asset based lending arrangement. In medium sized to larger firms in Canada it could also be effectively addressed by a mezzanine or sub debt cash flow loan.

Talk to an experienced, credible and trusted business financing advisor who can ensure you understand your options in the working capital area.

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Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/Working_Capital_Financing_Canada_4.html

Computer Leasing – Business Computer Leasing In Canada

Computer Leasing – the lease financing of business computers and technology is probably the best example of your Canadian business utilizing classic benefits of lease financing. Why are Billions of dollars of computers and related technology leased every year – The answer is that the computer industry seems always in the forefront of new and leading edge technologies. As consumers we know in our home purchases how quickly we might be feeling that our technology for home computing is out of date, not fast enough, doesn’t have enough bells and whistles, etc .

The classic benefits of lease financing are generally known to most Canadian business owners and financial managers – they include the ability to upgrade equipment easily or at the end of a lease term. Many organizations, especially moreso if they are larger are not looking to spend large sums of their capital budgets all at one time on computer upgrades. We refer to ‘ computers ‘ – but to be clear computer related financing includes everything you might be thinking of in a technology acquisition – that includes the actual personal computers, servers, mainframes if that is appropriate, application and operating software, as well as maintenance contracts and service contracts . The total dollars spent on computing power in any organization is always significant relative to the total of any company’s capital budget.

Additional benefits include the ability to contain debt on your balance sheet, remove debt entirely and still acquire your computing power ( operating leases do that ) and also you have the ability to influence cash flow via fixed or variable payments . Many customers choose to pay leases on a quarterly or sometimes even on an annual basis, although monthly tends to be the most popular method.

We have spoken of obsolescence, and also referenced the fact that computer and technology leasing is a classic ‘poster boy ‘for lease financing. That is because as technologies change you do not want to be locked into the inability to acquire more computing power for the same or less money. The author worked in computer financing for over 20 years, and whether it was dealing with the CFO of some of Canada’s largest organizations, to small start ups during the’ dot com’ era – all of these people recognized the power of technology financing .

Let’s illustrate via a simple but clear example -. You need to purchase 100,000.00 of computers and related accessories – Typically your monthly payment would be, over a 36 month term approximately 3100.00/ month. If you had paid cash for the purchase you would probably find in two years you needed new computers – you have spend 100,000 in cash, you own old technology which is depreciating, and newer computers and software are being used by all your competitors to gain a competitive advantage .

What might you have done? What would an alternative business financing strategy be? Well , if you had leased the computers and structured the transaction as an operating lease here what you would do – you would return the computers to the lessor , order the new computers , and you payment would stay the same or in some cases be less ! And of course now you have regained competitive advantage in your marketplace if you place an emphasis on computer power, internal infrastructure, and access to your data, ET c

That is just one of many, many ways in which computer lease financing is a powerful financing strategy. Talk to an experienced business financing advisor who has credibility and experience in this type of financing – You will soon find your firm is also ‘leading edge ‘in financing!

--Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.webpage66.com/Computer_Leasing_Business_Computer_Leasing_Canada.html

Factoring In Canada – What is the best rate?

Factoring In Canada - more firms are doing it and as this type of financing becomes more popular many business owners quickly discover they either do not know the rate they are paying, and in many cases are looking for a more competitive rate.

We are assuming in our share of information that you understand the basics of factoring – i.e. the sale of your receivables – It is most commonly used with high growth firms that cannot obtain he amount of traditional financing they need to grow; utilizing the working capital and cash flow derived from a factor facility.

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Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/factoring_in_canada_working_capital_now.html

There are several key factors that influence your pricing on factoring – we would also point out that many customers refer to the factoring rate as a ‘ interest rate ‘ , while the industry itself does not position the cost of factoring asborrowing , or a loan, so therefore it is more commonly referred to as the discount rate . That is a small nuance but important for many business owners to understand.We recently met with a customer who felt his ‘rate ‘on factoring transactions was 3% / annum, when it fact it was closer to 24% per annum. Again, as we had said, the lender positions that 2% / month as a ‘discounting fee for their service.

