Commercial Factoring And Receivable Financing Strategies in Canada

Canadian business owners and financial managers can be forgiven for getting confused when they hear about ‘commercial factoring ‘of accounts receivable as a financing strategy that is recommended for both growth and business financing survival.

Part of this confusion comes simply from the fact that this relatively new business financing strategy goes under several names – those names include invoice discounting, receivable financing, etc. In reality they all of course are talking about the same financing strategy – which is the sale of your receivables for immediate cash to another party, generally a ‘factoring company ‘.
The sale of these accounts receivable causes two occurrences, a profit for the factoring company, (generally between 1-3%) and immediate cash for your firm, which is the seller and owner of the receivables your firm has generated.

In Canada we feel the main challenge for the acceptance of this strategy is the entire concept of who collects the receivable, i.e. your firm which sold the product or service, or the factoring company. The Canadian business marketplace has been somewhat slower to accept commercial factoring as a true traditional business financing strategy because of the optics of who collects the receivable. In years gone by it were only ‘financially troubled’ firms that utilized this strategy. That has clearly changed and factoring of various types is utilized by small start ups to some of Canada’s major corporations.

When we meet with clients who are considering a receivable financing working capital facility it is very easy to explain the immediate benefits - these of course include working capital and cash flow generation. However the type of facility you enter into, what firm you work with, and how this facility works on a day to day basis is really the essence of the key points that we focus on when a client contemplates this type of financing.

The ‘cost ‘of factoring should be a key discussion point in contemplation of such a financing. Unless you are a large already very credit worthy corporation your factoring costs will range from 1-3% per month. Factors that should take into account are the length of time that your customers take to pay yourself, and your ability to sustain the additional financing costs. There is a bottom line here, and that is simply hat you should have sufficient gross margin on your product or service that allows you to bear these additional costs. Customers think of these costs as the ‘ interest rate ‘ on the transaction – this is really not valid because commercial factoring is not a debt financing per se, it is simply the liquidating of your receivables at an agreed upon discount . At the end of the day whether it’s perceived as a ‘ rate ‘ or a ‘ discount ‘ it still needs to be build into your profitability and cash flows budgets .

Is commercial factoring and receivable financing a recommended strategy? It is if you can immediately benefit from cash flow and working capital. It makes even more sense when you can utilized those funds (often received the same day as you invoice) to take advantages of supplier discounts and improved purchasing power. We have known some customers that have gained 100% cash flow benefits by immediate sale of their receivable, while at the same time utilizing those funds to reduce almost all of their discount factor fees. That’s true cash flow power.

Is there a bottom line? It’s simply that you should investigate commercial factoring, determine which benefits might work for you – while at the same time assessing costs and how the facility will work on a day to day basis. If it makes sense at that point work with a trusted, credible and experienced advisor to implement this relatively new cash flow solution for Canadian business .

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Inventory Loans and Purchase Order Loans – How does Inventory Financing Work in Canada

Inventory Loans in Canada and inventory and purchase order financing are subsets of a specialized industry that many refer to as asset based lending.

As sales and new order opportunities grow many Canadian business owners and financial mangers find that financing these to critical areas (inventory / p.o.’s) is increasingly become in a challenge. We advise clients that if these two critical areas of finance were a challenge in past times, that challenge is certainly magnified ten times over in the current global and Canadian business environment.

Are there specific solutions for inventory and purchase order financing in Canada. Yes there are, that’s the good news, but these are very limited and specialized in nature. We encourage all clients to speak to a trusted, credible, and experienced business financing advisor in this area who can provide guidance, assistance, and most importantly clarification on how this type of financing is achieved.

Inventory and purchase order financing in Canada extends beyond traditional Canadian chartered banks, who wrestle with the ability to truly understand a customer’s inventory component as a key part of working capital. (Working capital is derived from the continual conversion on inventory into accounts receivable).

Purchase order financing can be accomplished when your firm has the ability to generate sufficient orders from a major client, or clients, who are creditworthy. You must also be prepared to convince the inventory and p.o. finance firm that your company has the ability to fulfill customer orders successfully. Starts ups in Canada can achieve inventory and p.o. financing, but be forewarned that management must have a strong background in the industry – you have to demonstrate you can perform and deliver.

The financing of inventory and purchase orders is achieved via a direct payment or payments that made to your suppliers for product you need in order to fulfill orders and contracts. For Canadian customers this more and more means that key suppliers may well is located in the U.S., and in many cases, China. This does not deter the inventory and p.o. lender, but you must be in a position to show that you have sufficient gross margin ( i.e. profit !) in your business model in order to be able to withstand the additional financing charges that come with inventory and p.o. finance .

