Why an Asset Based Lender Is Your Working Capital Solution

When we ask clients if they will consider an asset based lender for a working capital refinancing many business owners will come back with a surprise questions for us – namely ‘ What is an Asset Based Lender , and what do they do?’

Asset based lending in Canada is still relatively speaking a fairly new for of business financing. Business owners and financial managers are moving to this form of financing for several reasons which we will discuss.

As the name implies the financing it focuses on your business assets. All sizes of companies in Canada can utilize asset financing – even start ups. Practices vary within the industry as to how the financing works on a day to day basis – frankly this is one of the biggest challenges that owners face, i.e. understanding the offering in the Canadian marketplace. (Asset based lending, or ‘ABL ‘is very commonplace in the U.S. )

Rates in Canada vary all over the place for these types of financing. The size of your financing as well as the overall perceived ‘ quality ‘ of the transaction ( as perceived by the lender, not yourself!) dictate financing rates – In Canada Abl financing cost vary from 9%/annum to , on many occasions 2% per month . Although the financing is generally more costly it has repositioned many firms for survival and growth – simply because it brings more working capital and cash flow into your business.
The asset based lender only has one focus (your bank has two focuses). That focus is on the ‘true’ value and size of your underlying assets.

Let’s use a quick example to demonstrate the true power of asset based lines of credit. Let’s pick a sample company with say 4 Million in revenue, with the following asset size categories:

Receivables – 300k

Inventory - 250k

Equipment (unencumbered) – 400k

It is extremely common, using the asset sizes above that the firm’s bank might offer up a 225k line of credit for the receivables. For discussion purposes lets say they provided another 75k based on the personal guarantees of the owners. That’s a total of 300k. We can assure readers this would be a very common formula for a Canadian chartered bank, i.e. 75% on receivables, with no financing provided against inventory, etc.

So how an asset would based lender look at this transaction. Remarkable the line of credit provided could be in the 500k range, as an ABL lender would advance against receivables, 40% against inventory, as an example, and would also assess some value in the equipment and provide working capital financing against that.

So while the company’s asset size stayed the same the firm came close to doubling working capital and cash flow under the asset based lender. That is true working capital power.

Although the majority of asset based loans are used for straight working capital and operating facilities, many times they can be structured to allow for a major restructuring or merger and / or acquisition. Again, assets are leveraged to produce cash.
Investigate an asset based lender solution. Although sometimes more costly they provide a source of capital and do not directly affect your overall balance sheet – you are simply leveraged operating capital to the max.

Talk to a credible, trusted, and experienced advisor in this area of Canadian business - that is a solid Canadian business financing strategy for future profits and growth.

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Sources of Working Capital Financing for Canadian Business

Canadian business owners and financials managers need to know potential sources of working capital financing to ensure they can grow and profit from sales opportunities. Operating capital is viewed as one of the most critical aspects of ongoing financial liquidity; simply put, the ability to meet your short term and long term obligations.

Most financial people agree that if your business has more access to working capital your chances of overall financial success are greatly increased. The bottom line is that you have the working capital to expand and grow your business.

The textbooks of course have a definition for working capital, however the real world use and understanding of that term differs somewhat. Finance books tell us working capital is calculated by subtracting current liabilities from your current assets. The major current assets are receivables and inventory. When we meet with clients to discuss their working capital needs we focus moreso on two issues within those working capital components that the finance textbooks don’t really touch on?

- Turnover of working capital

- Margining of working capital

So the key point for business owners is not really what the text books says, it is that you need to be able to understand how to convert these assets into cash . We do of course agree thought that positive working capital (what you have) is better than negative working capital (what you owe)!

Sitting down with clients and working through changes in their working capital is one of the most valuable tools in understanding your current and future cash flow needs.

A fine balancing act is created, on in which you are liquidating your receivables and inventory on an ongoing basis, but at the same time managing to keep your short term obligations to suppliers current.

Another hard reality of business financing is that working capital varies by company and in general by industry. The amount of turnover in inventory and A/R varies considerably in every business.

We have discussed the definition and importance of working capital. So what are the sources of those funds? In a perfect world your company should have an overdraft or operating line of credit with the bank. The is the cheapest and lowest cost method of financing short term cash and working capital needs in Canada. The challenge is of course being able to meet the banks criteria for lending, which include personal guarantees, additional collateral possible, and imposed loan covenants and ratios.

A growing and more popular solution is asset based lending, this has little focus on the bank qualities demanded by Chartered banks and is more focused on what we discussed above, your firms ability to margin and leverage current assets and turn them over more quickly, thereby increasing sales and profits, albeit at a higher financing cost s. For smaller firms this might simply be a factoring or invoice discounting solution.

Ultimately each Canadian business owner must understand their working capital needs and determine which solution works best for them. Plan for growth, and Speak to a trusted, credible and experienced financing advisor to understand what sources of capital are available and which work best for your company.

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Equipment Financing Canada Best Commercial Equipment Lease Solutions for Canadian Business

Canadian business owners and financial managers continually are searching for the best equipment financing structures for their asset acquisitions. Commercial equipment lease solutions offer the benefits those business owners are looking for. The only challenge of course if to navigate the minefield of knowing who to deal with, what criteria are required to get approved, and what rates and structures and overall terms best suit your firms needs .

Asset acquisition of new equipment is one of the most logical ways of staying ahead of the competition and technology curve – whether your firm is in the high tech industry or at the opposite end of the spectrum as one of our clients are, manufacturing nails for the lumber industry and selling into big box stores .

Not only are those asset acquisitions expensive, they run the risk of utilizing too much of your valuable working capital and cash flow. You want the benefits of use of the asset, but not the inherent ownership risks – that’s why leasing has always been the most valuable method of acquiring assets for your business.

The benefits of lease financing are often touted – they seem quite logical – you have minimal cash outlay, you are working within defined operating budgets, and if you are savvy about constructing your lease properly you can avoid the issue of asset obsolescence, which is the greatest fear of many business owners – they don’t want to outlay significant cash and working capital for assets that will be obsolete and not relevant to their business model.

Many clients tell us that both their accountants and lawyers recommend lease financing solutions for all those reasons, they also point out the equipment financing can , with a properly prepared business case and application, be prepared in days .

As we pointed out previously the benefits of lease financing and commercial equipment acquisitions (whether it be computers or plant equipment) are significant. The everyday business challenge is simply – “”How do I effect this type of solution? Who can I talk to for advice in rates, terms and structures?””

We recommend that all clients speak to a trusted, credible and experienced commercial equipment financing specialist who can guide them thru the minefield of Canadian lease financing. By properly preparing your financial statements and business application, and being very focused on the type of lease you want (there are two types – capital and operating) you can achieve the benefits you want in a very short period of time. We have not really discussed that quite often equipment financing is the only alternative to bank term loan financing, and understanding the benefits and requirements of each of those proposed solutions requires solid advice and guidance .

Focus on cash flow, benefits of the asset acquisition, and the structure and payment terms that will allow your firm to increase revenue and profits. That’s the definition of solid commercial equipment lease solution financing in Canada.

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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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