Inventory and Purchase Order Financing Solutions for Canadian Firms

For many Canadian business owners growing sales and profits is not always the biggest challenge, it’s locating business financing in Canada a can satisfy inventory and purchase order requirements from their customers.

When traditional financing doesn’t necessarily satisfy your firm’s ability maintain thee right levels of inventory, and satisfy those large new customer purchase orders and contracts than an inventory and P.O. Financing facility might just be the solution.
Clients we speak to like the concept but always ask – ‘How does this type of financing facility work?’ . We can use a basic example that reflects the power of this unique financing tool. Let’s assume you have an order, contract, purchase order, etc from a valued new or existing client. The challenge, mainly due to the size and or timing of the order, is of course how you purchase and maintain the level of inventory to satisfy those client needs.

When you use an inventory or purchase order financing facility your vendors or suppliers are paid directly by the inventory financier. Generally speaking up to 75% of the value of your order can be financed via a payment to the supplier. That 75% number is key, because in the example we are using I reflects that you probably have at lease a 25% gross margin on the sale of your products. Generally speaking at least that amount of margin is required to efficiently and properly complete an inventory or financing transaction. That is because the remaining 25% acts as both a buffer to the lender, as well as it allows some of your margin to be paid out as a financing fee of course , for the business risk and cost to finance your inventory/project .

Generally inventory finance lenders prefer to be paid as soon as you ship and create a receivable for your goods and services. That necessitates ensuring that you have a receivable financing facility set up with either you bank or a receivable financing/discounting firm.

What is the key benefit of such an inventory or p.o. financing facility? It is simply to remove a huge part of what finance people call the conversion cycle. If you don’t know the term we are very sure you know ‘the feeling ‘. It is the feeling of knowing that in a normal environment, if you were fully financed, that you would be waiting anywhere from 60-90 days, (sometimes more, sometimes less) for a dollar of your services to move from time of receipt of purchase order, your purchasing the inventory, your finishing the inventory, and then billing and waiting another 30-60 days for payment. The inventory finance facility helps to significantly lesson that amount of time as you can imagine.

That is why growth and the ability to carry inventory, (and receivables) are often the biggest challenges to Canadian business owners who are focusing on increased sales and profits.

Inventory and purchase order financing focuses on the transaction, and focuses less on the fundamentals of your company. Naturally the facility works best when you can validate that your firm has strong management, good profit potential in your orders, and the ability to successfully deliver and get paid to clients who are generally known or credit worthy. Financing for clients who sell to the ‘big box ‘stores are commonplace in inventory and P.O. Financing – think ‘Wal-Mart’.

Remember also that the financing facility we describe above delivers on working capital and cash flow, but is not a term loan per se, so no additional debt is on your balance sheet – you are simply monetizing your inventory, receivables, and purchase orders in order to complete our full ‘ conversion cycle’ of order  inventory  Receivables Cash .

When you can duplicate that process over and over and shorten the total time outstanding you have successfully utilized one of the most unique financing alternatives for Canadian business.

Speak to a trusted, credible and experienced advisor in this area if you have an inventory financing need. Ensure you understand timing, costs, how the facility works and whats required. You might find that it’s the perfect solution for growth and profits.

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Film Financing In Canada via Tax Credit Loans

Film financing in Canada (we’re including television and digital animation productions) has significantly benefited from the Canadian government’s very aggressive stance on increasingtax credits, which are non- repayable.

Unbelievably, almost 80% of U.S. productions that have gone outside of the U.S. to be produced have ended up in Canada. Under the right circumstances all these productions have been, or are eligible for a number of federal and provincial tax credits which can be monetized for immediate cash flow and working capital.

How do these tax credits affect the average independent, and in some cases major studio production owners. The reality is simply that the government is allowing owners and investors in film, television and digital animation productions to get a very significant (on average 40%)) guaranteed return on the production investment. This most assuredly allows content owners of such productions to minimize the overall risk that is associated with entertainment finance.

Naturally, when you combine these tax credits ( and your ability to finance them ) with owner equity , as well as distribution and international revenues you clearly have the winning potential for a success financing of your production in any of our aforementioned entertainment segments .

For larger productions that are associated with well known names in the industry financing tends to be available through in some cases Canadian chartered banks (limited though) as well as institutional Finance firms and hedge funds.

