Financing Your Independent Film , Movie and Animation via Tax Credits

Independent film, television and animation players in Canada are always, it is very safe to say, looking for financing for their productions. One of the best ways to compliment your overall financing strategy in the three sectors of this industry (film/movies; television; digital animation) is to utilize your tax credits in a unique and innovative manner. Let’s explore what that is being done more and more, and some of the how to’s in this very unique area of financing in the Canadian entertainment industry.

The financing we are discussing is against the backdrop of very aggressive government assistant in this segment of the Canadian economy. Rather than back away from the sector after the 21008-2009 global economic turbulence provincial and government bodies stepped up to the bar, so to speak, and in fact increased their support in this area of the industry. Traditionally film and televison were the focus of the tax credit assistance, and recently the government has included digital animation as another key vertical in this sector of the industry.

Is there a simple explanation to the financing we are discussing? Yes there is – it is simply your ability to convert your tax credits, which have in fact significantly increased, into cash! The ability to generate cash flow and working capital from your tax credit assists you in of course completing your project successfully, and at the same time ensuring stakeholders such as owners, investors, and debt holders view the project as financial viable a mutually profitable for all stakeholders. That’s a good thing.

Tax credits have been available in many countries, including the U.S. for years. We can surmise the governments have supported these strategies to help ensure the overall competitiveness of the industry. Clearly the revenues generated by the industry from box and gate receipts, let alone labour and production spending are very significant.

So what does the strategy entail? Simply speaking you should ensure you are working with a trusted advisor in this area – someone with credibility, experience. At the same time you should ensure you are filing for eligibility under any one of 6 tax credit available, using the province of Ontario as an example. Tax credits are available of course in other provinces also, with B.C. and Quebec industry segments flourishing equally as well.

Proper planning is the key to financing your tax credits, and if you can prove you have a solid budget and finance plan , along with management and operational capability you can even ‘ pre-finance ‘ your credits in most circumstances . Again, credibility is the key here, and a track record in the industry is not 100% mandatory, but certainly helps.

Financing is made similar to the concept of ‘mortgage lending ‘i.e. on a loan to value basis. Typically you can expect to receive anywhere from 40-80% of your tax credit claim in cash. Factors that affect this amount are the timing of your filing, the quality of the filing, and of course the amount of the claim.

Naturally the ‘pieces ‘of the complex film/ tv/animation financing puzzle can be complex – whether they are bank financing, gap financing, distribution sales, and of course our own tax credit financing strategy. Film, TV, and animation Tax credit financing is a great way to complement the other pieces of the entertainment financing conundrum.

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Canada’s SRED PROGRAM - Cash Flow via Tax Credit Financing

The Sred program for tax credits is one of a small handful of government programs in Canada that in a very direct fashion turn credits into real cash flow and working capital that is non repayable . When business owners find out that they don’t have to wait anywhere from 3-12 months for their refund, and that they can discount, or monetize that tax credit now they are pleasantly surprised.

The question then becomes simply understanding the mechanics and benefits of such a financing – i.e... answers to the basic questions –

- How much can I get?
- What does it Cost?
- What is involved?
- What are the benefits of financing my tax credit now versus waiting for the cheque from the federal and provincial governments in Canada

Let’s cover off some of the answers and the basics you need to know to make an informed decision in this regard.
Business owners that either have prepared SRED claims in the past , or who are preparing them for the first time are always advised by their accountants and sred consultants as to how much the claim will be for . The reality is that this claim is filed at the same time you file your corporate tax return. If you have highly confident that you will receive the full amount of your claim we see many clients actually booking this future cheque as an ‘ account receivable ‘ – i.e. money that is due their firm just as if it was a sale to a customer .

So when you finance that claim you are dealing with an absolute amount. But the one thing to understand is that generally advances under the SRED tend to be in the 70% range based on the total value of the claim. So for example $ 300,000 dollar claim filed by your firm has the potential to net you 210,000.00 as a working capital loan should you choose to cash flow or monetize that claim now.

Although we see some claims as much as a million dollars from clients, the reality is that most claims tend to be in the 200 – 500k range, some smaller, some larger .