What other factors are important in either determining if your factoring pricing is competitive, or simply to determine what your rate in fact is?Size and volume are also critical factors in your overall facility rate, and other factors include the credit quality of your customers. Also, the factoring industry in Canada is very fragmented – by that we mean that the actual factoring firms are in the following categories:

-Small and local

-Medium size and large – Canadian owned( few and far between)

-Branches of American and European firms where factoring originated and is more popular and well known as a alternative financing vehicle

So why is it important to understand how a firm is structured and who owns it? It is probably one of the least focused on areas when Canadian business owners or financial manager consider a factoring facility.They don’t necessarily care who they are dealing with, they just want a factoring facility.

What are then the differences between firms that can make your company a happy factoring client versus a dis-satisfied or uninformed client?

A solid advance rate in Canadian factoring is 90% - if your firm is not getting that amount of advance on each invoice we believe you do not have an optimally priced facility.Pricing in our opinion tends to be more aggressive if your firm has a monthly facility size of 250k – Facilities below this size tend to be higher priced and have less aggressive advance rates.The general overall quality of your receivables helps to determine final pricing.

So what is the range of discount rates in Canada – in our experience they are between 1- 4% per month? This is a huge range and only re-enforces the point that many firms do not understand where they may fit into the overall price positioning of the factor facility.

Finally, we would also point out that there are a number of miscellaneous fees that firms charge that significantly alter the final fee. These are buried deep in the body of term sheets and approval facilities, they seem nominal in nature, and add up to large differences in pricing.

Whats the best advice? Find an experienced, credible and trusted business financing advisor who can ascertain your optimal factoring facility relative to discount rate, terms, and structures.

Factoring in Canada – Working Capital Now

Factoring in Canada – as a Canadian business owner or financial manager you have heard of this type of financing but require more information in two areas:

-How does it work

-What does it cost

Naturally, even more important, is it right for your firm?Factoring in Canada is what we would call somewhat ‘fragmented’ as a business or industry. As a result many clients we meet either have entered into the wrong kind of factoring facilities, or simply don’t know where to go when they want more information. Because of that we encourage business people to enlist the aid of a trusted and experienced financing advisor in this area.

Unbeknownst to many people there are even banks in Canada, including some in the big 6 that offer this type of financing. We would position that offering as probably the best one in the industry, however ouroverall financing volumes must be very large and typically a facility would be at least in theone to two million dollar range, so that does not work for everyone .

When we refer to factoring we can make the statement it is in the general category of asset based financing – but it’s very specific in that in deals only with your account receivable.The basics of the factoring finance offering are that your receivables are purchased, as soon as you issue them, (if you wish). Legal ownership of the receivables is not longer your firms, but you have the immediate cash flow and working capital by virtue of having sold those receivables.

In our opinion 95% of the factoring in Canada involves the factor firms role in the billing and collection of your accounts – we don’t necessarily feel that is the best facility for the Canadian marketplace and encourage customers to initiate a facility whereby they get all the benefits of factoring from a financial perspective, but at the same time are able to bill and collect their own receivables. Most Canadian business owners are not looking for what we could call an ‘intrusive ‘financing facility that has their customers interacting with the factoring firm.

Canadian business probably does not realize that factoring, also otherwise known as invoice discounting, is used by thousands and thousands of firms in Canada. It has become more popular for a variety of reasons, one of them simply being that as it gets more difficult to obtain business credit in a challenging financial environment factoring itself offers total solutions to working capital and cash flow challenges. Another key point is that this type of financing has a broader appeal to companies that are either in start up phase, or growing very quickly and unable to access more traditional working capital.

A true feature of factoring is that it in effect provides you with unlimited working capital. By that we mean that if you have a traditional banking or term lending type facility it has caps and limits on it, including things such as covenants and other collateral. Since the underlying asset in factoring is just the account receivable, we can make the statement that if your receivables are continuing to grow you will always have the commensurate access to cash for all those receivables.

Most of the factoring in Canada is done on a recourse basis , so your firm ,or your factor partner, has to do some level of due diligence on your customers, although naturally every Canadian business should be doing that anyway . So if a receivable becomes uncollectible then you need to repay that amount that was advanced on that receivable.

In summary, if your Canadian firm is looking for a traditional factoring model and you don’t have concerns about your customers being notified of your factoring facility, this type of financing will suit you.

