Working Capital Financing for Canadian Business

Canadian business owners and financial managers know that working capital planning and assessment are key any businesses growth. The term working capital is used in various contexts, and at the end of the day is simply a synonym for operating liquidity.

Text books tell us that there is a clear definition of working capital, namely going to your balance sheet and subtracting current liabilities from current assets. That’s a great textbook definition, but let’s visits the real world together on what that means.

Your working capital allows you to plan and pay for your daily operating needs, plus of course to reduce your long term obligations that you might have in leases or loans. The absolute number of dollars in your net working capital as defined by our definition above does not really matter. (Although positive working capital is better than negative working capital!)

What is important is the turnover and management of your working capital accounts – those accounts are:

Inventory
Receivables
Account Payable

Simple business logic tells us that if your inventory and receivables are turning over properly, and you’re managing your payables (by delaying them to the maximum amount possible per your terms with suppliers) you will be achieving working capital management success.

When you business is building up receivables and inventory the pressures on liquidity are increased. They can only be addressed by injecting permanent working capital into your business via a working capital term loan, also called “subordinated debt ‘when it’s a larger loan, or by implanting traditional or alternative financing strategies to increase cash flow turnover.

So what are those options to managing and improving your short term working capital and cash flow requirements? The most traditional one is of course an operating line of credit from a Canadian chartered bank or credit union. This type of facility has the lowest overall cost and can be accessed anytime on an ongoing basis.

Many clients tell us that they address some of their working capital needs through use of Business Visa credit cards. This clearly adds additional capital, you are paying for what you use, but in our opinion does a poor job of separating the owners personal credit from the business – as these types of cards are closely tied to personal net worth’s and credit scores of the owners.

Two other very viable solutions come into play for consideration of working capital gaps. They are the use of factoring, which allows you to generate same day cash flow for your invoices, although you pay a discount fee to get the money immediately. While somewhat unheard of in previous years this method of financing gains more traction everyday.

The other solution in a more traditional sense is to ensure you are using lease financing or sale leaseback financing to minimize cash flow out when you are considering purchases of assets. Solutions such as this save the business owner from committing additional funds into the business via owner equity which he may not be able to, or not want to do. It certainly isn’t unusual in Canada to see business owners ‘lend ‘their company money in times of need, often with no fixed repayment schedules. However, as we have noted, the better solution is effective turnover of receivables and inventory or accessing alternative working capital solutions such as factoring, inventory financing, as well as purchase order financing for large contracts.

In summary, business in Canada always has working capital challenges. Those challenges are diminished when you are focusing on proper turnover of A/R and inventory. When additional funds are required you should turn to operating facilities to meet your needs, which can be traditional or alternative in nature. Speak to a trusted and credible business advisor to understand which options make sense for your firm.

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Stan Prokop is founder of 7 Park Avenue Financial. 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 :
http://www.7parkavenuefinancial.com/working_capital_financing_canadian_business.html

Equipment Leasing – Canadian Solutions

Equipment leasing in Canada is a trusted and well worn way to acquire assets for your Canadian business.Leasing has always been popular in Canada – it continued to be a dominant method of equipment acquisitionduring the 2008-2009 economic woes because it was an alternative form of financing to many traditional areas of business financing that had temporarily dried up, or in some cases ‘ disappeared ‘!

We can’t think of any business asset that can’t be financed via leasing. It goes without saying that your firm has to demonstrate the ability to pay for that asset over the period of the lease.In many case acquisition of assets through lease financing is part of a long term strategy for Canadian business owners and financial managers who wish to ensure they have productive, up to date assets that are being acquired at the lowest cost method, including flexibility that often comes with lease financing.

What is that flexibility? It comes in various forms – some of the basics are flexible payment arrangements,a term in the lease that meets your firms anticipated use of the asset, and, probably as important as anything, a lower cash outlay for the acquisition of the asset.

As bank lines and term loan facilities in Canada tightened up a lease financing strategy become ‘job one ‘for many Canadian firms who wished to continue to remain competitive within their industry.As analysts and bankers focused on a company’s ability to generate cash and working capital leasing became a tool that allowed them to do that. Cash flow is probably better used to allow your firm to build up receivables, inventories and generate profits from same.