On to costs. Generally the overall size and quality of your claim, coupled with the amount will dictate the costs of financing the claim. A few key points should be kept in mind, and they clearly are in the category of ‘benefits ‘. That is to say that when you undertake a SRED loan you receive 70% of the claim immediately – there are no payments made unlike a regular loan, and you receive the final 30% of the claim when the refund is made by CRA, or, if you choose, when they indicate in writing or via their technical audit that the claim has been approved. The financing costs are deducted out of this final 30%. So clearly the overall benefit of financing your SRED claim revolves around taking that cash and working capital and putting it to work in your business right away. Putting those funds to work might mean acquiring new equipment, reducing payables, investing in sales and marketing of your product services, etc.

A tax credit sred financing loan is not unlike any business financing. An application with typical business background data is completed , one of the key additional pieces being of course the actual sred claim you have filed, and , in some cases, proof of your success in previous years . We advise clients the whole application and diligence process takes about 2- 3 weeks, so if you are focused on financing your sred claim you should undertake your sred financing negotiations as soon as you have made up your mind to finance the claim.

Everyone agrees the SRED program is the government’s way of encouraging in a measurable way (their cash back to your firm!) research and development. If you have filed claims in the past, or are filing for the first time you should also investigate the benefits of financing your claims. Its non repayable money – why not put it work as early as possible to grow sales and profits and improve you overall financial picture. That’s a solid business financing strategy.

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

Franchise Loan – A Franchise Financing in Canada Primer

A franchise investment you are considering in Canada is clearly one of the large business and personal decisions you will make . Is Franchise Finance available in Canada, and if it is, how does it work?

Clients are always asking us how franchise financing works . Typically, and hopefully !, they have made a substantial time investment in the selection of a franchise . This more often than not seems to be in the restaurant business, but in reality there are hundreds of other franchise opportunities available to the Canadian entrepreneur. Many prospective franchisees we meet have come from the corporate or ‘job’ world, and are looking to be independent business people in command of their own life and financial destiny.

There are two schools of thought in Canada around actual financing your franchise investment –

School of thought # 1 – Financing the business will be difficult
School of thought # 2 - Financing the business will be easy

I think the reader knows the answer, which is simply that there is a little truth in both statements. The reality is that there are only 5 methods of financing a franchise in Canada and the successful completion of a transaction is always one or a combination of those types of financing

What are the 5 types of financing for your new business – We will keep it simple. They are:
1. Government financing under a special loan program that suits most franchises
2. A working capital term loan
3. A vendor takes back from an existing franchisee you are buying the business from, or the franchisor
4. Equipment financing
5. Your own personal equity investment into the business (It can’t all be other people’s money)

There is a common perception by our clients that banks and lending institutions are reluctant to finance a franchise. That is not the case, but does involve showing that you are properly prepared. More often than not you should be spending time on the financial planning aspects of your business. This can be done by utilizing simple cash flow templates.

Sit down and estimate how much monthly revenue you will generate. Now, let’s look at expenses. We like to start off with an estimate of what you want to draw out of the business every month as a salary. Then simply go down a list of expenses that seem to be realistic in the new business. Typically those items include basic things like your costs of sales or inventory, advertising, wages to any employees, accounting fee, phone, utilities, etc,etc,etc,

At the end of that quite simple exercise you will be left with either a profit of a loss. We would suggest that if you are left with a significant loss that you reconsider the investment. However, if you are within the striking range of both paying yourself and creating a small profit then you probably have a reasonable franchise risk investment.

Other factors to consider are the amount of your own investment in the franchise. It does not make sense to over invest in the business, but there is a fine line between what you put in and what will then create somewhat of a comfort buffer in case sales don’t materialize as quickly as you want them to. Remember Murphy’s Law, which is ‘what can go wrong will’.

In summary, how to finance your franchise is often as critical as picking the right one. Plan carefully, assess which of the 5 options, on their own or together might work for your franchise acquisition, and sit down and carefully work out a realistic profit and cash plan. If necessary work with a trusted, credible and experienced advisor who can assist you in this unique area of Canadian business financing.

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

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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