How to Get Funding for a Canadian Franchise Loan

Successfully getting a franchise loan in Canada still remains a financing challenge for Canadian entrepreneurs who wish to pursue the Canadian dream of owning their own business. While the Federal governments key loan programme, technically called the BIl programme is the main financier, in our opinion, of franchise loans in Canada the program has come under the microscope by a number of people and different associations and bodies.

People who are actually experts in Canadian finance seem to feel strongly that the program has been mis used by the franchise industry. We certainly don’t think so, and feel it’s simply a case of presenting a clean transaction that has both business and financing merit. That is the key to successful franchise financing.

Just to give the reader a sense of the popularity of this program the government figure actually show that overall defaults under the total program involving franchise financings were 26% higher than non franchise transactions, and that the average franchise loan was 43% higher than those businesses seeking financing in a non franchised environment . That clearly evidences at least the popularity of the program.

In the uncertain business global and economic environment, of which certainly Canada Is no exception it is easy to understand how many people from all walks of life and business want to own, and therefore need to finance, a franchise .

With respect to the BIL / CSBFL programme itself (that’s the technical name of the government program) it seems quite obvious that without a government program in place a lot of franchise financing would not get done. When clients seek our advice on how to finance a franchise we point out the basics, which are simply that financing a franchise in Canada has become a challenge, and invariably needs to be a combination of a couple different types of financing to achieve full financing success . We also caution business owners to focus on two things, putting the proper financing in place to buy the business, and, oh yes, ensuring you have the proper working capital and cash flow in place to operate the business successfully in the long term, generating profits and cash flow of course.

There are many downsides to financing a franchise improperly, that’s why we caution clients to choose an experienced, trusted, and credible financing expert in this very niche field.

So let’s focus on some of the things that can go wrong in financing a franchise, and how in some cases you can avoid or manage those pitfalls. In many cases we see clients choosing a franchise too quickly, this might mean they are putting themselves in an industry they don’t know much or anything about, or in some cases the size of the opportunity and financing are just too large for them to handle.

When any business owner decides to finance a business, either at the start, or ongoing, he talks to his advisors about the proper mix of debt and equity – simply speaking how much you borrow and how much you put in. We see many cases of clients who should have entertained a borrowing or loan strategy and instead have sunk in their life savings, only to see those savings either dwindle or disappear. So whats the bottom line, it’s simply that you should assess the proper mix of debt and equity – it’s ok to borrow if it’s for the right reasons. And we can give you one good reason to borrow under the government programme, and that is that you are only obligated to guarantee 25% of the loan if your business fails. That relatively nominal guarantee happens nowhere else in Canadian business financing!

So in summary, should you buy a new or existing franchise? Quite frankly that’s your decision and we will assume you are an informed buyer who has planned. But when it comes to financing that business, let’s recap the key basics again –

- Avail yourself of the loans and programmes that are best suited to franchise financing in Canada

- Work with an expert , that’s preferable on any type of financing

- Ensure you have a proper mix of debt and equity – its ok to borrow if you borrow smart

Many say a franchise gives you a better or more proven chance of success. If you believe that finance your franchise properly and your ability to generate sales and profits and personal wealth should increase greatly.

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Working Capital Financing – Why Asset Based Lines of Credit Work

How can Canadian business owners and financial mangers secure working capital financing and cash flow financing for their business at a time when it seems that access to business financing provides significant challenges .

The answer is that a potential solid solution exists by the name of an ‘asset based line of credit ‘otherwise what we call a ‘working capital facility ‘. What is this type of financing is it new to Canada, and more importantly – how does it work and what are the benefits and risks?

Although asset based lenders tend to be specialized independent finance firms many business people are surprised to find that deep in the bowels of a few Canadian bank there exists small , somewhat boutique , divisions who specialize in asset based lending . Ironically they are many times competing with their peers down the hall in more traditional commercial corporate banking.

The most active assets these firms finance tend to be ongoing receivables and inventory, but in many cases, utilizing an expert advisor or partner you can structure a facility that also includes a component of equipment and real estate.
Generally speaking a good way to think of an asset based line of credit is one that for a temporary period, typically a year or so in our experience, allows you to margin up and get higher advances on receivables and inventory . That translates into more cash flow and working capital.

One of the main attractions of an asset based lending facility (insiders call it an ABL facility) is that your firms overall credit quality doesn’t play the largest role in determining if you can get approved for this type of financing. As its name suggest, financing is on your ‘assets ‘! And doesn’t really focus on debt to equity ratios, cash flow coverage, loan covenants, and outside collateral. Business owners who borrow from Canadian chartered banks on an operating or term loan basis are of course very familiar with those terms - in some ways we could call them ‘ restrictions ‘

Most lawyers and accountants will tell you that any type of business borrowing should in fact be entertained only with a respected, trusted and credible business financing advisor who can guide you thru the roadblocks and pitfalls of any commercial financing arrangement. Missteps in business financing can lead to long term negative effects around such issues as being locked into a facility, giving up too much collateral, or being locked into pricing that isn’t commensurate with your overall asset and credit quality .

What are the key issues you should consider when considering such a financing facility? Primarily they are:

-Advances rates on each asset category (A/R, inventory/equipment)

- How is pricing defined (asset based lines of credit and ABL lending is general is more generous in overall facility size, but you should ensure you are only paying for what you use

- Contractual obligation - in a perfect world (we know its not!) you should be focusing on the ability to pay out at any time, or at a minimum with some form of nominal breakage fee

- Ensure that the asset based lending facility , which generally costs more, will allow to you remain or focus on profitability ; we spend a significant amount of time with clients on how that can defer the additional costs of Abl facilities by several different strategies

So whats the bottom line. As always it’s simple – consider asset based lending and an ABL facility as a solid alternative for financing your business. Work with a trusted advisor as this type of financing is generally either mi understood or not too well known in Canada. Be selective in structuring your facility around issues that work best for your firm re benefits derived .That’s solid business financing sense.