When clients share their stores about equipment financing one of the key points they continue to make is that lease financing is simply easier to arrange and get approved. That is true for a variety of reasons, but simply speaking it’s that lease firms are in one business only, they know their collateral, and they are focused on optimizing rates, terms and structures that work for themselves and the customer. A large amount of emphasis is always placed on collateral, while a similar application at your bank or term lender might focus more on overall balance sheet and income statement health.

That is simply why in many cases Canadian business owners and financial managers should assume that a decline from a bank or term lender will mean the same from an equipment financing firm. In some , perhaps most cases leasing actual overall interest rate will be higher than a bank or term lender, but cash outlay, credit covenant restrictions,and flexibility structure make that higher rate generally worth it !

If you speak to your account or lease advisor you will also find there are a number of balance sheet, income statement and tax advantages to leasing equipment. We find that each firm wants to maximize those benefits but some are more important than others. More sophisticated and larger firms tend to gravitate toward operating leases – in this case transaction tend to be larger, the debt on the transaction is not on the balance sheet, and the company has the right to return, upgrade, or purchase for fair market value the equipment at end of term . That is true flexibility!

Your firm should always consider a lease financing strategy when your asset acquisitions involve technology. That technology is changing and your ability to buy the best, newest, as and when you need it is why lease financing is such a driver in technology asset acquisitions. Those assets tend to be computers, medical equipment, etc.

Down payments are often required in leasing, but they tend to be minimal – 10% is a common number, and that certainly beats an outlay of valuable cash and working capital of 100!

The main challenge and focus of your firm should be to ensure you, or your trusted lease financing advisor position your application properly. That involves a solid identification of who your firm is, what asset you wish tot acquire, the structure desired, and most importantly, the ability to show that the weight of evidences suggests you can pay for the asset over the desired term. Solid financial statement presentation is key.Working with credible lease advisors and lease firms is also key – fostering a long term relationship in that area will reap many benefits over the years.

In summary, equipment leasing in Canada provides a multitude of solutions for asset acquisition. It’s a direct way of acquisition without utilizing your bank and term loan credit lines. Flexibility is key in leasing, and you should focus on which benefits and structures work best for your firm as every company and industry has different business models and challenges.

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Stan Prokop is founder of 7 Park Avenue Financial. 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 :
http://www.7parkavenuefinancial.com/Equipment_leasing_canadian_solutions.html

– Sale Leaseback Financing Canada

Canadian business owners and financial managers realized in 2008-2009, despite economic and financial challenges, that they had significant equipment and assets that were available to generate additional working capital and cash flow for their firms.In essence they were equipment rich and cash poor, as a significant amount of assets was tied up.

How can your firm free up the cash flow and working capital in these assets and put those funds to work for sales and profit generation? The answer is a sale leaseback strategy.

In many instances if you owe money on the equipment those payments can be stretched out to lower amounts, and at the same time improve working capital and liquidity.

Is it difficult to engineer a sale leaseback financing. The answer is categorically no if you employ a trusted, credible and experienced advisor in lease financing in Canada.

The one caveat that we warn clients on is that the sale leaseback should not be greater than the book value on your financial statements of the asset being financed.

If in fact that value was greater you would incur a tax on the financing which might negate the positive aspects of the sale leaseback.

So how do you get your sale leaseback financing completed? In effect you are selling your equipment back to the lease company, so you are required to prepare an invoice and a bill of sale. That invoice of course means that you are warranting that the equipment is free and clear of liens and that you have valid title to the asset.

So how does the lease company register their interest in your asset? In Canada they do this under a simple filing under the Personal Property Security Act – ‘PPSA ‘.

There are a large number of assets that actually hold their value, sometimes increase in value, and in some circumstances only depreciate a modest amount. In that case we recommend to clients that they invest a nominal amount in an appraisal – this may well generate a larger amount of working capital and cash flow coming back into your firm. Prudent customers will generate an appraisal known as a fair market value appraisal – unfortunately many lenders will focus on a liquidation value appraisal, which is of course much more conservative .