The irony of the whole tax credit scenario is that these credits actually drive what province in Canada a production might be filmed.We would venture to say that the overall cost of production varies greatly in Canada depending on which province is utilized, via labour and other geographical incentives.Example – A production might receive a greater tax credit grant treatment if it is filmed in Oakville Ontario as opposed to Metropolitan Toronto.We have often heard ‘follow the money’ – in our example we are following the (more favorable) tax credit!

Clearly your ability to finance your tax credit, either when filed, or prior to filing is potentially a major source of funding for your film, TV, or animation project.They key to success in financing these credits relates to your certification eligibility, the productions proper legal entity status, as well as they key issue surrounding maintenance of proper records and financial statements .

If you are financing your tax credit when it is filed that is normally done when principal photography is completed.

If you are considering financing a future film tax credit, or have the necessity to finance a production prior to filing your credit we recommend you work with a trusted, credible and experienced advisor in this area. Depending on the timing of your financing requirement, either prior to filing, or after you are probably eligible for a 40-80% advance on the total amount of your eligible claim. From start to finish you can expect that the financing will take 3-4 weeks, and the process is not unlike any other business financing application – namely proper back up and information related directly to your claim. Management credibility and experience certainly helps also, as well as having some trusted advisors who are deemed experts in this area.

Investigate finance of your tax credits , they can province valuable cash flow and working capital to both owner and investors, and significantly enhance the overall financial viability of your project in film, tv, and digital animation .The somewhat complicated world of film finance becomes decidedly less complicated when you generate immediate cash flow and working capital via these great government programmes.

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Financing Sr ed Credits – Access Working Capital via SR&ED Discounting

Canadian business owners and financial managers should consider financing sr Ed credits as a source of working capital and cash flow. It is a unique and alternative financing strategy that monetizes your Sr&Ed tax credit, and has no long term effects of adding debt to your balance sheet. All you are doing is simply ‘cash flowing’ or receiving your refund now instead of waiting for a potentially long time for your government refund cheque.

Business owners who file claims under the program already are keenly aware of the power of this great Canadian government program. Hundreds of Millions of dollars are refunding annually to your firm and your competitors – why not get a step ahead of the competition and turn that SR ED credit into immediate working capital.

Naturally the amount of your sred financing is related very directly to the total amount of your filed SR ED claim. Therefore it is in the best interests of every Canadian business owner who files under the program to maximize the size of their claim. They do that by working with a solid accountant or sred consultant who understands the true nature of the program. It is a misnomer that your research and development must be ‘successful ‘in the true sense of the word. The reality is that a proper sred claim is often increased simply by proving that you had significant trial and error in those business processes and research that you are documenting.

Anyway, you are aware of the program; you have filed a claim, or are in the process of filing a claim. What now? Consider financing the claim and turning your refund into immediate cash. Clients we work worthy with typically utilize funds in a SR ED financing to reduce payables, invest in additional research, buy equipment, or focus on investing in more direct marketing and sales The bottom line is that when you finance you SR&ED claim funds can be used for any worthwhile corporate purpose .
How does SR ED funding work? It’s really complimentary to any type of business financing you have ever done. You are not taking on debt; you are simply converting a receivable, i.e. your SR&ED credit, into cash. The best and most easy way to think of a sred financing is simply that you are factoring or discounting your claim. The funds will be repaid to the SR ED lender when you claim is approved by the government and your provincial government. (There is a Federal and Provincial component to each Sr&Ed claim)

You can access approximately 70% of the total claim you have filed. If the claim has already been approved by Ottawa and you are just waiting for the confirmed refund the 70% loan to value we just referred to can even be increased in many cases.
Even more sophisticated firms that finance their SR ED claims annually are not aware that under the right circumstances they can receive funds even prior to filing! That process is called a Sr&Ed accrual loan. That’s really staying one step ahead of the competition!

Financing SRED claims in Canada is a boutique financing. You accomplish it successfully when you work with a trusted, credible and experienced financing advisor re sred claims. The process involves a simply business financing application, copies of your sred filing, and miscellaneous business back up material to substantiate the sred loan. The total focus of the loan relies heavily on the actual claim itself, not the overall credit worthiness of your claim, as some might believe.

If you are filing sred you can stay ahead of the competition by considering of financing your claim. It’s a simple process that can be completed in a couple of weeks with your full co operation of back up info, etc. Your sred claim is already not repayable to the government, as it’s a grant, so consider supercharging that program by immediately monetizing your claim in valuable cash flow and working capital.

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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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