Discounting Invoice Factoring Financing in Canada

Invoice discounting, also known as factoring in Canada has significant advantages for Canadian firms seeking to improve cash flow and working capital generation.

This method of financing is essentially a form of asset based lines of credit – your firm is leveraging assets to maximize cash flow.

Factoring and invoice discounting firms are playing a larger role in the overall climate of business financing in 2010 – coming off very challenging years ( 2008-2009) as the global meltdown severely hampered small and medium sized firms ability to raise financing for operating capital needs .

Borrowing against accounts receivable is a very simply way of leverage assets, without taking on additional debt to your balance sheet, and converting a/r into cash – allowing your firm to reduce payable and invest in ongoing growth and profits .
Some clients continually ask us if there are negative aspects to factoring. The reality is that there is no one single perfect solution for any firm considering working capital financing – the reality is of course there are pros and cons to every method of financing your Canadian business. So the recommendation we provide is simply, ‘ caveat emptor ‘ – or to translate that Latin phrase into plain English - investigate invoice discounting and factoring and determine if the benefits of that type of financing can help you survive and prosper !

When you secure an invoice discounting or factoring facility you have new flexibility in a number of areas – you have additional cash for one thing, and ‘cash is king’ has never held so much importance as a business catch word .
Many Canadian firms have seized the day and taken the global financing challenge head on and in effect capitalized on this opportunity – they have acquired a competitor, merged with a synergistic partner, or in some cases engineered a management buyout. Factoring or invoice discounting can assist you in any of those strategies.

More often than not funds acquired through a factoring facility are simply used to reduce payable, or help to affect a business turnaround after a firm has had a very difficult year. In some cases traditional financing has been curtailed, and leverage of cash flow via factoring has emerged as the only option to business survival. In the direst cases factoring or a full asset based line of credit has helped many a firm in fact survive the bankruptcy or re organization process.

Invoice discounting works because it immediately frees up cash in your receivables – this helps to increase sales and allows your firm to invest in additional inventory – the cycle of course continue as this inventory is again converted into a receivable, generating further profits for your firm .

Many times smaller and medium sized firms cannot take advantage of the strategies that larger firms utilize to liquidate receivables – they don’t have the funds to invest in corporate credit and collection personnel, as well as sophisticated cash management and planning. So, by utilizing factoring and invoice discounting issues such as being ‘too small ‘, or ‘too new a firm ‘hold little relevance.

Many Canadian firms adapt formal U.S. or European methods of factoring – careful investigation, best achieved by working with a trusted and credible advisor, will allow you to find a facility that meets your long term needs. In a perfect world we recommend to clients that they seek a facility that provides maximum loan to value on receivables, can incorporate inventory as some additional component of financing, and, most importantly, allows you to bill and collect your own receivables.

Is factoring or invoice discounting the optimal solution for your firm? Weight the benefits, understand the costs and business processes, and determine if this form of Canadian Business Financing is right for your firm.

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Small Business Inventory Financing in Canada

Small business inventory and purchase order financing in Canada is a much sought after yet widely misunderstood aspect of business financing in Canada. This type of financing is sought after by retailers, manufacturers, and wholesalers in all aspects of Canadian business products.

Business owners and financial managers know that maintaining inventory necessities the tying up, by necessity, of valuable working capital and cash flow. When your own resources, or the unavailability of Canadian chartered bank inventory financing do not meet your needs you need to assess, examine, and consider working with an independent commercial finance firm that specializes in inventory financing . This is a sub set of what is known as asset based lending in Canada, and the industry continues to gain broad appeal after the global economic crisis of 2008-2009.

To be able to finance your inventory is must be saleable, and a specialized firm that understands both your industry and the true value of inventory quickly becomes a valuable asset and ally. It goes without saying that the inventory lender must be able to properly secure the inventory asset via a proper lien registration on this component of your current assets.

Many clients we meet have bank financing in place, but quite often if cover receivables and only a small portion of inventory. Therefore inventory financing, and its ‘sister ‘– purchase order financing must be properly secured and broken out of your total current financing strategy. We have seen many cases where clients were receiving no, or modest advance against inventory, yet have then seen the margining on their inventory go to 50 – 80% in some cases when they have secured a true inventory financing program

The inventory of your firm becomes a clear identifiable and valuable asset in your overall financing strategy. In many cases bank financing treats inventory as simply bolstering up the overall bank security, but your true borrowing or margining power is somewhat insufficient based on your growth an customer fulfillment needs .

There is a combination of an art and science as it relates to inventory financing. Inventory is monitored regularly; usually a minimum of monthly, to ensure that is always can satisfy repayment of the loan. If you are a wholesale or distributor inventory is one of the largest assets you can leverage, and improving that leverage simply adds cash flow and working capital to your overall financing strategy.

Inventory becomes a receivable after it has shipped, so both your firm, and the inventory and purchase order lender want to understand your total cash conversion cycle – that is simply a financial phrase and formula that relates to how long it takes a dollar to go from product purchase, inventory, receivable collection, and back into true cash. Naturally this formula repeats itself over and over, and we encourage all business owners to understand their own cash conversion cycle. Even modest improvements in both inventory and receivable turnover can lesser your overall borrowing costs significantly.

The bottom line on inventory financing is that it is a specialized form of finance. Work with a trusted, credible expert. If your firm has a reliance on inventory to be successful you should investigate your ability to maximize and leverage additional financing on what is probably the largest asset on your balance sheet

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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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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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