Are there different documents used in a sale leaseback transaction? No! They are the same lease type of documents that you would expect in any type of equipment financing transaction.

Carefull attention should also be paid the ‘type ‘of lease that you consider in such a transaction. You essentially have two choices in Canada regarding such a structure; they are capital leases and operating leases. If you choose the former you have a stated intention to own the equipment again when all payments have been made; an operating lease signifies your intention to use the equipment, upgrade it, or return it at the end of term. Each of these two types of structures has different balance sheet and income statement effects.

In summary, sale leaseback financing allows you to generate working capital and cash flow from unencumbered assets. It can be done for any asset, including real estate by the way. Work with a trusted, credible, and experienced lease advisor to ensure you structure your transaction properly for maximum cash flow and working capital gain.

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http://www.7parkavenuefinancial.com/sale_leaseback_financing_canada.html

Factoring in Canada – Receivables Financing that works!

Factoring in Canada is four things:

-New and increasingly accepted

-Misunderstood

-Different than in the U.S.

-Growing more popular every day as an alternative vehicle to business financing

Canadian business owners and financial managers keep hearing about factoring , and when we talk to clients who are pursuing this financing option it is increasingly clear there is a lot of mis information and‘ noise ‘ about this unique type of financing that needs to be clarified .

So why is there so much mis information about factoring and how can business owners in Canada get the ‘real story ‘. Part of the problem is that factoring, in our opinion, means different things to different people, both within the industry itself, and also to the Canadian business owners. Similar to the terms ‘ cash flow ‘ and ‘working capital ‘the use of the term is interchanged in a variety of ways .Also, factoring isn’t a home grown solution, and migrated to Canada from the U.S. and Europe, where it has been in place for hundreds of years.

Factoring, also know as receivables financing, or ‘ invoice discounting ‘ is best utilized when firms are growing rapidly, have sales and verifiable invoices, and require injections of working capital for that a/r investment that otherwise might not be available through traditional sources such as the bank .In 99% of cases that we deal with where a client is a ‘ start up ‘ the initial financing through a factoring facility is a critical and valuable tool in the early growth of the company .

Let’s get back to the confusion around factoring. Traditional factoring in Canada is in fact simply the sale of your receivables, and their purchase to a factor firm. The most immediate benefit is the immediate receipt of cash, which eliminates the need to wait for anywhere between 30-90 days for payment from your customer. Over the years it is inherently obvious that every firm out there recognizes that delaying payments to your suppliers is an instant form of cash flow. However, when you are on the receiving end of that, waiting for your money, that is poor consolation!

Does your business receive 100% of the invoice value when you sell your invoices either individually, or bundled in a larger amount of invoices? The answer is ‘no’ – You generally receive on the same day anywhere form 75-90% of the invoice value. The balance is held back as a hold back or buffer, and paid to your firm immediately on final receipt of payment from your customer. At that point factoring would be ‘free ‘, but it isn’t, there is a further deduction for the commission or financing cost by your factor firm. That cost is one of the greatest issues facing Canadian business owners, because it is anywhere in range from 9%/annum to 2-3% / month.

The costs associated with factoring in Canada have to be viewed in the context that although they are higher than traditional bank financing that point becomes moot because your firm probably cannot qualify at this point for a true Canadian chartered bank operating facility. So factoring simply allows you to grow your firm when you can’t obtain sufficient financing otherwise.

So now we have understood what factoring is, and why it has become a tool within the Canadian business financing tool kit.That’s the easy part. The challenge for Canadian business then becomes –

-What type of firm is the best one for my company and industry

-How does this financing work on a daily basis

-Am I comfortable enough to let the factor firm notify my customers regarding invoice verification and payment

-Is there an alternative to involving my suppliers and customers into this financing process

We advise clients that the best factoring facility in Canada is one in which your firm can bill and collect its own receivables. That type of facility is called non notification and is as close to traditional financing mechanics as one can get.

So whats our bottom line summary – it’s simply as follows. Factoring in Canada is only mis understood because business owners don’t have access to solid unbiased information on how it works, what it costs, and how it benchmarks as an alternative to traditional financing. Certain factoring facilities in Canada exist that are very transparent to your firm and its customers. Factoring has higher costs, but those costs can grow your sales and profits considerably. Seek out the advice of a trusted, credible and experience advisor in this somewhat misunderstood area of Canadian business financing.