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Factoring and Accounts Receivable Financing Expert Tips

There probably isn’t a day when Canadian business owners and financial managers don’t hear about factoring and accounts receivable financing as a method of financing their business in Canada. Despite its growing popularity and, we can say, relative importance in the Canadian business financing marketplace this financing mechanism is still somewhat understood.

What information do business owners need to know in order to assess if factoring, also known as invoice discounting, is a viable transaction? Also, are there mistakes and pitfalls to be avoided when considering this financing strategy?

Let’s examine the answers to some of those questions. You can be forgiven for trying to figure out why factoring has increased in prominence from a time when no one had almost ever heard of it! The answer to that popularity is more simply and obvious than you might think, and its simply that Canadian chartered banks are finding it increasingly more difficult to fund accounts receivable ( and inventory of course ) to the extent that their customers need this financing .

When you have a situation where the actual need for financing is acute, and the benefits and flexibility seems significant it is not hard to see the rise in popularity of such a financing mechanism.

First of all, 99% of the time, factoring provides your firm with a greater level of borrowing based on your accounts receivable levels. Quite of 90-100% of you’re A/R under 90 days can be financed.

So is it all good news? Not necessarily, as we are always meeting with clients that have chosen the wrong type of funding or factoring, and, even worse, find them locked into contracts they cannot get out of. That is uncomfortable for any size firm as you can imagine.

As with any newer type of financing the playing field is complex. You can be forgiven for not knowing how many factor firms are out there, how they run, what their own limitations are, and , even to a certain extent, do they in fact themselves have the funding to survive, let along finance your firm . For that reason we cannot over emphasize the need to work with a credible, experienced and trusted professional in this area.

Lets talk about some of the nuances, we can call them potential ‘pitfalls ‘also, of picking the wrong factoring partner. For a starter if you choose a firm who itself is not well capitalized, as we said, you might find that the financing commitments made to you cannot be honored. Canadian business has never had to think that the Canadian chartered banks could be ‘out of money ‘but the Canadian landscape is somewhat littered with small and medium sized factor firms that do not have the financial wherewithal to support their funding commitments in all places. That just re – enforces our idea that a trusted industry expert will guide you to the best partner for your firm.

Other issues, again, we can call them pitfalls, to look for include:

- being locked into a contract
- having the total factoring cost , or pricing, not reflected properly in your term sheet
- advance rates which don’t make sense relative to the price you are paying for discounting invoices
- excessive notification and intrusion with your customers , which is very prevalent in the U.S. model of factoring ( Many Canadian factor firms are branches of U.S. firms )

So let’s recap. It’s simply that factoring is growing in popularity. It works because it is providing funding where banks often cannot. If you don’t understand who you are dealing with and the various nuances of this type of financing it becomes a burden, not a solution. Investigate this great financing mechanism, but ensure you know what you are getting into. Talking to an expert always helps – that’s just common sense
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Working Capital Business Financing Sources

Working Capital and Business Financing in general is available to Canadian business owners and financial managers in a number of ways. When we speak to clients about their needs and answer their questions in this area it is simply a case of pointing out all the alternatives available, and discussion what features and benefits of each type of facility make the most sense for their own particular firm and industry.

The majority of working capital loans and financing alternatives are on a secured basis, but that is not the case 100% of the time. With reasonable good financial health and equity in your firm a cash working capital loan can be achieved at solid rates, terms and structures. This is general, is not the norm though, as most lending to small and medium businesses in Canada is in fact secured in some manner.

For larger corporations unsecured cash flow loans are more often than not called ‘ subordinated debt ‘ and they are term loans structured around the analysis of the company’s ability to repay based on future cash flow forecasting . For smaller firms it is simply a working capital loan that might have some covenants attached relative to ongoing profits and cash flow metrics. Again, we can summarize these offering by saying that cash flow unsecured loans are generally only available to firms that have very reasonable financial health and prospects.

In certain cases the working capital and cash flow loans we have described above often relate to the acquisition of a business, with the funding provided to acquire the business.
A more common ‘working capital loan ‘is in effect not a loan but the financing of receivables and inventory. In effect your firm leverages these assets and turns them into ongoing working capital as you create inventory and receivables on an on going basis.

Many business owners come to us and ask if there are ‘government loans ‘for working capital. The reality is that there is not anything available in Canada in that regard. The most common, successful and popular government loan program is called the CSBFL program; thousands of businesses utilize this loan. However, as we have noted, it does not provide working capital, and some business owners are dismayed when we advise them that this loan program only covers three items – equipment, leasehold improvements, and real estate.

When looking for a working capital solution there are some critical factors to assess and address. Many firms we meet can in fact cure their own working capital solutions by affecting a better turnaround in their receivables and inventory. Those are the key working capital components of any firm. If your firm has been self financing then you should consider a working capital or an invoice discounting facility. This injects immediate working capital into your company, and is not treated as a loan on your books, you are simply converting A/R, and in some cases inventory, into immediate cash.

Many business owners we meet simply don’t do even basic cash flow planning. A very simple template you can set up can easily show you what cash is coming in over the next three months, for example, and you already know your fixed and variable expenses, it’s as simple as that.

Working capital needs can be either short term or longer term in nature. The cash working capital term loan we spoke of earlier is a long term solution for permanent working capital. On the other hand the conversion of your receivables and inventory via a working capital facility via a non bank is immediate short term cash flow.

Work with a trusted, credible, and experienced advisor in this area. Assess your needs, evaluate the solution, and focus on implementing a facility based on the benefits that are derived from that type of financing. That is cash flow and working capital planning 101!

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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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