Also, unbeknownst to many business owners, the inventory and p.o. finance firm likes to generally get paid when an invoice to your customer is generated by your company to your customer. This requires that you have banking or factoring facility in place to convert receivables into cash, in order that the inventory and p.o. lender can be a paid.

We encourage all customers to take some time and understand the total costs of such a facility – you need to remember that your firm will bear financing costs for , often, between 60-90 days from the time you get and order, obtain product from your supplier, manufacture and / or ship the order, and, last but not least, wait to get paid ! Inventory and P.o. financing can be expensive, but naturally the alternative to avoiding this type of financing means simply lost order, opportunities, customers, etc. No Canadian firm chooses to become less competitive by virtue of not wanting to incur finance charges to convert new sales into profits.

Speak to an inventory and finance expert – understand the basis paper flow and the charges involved in this unique method of business financing. Turn inventory and purchase order and new contract challenges into increased revenue and profits to promote your competitive edge.

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Independent Film and Movie Financing Via Tax Credits in Canada

It certainly might look like somewhere in Hollywood, but the reality is that much film, and television projects are produced and filmed in Hollywood North, a.k.a Canada.

The Canadian government at both the federal and provincial levels has moved to significantly enhance the generosity around tax credits. Business owners of film, television, and yes animation also can utilize these tax credits to form an integral part o their overall project financing strategy.

A very significant portion of your project expenses can be recovered via the appropriate use of tax credits. Moreover, you can finance these claim prior to, or at the time of filing. This generates working capital and cash flow for the current project, and in many cases we speak to clients who intend to use these funds for their next project.

It can be very realistically stated the may projects in film, tv, and digital animation in fact could perhaps not be funded or completed without the effective use of tax credits . When you can ‘ monetize ‘ or ‘ cash flow ‘ those credits now you have just taken advantage of a powerful overall project financing strategy! As a result all areas of Canadian entertainment in our three aforementioned market segments continue to generate box office revenue in Canada. What was a new and innovative strategy in years past now becomes a priority ‘ job 1 ‘ in the financing of almost every project .

Entertainment projects in film, tv and animation clearly ‘ follow the money ‘ and that money has been followed to Canada in a number of different provinces – primarily Ontario and B.C. , but in other provinces also .

While there is great pressure in many of the U.S. states to reduce, or in some cases eliminate tax credit incentives Canada has in fact increased incentives in every area – the government has essentially based its case that there is a huge economic windfall to Canada by virtue of the tax incentives offered . The term ‘ domino theory ‘ might well be mentioned, because the way the Canadian government sees it additional revenue comes into Canada in the form of hotels, food, carpentry, etc

So how are these tax credits financed? In any business your probably are ahead of the game when you work with an expert, and certainly tax credit finance is no different. We recommend to clients they work with a trusted, credible and experienced advisor in this area. When you project is well documented in the form of a project finance plan , and has solid Canadian content in key areas such as Director, Writer, Performers, Art, Music or Animation you have a very significant ability to enhance your total claim for the credit. (Other key areas of your total project are of course: Equity contribution via owners or investors, foreign pre sales, etc)

Your eligible tax credits can be financed as soon as they are filed – if you have a strong mgmt team – i.e. a good entertainment accountant, lawyer, etc, your credits can even be financed before you file them. That’s a total cash flow strategy that provides valuable cash flow and working capital to you project.

Let’s look at a quick example – let’s assume your production is budgeted at 1.04 Million dollars, and your labour component is 571k. Your labour to production ratio is 54%. Using Ontario as a current example the tax credit on this project would come in at 45% of your labour budget – That nets you 257,000.00$ in capital .If you finance your claim you could receive a significant portion of those funds almost immediately .

Utilize the services of a film financing expert to investigate the financing of your tax credits. Prepare a solid project finance plan and let the cash flow from monetizing your credits enhance the viability of your project.

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SR&ED Tax Financing – New SRED Loan Strategies

SR&ED tax Credits continue to be a strategic method in which Canadian business can both stay competitive and at the same time take advantage of the governments non repayable grants . Most parties agree this is probably the most beneficial grant program in Canada, bar none.

Not only is the program applicable to almost every industry in Canada, but at the same time business owners and financial managers can compound the power of this program by financing their claim. Get cash for my SR ED claim now? Asks Canadian business. The answer is an unqualified yes.

Let’s recap some of the key aspects of the program as they relate to your ability to ‘monetize ‘your tax credit into real cash flow and working capital now. Also, let’s recap and focus on some current issues in your ability to access and maximize your SRED claim.

If you aren’t filing a Sred claim you certainly can’t finance one. The Canadian government, both federally and provincially reimburse billions of dollars annually to Canadian business in all industries. A few industries seem more tailors made than others for SRED claims, example: Software and information technology. But the reality is your firm can be a commercial bakery, a sign company, or an industrial manufacturer. The bottom line is that almost every industry is eligible in some manner.