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http://www.7parkavenuefinancial.com/Factoring_canada_receivable_financing_that_works.html

Film , Television, and Animation Tax Credit Financing Canada

Growth in film, TV and animation productions in Canada is very strong in 2010. The planets have aligned via an improving economy, a generous increase in the tax credit themselves, and more access to cash flow and working capital for these productions via creative financing.

Although the Canadian dollar is as strong as it has every been the reality is that talent continues to migrate into Hollywood North.

How can your tax credits be financed? Why should you consider financing them? We can categorically say that there is financing available for your Canadian productions and in some cases co-productions. Owners of these productions, often set up as SPE ( Special Purpose Entities ) should consider financing when they see a need for interim working capital to complete the current project, and , in some cases, to monetize the tax credit , allowing the owners to move on to another project . Both cases make good business sense!

The changes by the federal and provincial governments in Canada have been viewed unanimously as very positive for the industry. Grants and tax credits have been increased, and these vehicles have become an important add on to the traditional debt, equity, and distribution financing for Canadian productions. To some extent some of the Canadian banks have also started to get involved.All of these financing vehicles are the alternative to previous strategies such as tax shelters, which are no longer in vogue, and in fact not even currently legislated .

To finance your film, TV and digital media credits it is important to seek out the resources of an expert, which will save your production time, and at the same time allow you’re to maximize the cash flow of the tax credit. Utilizing the appropriate party can also potentially allow you to finance your credits on an accrual basis, which simply means that eligible productions can be financed all along the way – providing an even more immediate monetization of your future claim . That in it can be extremely valuable as a cash flow ‘super charger ‘to your Canadian production.The huge amount of new content in Canada via Canadian productions, co-productions with other countries, and the massive amount of new cable channels, etc bodes well for financing availability.

How do you go about financing that credit? The basics have to be followed. And, as noted seek out the services and expertise of a solid advisor in this area. Ensure your production is properly incorporated and that your have a system, infrastructure, and resources available to document your project from an accounting, payroll, and tax credit filing point of view. Also, ensure you appropriate tax filings for your productions are up to date.When these key elements are all in place you can receive financing, either after your tax credit has been filed (and potentially before) for up to 80% of the final claim value. Financing amounts differ based upon traditional analysis of management, owner’s background, quality of your actual filing, etc.

In summary, owners of individual productions in Canada should make an all out effort to ensure they qualify for and file for any one of the 6 tax credits available. Credits and filings vary a little from province to proving. Bottom line is they are generous. Your credits can be monetized to generated immediate cash flow and working capital for your production. If you need additional or interim financing is needed seek an expert to finance your claims.

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http://www.7parkavenuefinancial.com/Film_Television_and_Animation_Tax_Credit_Financing.html

SRED Financing – SR&ED Finance Loans in Canada

SRED Financing is your firm’s ability to take immediate cash flow and working capital advantage of our SR&ED tax credit claim. This program, (formal name = Scientific Research and Experimental Development) is bar none the best tax incentive program in Canada. Other than being taxable as income the refund you receive from the government is a non repayable grant. What could be better than that?

The irony in this great program is simply that almost 70% of companies in Canada that are eligible for the program do not even apply, let alone receive their funds!! It clearly is a source of untapped cash flow and working capital for your Canadian business that should be maximized to the hilt.

The other 30% of Canadian firms who use the program utilize it around their efforts to develop new products and services, building prototypes, and solving technological challenges.

So your Canadian controlled private company utilizes and files Sred filings. Did you know your claim can be financing immediately after you file it, literally the same day. Specialists that work as ‘SR&ED consultants are experts in preparing your claim and in Canada your sred calim can be prepared at your cost – and you keep all the proceeds of the government grant, or alternatively, your claim can be done on a contingency basis, at no cost to yourself, and the consultant usually keeps anywhere from 10-30% of the total refund received.

However most Canadian business owners and their Sred consultants do not know that your claim can be financing, either during the preparation of your claim, (yes, before your file, if you qualify!) or immediately on filing of your claim.

