Sred Credits – How To Finance Your Claim for Immediate Cash Flow

Canadian business owners and financial manager who file for sred credits are often not aware that these claims can be financed in order to generate working capital and cash flow out of the claim. They are even more surprised to hear that it is actually possible under most conditions to obtain financing even prior to financing the claim.

What could be a better working capital and cash flow strategy than getting immediate cash flow for a government grant that is non repayable? We frankly can think of no other risk free way to bring valuable cash funds into your company if you are utilizing this great govenremnt programme.

Let’s establish some bedrock around what we are talking about. The programmes formal name of course is the Scientific Research and Experimental Development aka ‘(SR&ED) ‘program that is funded by the federal and provincial governments. Each SRED claim has a federal and provincial portion, and, combined, they provided you with a non- repayable tax credit for a significant amount of the funds you spend on qualifying R&D and business processes.

Many clients we work with have their claims prepared on a contingency basis – that simply is letting someone else , known as a sred consultant , prepare you claim and letting them absorb all ( yes all ) of the cost of that claim . When you finance a sred claim you can actually arrange to have the sred consultant paid at the same time also.

SRED claims continue to be on the rise in Canada, and when you couple the filing of those claims with a somewhat challenging financial environment for business financing you have a perfect storm, so to speak, for the consideration of financing your claim.

The financing of sred claims is the ultimate ‘boutique ‘financing business in Canada. We urge clients to work with a business financing advisor who can ensure they are receivable maximum funds and market rates, terms and structures for the amount of the claim.

Clients want to know how ‘complex ‘a sred financing is. The reality is that you should view a sred tax credit financing in exactly the same manner as any business financing, other than to understand perhaps that the main collateral on the sred loan is really the claim itself. We use the word ‘sred loan ‘but in reality the sred financing brings no debt to the balance sheet – you are simply monetizing your claim for cash flow and working capital now.

The essence of the entire process can be simply described under the following process

- sred financing application
- due diligence
- legal/documentation
- Funding!!

It’s as simple as that, and we advise most clients the entire process can be completed within a few weeks, which is standard for most business financings anyways.

You would only want to consider sred financing if in fact you don’t want to way from 1-12 months, (sometimes longer) for your grant cheque from the government. As a Canadian business that is growing you probably have much better uses of those funds now, including reducing payables, investing in even more r&d, acquiring new business assets, etc .

Consider sred tax credit financing as one more toolkits you have in your overall business strategy. Work with an expert and maximize the amount of your return and the overall most effective use of that essentially free cash flow and working capital.

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Franchise Financing and Franchise Loans for Canadian Entreprenuers

Franchise financing in Canada is the final step in the puzzle for entrepreneurs who are hoping to start a successful business buy purchasing a new or existing franchise in Canada. Many clients we meet with tend to address the financing issues around their purchase much too late in the game, and by doing some carefull planning and research they could have significantly increased their chances of financing success.

The beauty of purchasing as franchise, as it relates to financing, is that as a business owner you are able to determine in advance the total amount of financing you will need to complete the purchase and open the doors to your business.
In Canada all small business financing for entrepreneurs is a challenge, and that certainly doesn’t eliminate the franchise industry. But the reality is tar franchising is viewed very positively by a number of organizations who like the fact that your business tends to be a proven business model that has a greater chance of financial success based on the infrastructure and marketing assistance of your franchisor.

There are 4 components to franchise financing in Canada, and our experience and advice to entrepreneurs is that that must in effect choose the appropriate mix of financing, as in general no one financing mechanism can suit both the full purchase of the franchise and the ongoing needs of your business.

So what are those four components? They are as follows:

Owner’s personal investment
Govt BIL loan
Equipment financing (if needed)
Third party working capital loan

The cornerstone of your financing is always the amount of your personal investment in the business. A couple key points need to be made here. They are as follows:

- The amount of your personal investment may in fact be mandated by your franchisor – they might insist on you having a threshold of net worth and personal liquidity based on their experience as to what makes a franchise unit in their chain successful

- When you put more money in on your own, as opposed to borrowing you limit the general business risk of having too much debt (However..!! We have met with many franchisees who put too much personal equity in the business are tapped out personally when additional financial challenges arise )

- Debt and equity is a balance act – it’s a balancing act for a corporation such as General Motors, as well as for your new franchise – we suggest you work with a trusted, experienced and credible advisor in this area to develop the right mix of debt and equity – i.e. how much you borrow, how much you put in.

Boy scouts use the motto ‘be prepared ‘of course, and you should plan on the financing well in advance of your purpose. Many franchisees we meet with are ‘ behind the gun ‘ in closing their transaction because they don’t have simple basics such as a business plan, cash flow plan, list of equipment and leaseholds they need, etc . Planning is a good thing; in franchise financing it’s a required thing!

Consider your franchise investment carefully, work with a trusted advisor, understand how franchises are financed, and finally, develop the right mix of financing that allows you to complete the acquisition and grow your new business for future sales and profits.

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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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