Government grants SRED dollars in its own interest to allow Canadian companies to become more competitive and profitable.
Your claim of course needs to be prepared by a knowledgeable third party. In Canada this essentially is an accountant who is proficient in SRED or a third party commonly called a SRED consultant. In many cases some consultants specialize in only certain industries, which is a plus.

Recently changes in the entire SR&ED process can both help and hinder your firm in maximizing your total sred credit. Naturally the larger the claims the more amount of cash that you can finance under a tax credit financing.
Canada Revenue Agency has instituted new forms for the claim. Forms are found online at the government website, and in some cases have dramatically simplified your ability to file and explain and back up your claim. For example, the new online from limits the overall technical description of our claim to only 1400 words.

In general almost 75% of claims are not fully audited, and are therefore approved and somewhat fast tracked for refund.
How do some of the new forms and rules affect your ability to finance your claim? When it comes to financing your sred claim it is critical to work with an experienced, credible, and trusted third party. Claims are generally financed at 70% of their overall value. Therefore your ability to have your claim fully document, prepared by a credible third party, and fast tracked into the ‘non audit ‘75% of all claim range is a solid sred financing strategy .

Naturally just because your claim might undergo a sred audit does not mean it is not financeable. The reality is that your claim if it is strong and supportable will be approved and therefore can be financed.
We referenced that claims are financed at 70%. That simply means that the larger your claim you can receive immediately, on financing approval .70 cents on the dollar for your claim. You of course still receive the rest of the claim, less financing costs, when your calim is approved and funded by Ottawa

The entire sred tax credit financing process is very similar to any other business financing. You should not approach it unlike any other financing your firm might contemplate – there is a basic application, which is of course supported by your actual technical claim. The sred loan is collateralized by your claim, as we have stated. Typically a financing can be completed within a couple of weeks, which allows time for application, any due diligence that might be required, as well as documentation and registration of the claim.

If you are filing sred claims in Canada you are among the 15% of businesses that are eligible for this non repayable grant – why not compound the power of that government benefit and consider financing your claim. Accelerate your cash flow and working capital and utilize those funds for any general corporate purpose . A recent firm we worked with chose to finance their sr&ed claim simply because they had seasonal cash flow – they didn’t want to wait for many months for their cheque – and intend to utilize those funds for general business growth and working capital .

So whats our bottom line ? Its simply that you should take advantage of the funding under the program, and you may wish to consider monetizing your grant into cash flow now . That’s innovation in both your product and services, as well as your financing strategy! Utilize your funding to accelerate more research and use the cash flow for further growth and development .

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Franchise Financing - How Franchise Finance Works in Canada

Franchise Financing becomes critical to a prospective franchisee after he or she has made their selection to purchase a franchise. At that point clients always ask us - ‘How does franchise finance work in Canada?’

Naturally a large amount of time hopefully has been spent, as well as care! , in selecting the right business investment opportunity. Only one simply question remains, how does one pay for or finance the business.

One of the key aspects of that question is the type and size of the business you are purchasing.In some cases you are even considering perhaps purchasing an existing franchise from a current business owner who wishes to move on for whatever reason. (It is sometimes good to know why that owner wishes to sell of course.)

Size and type of business dictates the amount of financing you will need in Canada. We could generally lump franchise business models into two categories - service related businesses, or asset intensive businesses.Let’s choose a quick example - if you are buying a mobile furniture repair business all you need is a truck, some products and inventory, and you are in business. However, the purchase of a major restaurant franchise could involve hundreds of thousands, sometimes millions of dollars in leaseholds, assets, equipment, and on occasion even real estate.

So if finances are limited that might be one of the factors that you might want to consider focusing on a service business that is not asset intensive. Naturally just the type of business you purchase shouldn’t solely be driven around what you can afford; there are other factors to take into consideration also. These might include your personal interest in the industry, or even more importantly, your expertise. Example: Not everyone is cut out to be a restaurateur and deal with the public all day.

When financing a franchise you should also focus in on two key points - what funds do you need to acquire the business, and , as importantly, why financing is required on an ongoing basis for what finance people term as ‘ working capital ‘ . This would include ongoing investments you need to make in inventory, accounts receivable (if you are selling to a business) and in some cases equipment.

There are a handful of key options you can utilize to finance your purchase of a franchise. In Canada we can break these down into a few key components. The first component, and it’s a requirement also, is your own investment of capital into the business. No one will finance a business where the owner has not put in some capital. The majority of franchises in Canada are financed by a unique government guaranteed loan that is technically called the BIL programme. This program has attractive rates, terms and structures, but at the same time requires a lot of careful planning.