Generally with this type of financing you receive immediately approximately 70% of the value of your claim. The other 30% still comes back you of course,but its simply a bit of a buffer to cover financing costs and any risk that a portion of the claim will be disallowed or clawed back .

When we think in terms of specialty financing we can categorically state that SRED financing is specialty financing in Canada. We urge clients to locate a business financing advisor who has credibility, experience and background in this area.

The SR ED financing process is not as complicated as you seem if you are well prepared and have access to good assistance. Its as simply as completing a basic business financing application, ensuring proper back up is in place and valid . That includes info on your company, the Sr Ed claim itself, your previous Sr Ed claims if you have filed previously etc.

The reality is that SR ED financing can be completed within 2-3 weeks of starting the process. The beauty of this type of financing is that no payments are made on the sred loan. In effect you can say that you have factored or discounted the Sr Ed claim. You are simply waiting for your cheque from Ottawa, and are making use of the working capital and cash flow now. That’s a solid interim financing strategy for many firms, and that cash can be used for reduction of payables, investments in new equipment, additional staff, etc. The bottom line = any general worthwhile corporate purpose.

In summary, of course ensure you are taking advantage of Canada’s Sr&Ed program. Once that is the case you have the option of financing your claim, allowing you to maximize the true benefits of the program, i.e. the recovery of your R&D expenses in the most time efficient manner possible. That’s a solid financial strategy.

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http://www.7parkavenuefinancial.com/sred_financing_sred_finance_loans_canada.html

Financing a Franchise in Canada

Clients who are contemplating purchasing a new or existing franchise in Canada are always asking how financing a franchise works in Canada.The Canadian franchise industry is of course huge and covers almost every type of business in Canada. Certainly the majority of franchises seem to be in the Hospitality and QSR (Quick Service Restaurant) industry, but in actuality every type of business has some sort of franchise model attached to it. The franchise concept is many an entrepreneurs’ answer to the Canadian dream of growth and profits through business ownership and self employment.

It should not come as a surprise to Canadian entrepreneurs that there is no one single option of solution for financing a franchise in Canada. The reality is that a number of possibilities exist, and in some cases you must use a combination of these sources to complete the financing successfully.

The main source of financing in Canada for franchising is a government ‘subsidized’ and ‘guaranteed ‘loan from the Federal government. The program has two names, the CSBFL, and the BIL. These are acronyms for the government’s formal name for the program.

We firmly believe that this is the best program, bar none, for rates, terms, and loan structures in Canada. While the program is available and applicable to all Canadian businesses the majority of businesses in Canada that are franchised fall under this program.

That’s the good news, the less than good news is that in many cases you cannot totally complete your business franchise purchase with this loan financing on it own. Why is that? Simply because the program is structured and has limitations on what can be financed.

What can be financed under this program? The answer is 3 items only-

Equipment

Leaseholds

Real Estate

So if your acquisition of a new franchise involves anything other than these three items additional financing sources are needed.Those additional financing sources tend to come from your own personal resources, otherstructured term loans, and in some cases a vendor take back from either the franchisee you are buying theexisting business from,or potentially the franchisor itself . Don’t focus too much on the latter because in case you haven’t guessed by now, franchisors or master franchisors are interested in selling you a franchise so they can build another franchise unit into their network! They aren’t in the finance business per se.

The benefits of the franchise loan structure of the BIL/CSBFL program are significant. For a starter they carry only a 25% personal liability, and secondly the rates (3% over prime) (In 2010 Canadian primes continues to be very low!) are excellent. Under the spirit of the program the loan finances 90% of your eligible expenses. But don’t think that only a 10% equity or personal investment by yourself is going to get you approved. You should in general be thinking of anywhere between 25%+++ as your own personal contribution to the business.

In summary, financing a franchise in Canada is a unique specialty type of financing.You don’t want to do it wrong the first time and endanger your prospects of success by poor planning and mis information. Speak to a trusted business financing advisor who has credibility, experience and background in this area of Canadian business financing. With proper planning and assistance you will be on our way to achieve the Canadian dream of business ownership through the franchise model.