Receivable Factoring – Three Things You Didn’t Know About Factoring

Canadian business owners are demanding more information on receivable factoring and how factoring services can help their working capital and cash flow needs. When we talk to clients we talk about several myths and misconceptions about factoring in Canada .

Let explore some of those myths, misconceptions and mis understandings.

1. Factoring is pledging your receivables - (Wrong!)

2. Factoring is expensive (We will let you decide!)

3. Canadian factoring services are the same as in the U.S.( Not necessarily)

1. Factoring is pledging your receivables - This is a popular misconception around receivable financing. Some of the misconceptions revolve around the fact that various terminologies are used to describe factoring – these include invoice discounting, receivable financing, etc. The reality is that factoring is the sale of your receivables for immediate cash. In effect your company sells its receivables and your firm gets immediate, almost same day, (often same day) working capital and cash flow for your business. The factor firm benefits as they make an immediate profit on the purchase of that receivable. We should point out that customers in Canada can sell one receivable or all their receivable; they have that option and often don’t necessarily know that. The transaction becomes extremely favorable to the factor firm based on the amount of holdback you negotiate on your transaction. Many factor firms hold back up to 20% of the receivable and don’t give those funds back to you until your customer pays.

2. Factoring is Expensive: This is clearly at the top of the list of every discussion we have with customers around factoring. The reality is that customers view the cost of factoring as an interest rate, while the industry itself views it as a discount on the sale of the receivable. Discount rates in Canada vary from 9% per annum to 2-3% per month.

So yes, if you as a business owner view the factors ‘ charge ‘ as a finance interest rate you will perceive it as expensive . What Canadian business owners don’t do is to reflect how much it actually costs them to carry receivables for 30, and sometime 90 days. And, get ready for this – they also many times don’t realize they can use the immediate same day cash they get for their receivables to take prompt payment discounts with their suppliers, and, furthermore to negotiate better pricing and larger purchases with valued suppliers . We have know some customers do totally 100% eliminate the entire cost of factoring by buying smarter and better and paying suppliers on a 2% 10 day scenario. That is true cash flow power!

3. Factoring came to Canada from the U.S. and Europe. It was very slow to catch on and is catching on very quickly these days, aided of course by the overall global credit crunch of 2008 and 2009 – We are still in that crunch of course and business financing is still difficult to achieve for small and medium sized business in Canada. Factor firms in Canada vary in size, and many are simply branches of foreign operations. We believe a Canadian factor firm who understands the needs of Canadian business is best suited to your needs. Each factor firm has a different way of doing business, has a daily paper flow that differs often substantially, and prices their rates and holdbacks (remember the holdback!) in a different manner.

Speak to a trusted, credible and experienced financing advisor who will ensure you working capital and cash flow needs will be met by such a facility. Use the facility wisely to grow profits and cash flow.

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

Inventory Financing as a Working Capital Solution

If your Canadianfirm is ‘ inventory intensive ‘ then an inventory financing solution has to be an optimal part of your overall working capital strategy . Unfortunately it has probably never been more difficult to access the amount of financing you need for inventory in order to maintain and grow sales and profits.

Let’s review some of the key basics and then outline what types of solutions are available to your firm.The essence of inventory financing is simply the ability of your firm to generate a short term advance, or operating facility based on the amount of inventory you have on hand. A couple of key concepts come into play here. One is simply valuation – meaning of course there has to some agreement between you and an inventory financier as to what value can be placed on inventory.

We can appreciate to a certain degree the conundrum that Canadian chartered banks have with inventory – which is simply -how do we understand it! There are hundreds of different industries and business models in Canada, and the ability of any one entity to understand what the value of a certain industry inventory is, and more important, how it could be remarketed in liquidation is of course the challenge. As a result, as we have inferred, the banks have tended to shy away from advancing any significant amount of financing against inventory.When financing is in fact advance it tends to be very formulaic, and, similar to the receivables advance, very focused on your overall operational, financial, and collateral situation.

What Canadian business owners actually need is for a true inventory lender to work with them to understand what the maximum amount of funding can be given against ongoing inventory on hand.Again we will raise one other technical point, which is when we talk to inventory it can be in the form ofraw material, work in progress, or finished goods. Those three categories alone of course require a whole additional subset of lender knowledge.

Fortunately there are firms in Canada who are very focused oninventory financing – in some cases these can be in the form of floor plan financing , although the purpose of our information here is pure inventory financing .

We recommend clients work with a trusted, credible, and experienced advisor in this area – one who can deliver an inventory solution that either compliments your existing financing arrangements, or, in some cases perhaps replacing your current financing with a very focused and specialized asset based line of credit that maximizes the total value of your receivables and inventory.

When inventory plays a key role in your company’s sales process your ability to generate cash flow and working capital on an ongoing basis against this asset will ultimately prove to be a major competitive advantage for on going growth and profits

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Financing Film Tax Refunds for Filming in Canada

Financing film tax refunds on Canadian productions is currently an integral part of the overall financing for projects in film, television, and animation in Canada. Those in the know are aware that typically a valid tax credit can be financing almost immediately after production has been completed.

An even more little know fact , (and we are surprised at the number of people that don’t know this ) is that if you tax credit is certifiable and you are somewhat experienced in the industry your tax credit can actually be financing during your production, bringing much needed cash flow and working capital to your project .

When we meet with clients we are not of course surprised to hear that a large part of their total project involvement in the 3 key areas (film, TV, and digital animation) is spent on sourcing financing for their project. While the overall financing environment has improved considerably in 2010 (and boy has those great government tax credit increases helped) it is still a challenge for most productions to cobble together financing for the entire project.

There are, of course, a number of options and strategies available to owners of any particular production. Our focus here in our information is primarily the monetizing of the increased and generous tax credits that come in the form on non repayable cheques from the government. Your ability to monetize, (we can say ‘cash flow ‘) those credits is a key part of the industry today.
Tax credit financing is usually done in conjunction with the other forms of financing in our three key focus areas. Those other types of financing of course include equity, pre-sales, etc.

In order to finance your tax credit certain key elements must exist. The one key area to focus on is certification and eligibility, with criteria being a bit different, but essentially the same, depending on which proving your production is domiciled in. Ontario and B.C. seem to garner most of the action...

Owners that surround themselves with solid accounting and legal partners and who have a clean special purpose entity set up are 90% of the way there! What we are really saying is that if your production is eligible, and you have documented your bidets and costs carefully, and they are cleanly with a separate legal entity (preferable) you are safe to assume you can have your tax credit financed.

We strongly recommend that you work with someone who is at trusted, experienced and credible advisor in this area who will work with you to maximize the total dollars that you can derive out of your tax credit. Naturally a clean tax credit represents 100% of the dollars due to your production. To err on the side of safety and conservatism tax credits are generally financed at 50-80% loan to value. (There are exceptions on the upside and downside as always!). No payments are made on your financing, and final financing costs come out of the final receipt of funds form the government, with any additional balances left over due to your production of course.

The ability to finance your production creatively, with the assistance of the monetization of your tax credit is a powerful strategy not available in all parts of the world , due in most part of course to the generous non repayable credits the Canadian government as deemed for the industry . Utilize tax credit financing to improve the overall success of your projects.

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

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

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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