Because franchise financing in Canada is a niche industry we encourage clients to work with a respected, trusted, and experienced advisor in this area. The assistance you will get with cash flow planning, financing options, and access to franchise capital could make or break your overall success.

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

Construction Manufacturing Equipment Financing – Options for New and Used Equipment

Construction Manufacturing Equipment Financing plays a huge role in the Canadian economy. Business owners and financial managers such as you want to ensure they have the best leasing and financing options available to them – It has continually been proven that financing equipment via leasing is a very cost effective option.

One of the many important features of such a financing is the ability to match his term of the lease with your expected use and residual value of the equipment. Generally equipment lease financing for used and new manufacturing equipment can be arranged for terms varying from 3 to 5 years.

No one knows better than the business owner what the useful expected equipment life of the asset will be, and we encourage clients to match the term of the lease financing transaction with the economic life of the asset. The reality is of course that construction manufacturing assets have significantly longer useful expected values – (as compared to assets such as computers!)

We encourage clients to work with a trusted, credible and experienced lease financing advisor. The benefit of such knowledge can save you many thousands of dollars based on the overall rate, term and structure of your lease transaction.

There are of course other financing options when it comes to the acquisition of such assets – those options could include a government small business loan or a term loan from a bank. While these might have a lower rate to the overall transaction they come with much more stringent credit criteria – heavy emphasis is placed on the balance sheet and income statement of your firm. Leasing in general places a larger emphasis on the expected value of the asset during the term and at the end of the lease.

Many customers don’t realize that some of the additional costs that relate to the acquisition of used and or new construction manufacturing equipment can also be financed – these include maintenance, installation, shipment, etc. That’s a huge cash flow and working capital benefit.

In certain cases your firm might already own such assets and you might want to consider leverage them through a sale leaseback for additional cash flow and working capital. That is a very solid financing strategy that many firms have taken advantage of over the last year, as cash flow and working capital availability tightened significantly during the global credit crisis of 2008 and 2009. Owners simply adopted a strategy of leveraging their equity in assets to stay liquid and competitive.
Many financial mangers simply view lease financing of such assets as a solid cash flow strategy, you minimize payments and match them to the overall benefits of the equipment you are acquiring.

Seek a trusted advisor. Focus on which benefits of lease financing are most important to your firm. Structure and acquisition that makes sense form a cash flow, rate, and term structure based on the value of the asset and your current financial condition. That is solid business planning for growth.

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

Working Capital Financing – Canadian Corporate Financing Solutions

As a Canadian business owner or financial manager you are still somewhat bullish on sales and profit growth for 2010 – at the same time that growth requires working capital financing and corporate financing solutions that at times seem very challenging to achieve.

The reality is that small, medium, and even to some extent large corporations in Canada is demanding more access to working capital and cash flow financing – while at the same time the typical institutions who provide this capital are in fact denying access to many facilities that are required.

Business owners do not need to be told or hear about the difficulty and challenges in acquiring working capital facilities. Most firms think of Canadian chartered banks when they contemplate permanent or temporary working capital increases. This might be a bulge request for a temporary increase in their borrowing facilities, or sometimes a more permanent facility in the form of a term loan that might be tied to equipment, cash flow needs, etc. Various statistics are available which validate the difficulty that business owners have in obtaining working capital financing. Most of the needs seem to be short term based. In Canada unsecured working capital loans are available from the governments crown corporation bank, and, alternatively, through private independent financing firms. As the transaction tends to be a bit larger in size these loans tend to be called subordinated debt, or mezzanine type loans.

When a business is significantly smaller and can’t support the requirements of a more traditional cash flow or working capital loan Canadian business owners have actually turned to credit cards and personal equity loans to finance their business. This works, but comes at a higher cost. In general we believe clients we talk to want to separate their business finances from their personal finances.

Are their other solutions available to address working capital needs in Canada? Yes, there are several. One of the solutions you might consider is a working capital facility, also known as an asset based line of credit. This facility, available through specialty firms and advisors, generally significantly increases working capital while at the same time not bring on extra debt to your balance sheet.

Many clients we talk to don’t fully realize that they can unlock working capital that is in effect hidden on their balance sheets – It is a dual strategy of maximizing efficiencies in working capital, while at the same time leverage those current assets (most receivables and inventory, to their maximum borrowing power. These funds can help you avoid taking on more debt and allow you to grow sales and profits at the same time.

In summary, working capital and corporate financing solutions are in demand by Canadian business. Unfortunately supply is not fulfilling demand. Traditional solutions via Canadian chartered banks may not be available to your firm, and in some cases your firm might simply not qualify for the standard metrics around this type of loan / financing. Speak to a trusted, credible and experienced advisor who can suggest alternative solutions that deliver on cash flow and avoid additional debt. That’s a great business planning and financing strategy.