However, if you wish to maintain a total control of your billings, collections, and your interaction with our clients then consider a true working capital factoring facility – You will have all the funds you need, and your financing will not be transparent to your client based.That’s a great financing solution.

Purchase Order Financing - Canadian Solutions

Purchase Order Financing – Is it your solution to growth 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 pre payment 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.

This allows you to complete the order, generate receivables from that order, and of course collect from your customer. The financing charge is typically in the 3% range, so there needs to be a clear indication that your firm has the gross margins to support an additional cost in the 3% range. Therefore firms with higher gross margins are great candidates for purchase order financing, and they are less so if they are in a low margin commodity type business. It’s all about the gross margin!

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

- have exceeded the suppliers authorized credit limit for their firm
- the supplier is oversees and does not want to ship or commit capital to a firm in another country
- Your firm if new and has limited financial information or financial wherewithal to arrange financing of such magnitude

Remember also that your firm has what is known as a 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.

In putting 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.
One of the other advantages of purchase order financing is simply that from start to finish it can be set up in approximately 14-21 business days, assuming your full co operation on applications 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 long to complete.
In summary, purchase order 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.

SR&ED Financing – Why Wait For Your Cheque – Finance Your Claim Now

SR&ED financing is an incredible way of maximizing the whole Canadian SR&ED process in Canada.Of course Canadian business owners and financial managers can wait for their refund – there is certainly nothing wrong with that.

However, if you choose to finance your claim now you can in effect continue to maximize the overall potential of this great Canadian program. Funds can be used for immediate purchase of equipment, allowing you to maintain your competitive market position - an excellent strategy might be to use a portion of the fund as a down payment on a lease or purchase of equipment, thereby reducing your overall borrowing cost.

When we meet with business owners and financial managers one of the key questions we are always asked is how much money can be financed under a claim. That answer is that, in general, you can get 70% of your overall claim, which is, of course, the combination of both the federal and the provincial claims as a total.

Since the claim you are financing is a cash grant, and non repayable the financing you receive under a SR&ED tax credit financing is yours for any corporate purpose. So typically the funds are used for working capital, purchase of new equipment, and even the repayment of any Canada Revenue Agency (CRA) arrears that you might have if you are in the unfortunate case of owing government super priority payments such as GST, Source deductions, etc.

If you are in a position of financing two years of claim, which is the allowable backdating under the program, you can of course get immediate financing (FOR THE 70%)of the total of the two years claims . That can be very significant dollars in some cases. So as an example, you have filed a SR&ED claim for two years, the current fiscal year and your previous fiscal timeframe. Let’s say those two claims total $450,000.00 as an example. So over the last two years you have expended 450k, (probably much more) on research and development. You have had your claim prepared by a competent SR&ED consultant , and are now waiting for you technical and financial audit , which are standard during the SR&ED process .

So what is the option? As we stated it is a case of waiting, in our estimate between 3-12 months for your cheque, or, as we suggest for consideration, financing that claim now. Under of 70% rule you immediately obtain cash flow and working capital in the amount of $ 315,000.00 to use for general corporate purposes. When the claim is processed, approved and paid by the government you of course receive the balance of the 30% of the claim less financing costs. Financing costs are higher than normal business financing might be via your chartered bank, as in essence you are factoring a receivable that is due to your firm.

In order to ensure a solid and easier financing of your claim we again re state the fact that it is good to have your claim prepared by an experienced person in this area – which in some cases, but certainly not always, be your accountant or C.A. firm. We say ‘ not always ‘ because SR&ED claims preparation and analysis is very industry specific and is notwhat we would call a ‘ core competency ‘of every C.A. in Canada , and that’s an understatement !

In summary, it should probably go without saying that every Canadian firm should consider filing for their non- repayable SR&ED refund. If you choose not to wait for your government refund chq consider financing that claim now and making use of that valuable working capital for your cash flow needs. Speak to an experienced, credible, advisor in this area to initiate your claim financing.

Stan Prokop is founder of 7 Park Avenue Financial - www.7parkavenuefinancial.com
Originating financing for Canadian companies,specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details see: http://www.7parkavenuefinancial.com/SR_ED_Financing_3.html