Financing a Franchise In Canada

Financing a franchise via a Franchise loan or lending arrangement is probably the 2nd largest concern that any potential Canadian entrepreneur has - (we are assuming pick the right type and size of business is the largest concern?!).

So let’s assume that as a Canadian entrepreneur you wish to either purchase a new franchise, or in some cases purchase an existing business that is has already been in business and being sold by the new franchisee. There is actually a third scenario also, in that you might already be a franchisee and wish to either purchase another unit or invest in another franchise business within a different industry .

The bottom line though is that after you have made that decision financing of your new business quickly becomes ‘job 1’. The challenge is two pronged of course –

1. Finance the purchase of the franchise

2. Ensure you have a solid understanding of the long term financing needs of the business from a view point of increased investment required for growth, survival, and continual profitability. ( A good example is if you are purchasing a restaurant franchise – you should clearly investigate what further upgrades to leaseholds and equipment might be required for you to maintain your franchisee status , or simply to grow you business and stay ‘ fresh ‘ at the same time .

In Canada you certainly don’t have what we would call ‘numerous ‘choices to finance a franchise, but there are several what we will call strategies or programs that can assist you to complete financing successfully. We tell clients that we can’t over emphasize the importance of dealing with a trusted, credible, successful and experienced advisor in this area. Just on piece of advice or experienced from such a party can save you thousands and potentially save the regret of having purchased the wrong business, or financed it incorrectly.

We recently met with a client who had chosen what we will call for confidentiality reasons a ‘service’ business. The business was financed all through personal equity – that simply means of course that no funds were borrowed. Sounds good so far right, wow... a business with no debt. Well, here’s what happened, sales didn’t materialize, cash flow dried up, all personal resources, including sale of the family home, had disappeared. And the business was no longer financeable from a loan perspective because of the poor fundamentals. In reality the business should have been financed with some debt, so that any shortfall in revenues could be augmented with personal resources for a temporary period.

So how are franchises financed in Canada? ask our clients . They are financed via the following mechanisms –

- Owner personal investment

- A special loan guarantee program by the Canadian federal government

- Lease financing for equipment

- Some for of vendor take back in certain unique situations

- Cash working capital term loans to augment the owner investment

In a very small, and we repeat, small! Number of situations the franchisor themselves might provide some financing. This is rare and should never be counted on – for the simply reason that franchisors make their money selling franchises, not holding and financing them.

So lets recap our basic shared information – it’s simply as follows: Carefully pick a franchise that suits your skills, interests, and financial investment profile. Ensure you properly mix the right amount of debt and equity – too much of either is rarely a good thing. Work with a trusted business financing advisor in franchising to ensure you avail yourselves of the proper mix of the 5 methods we outlined above. That’s a successful Canadian franchise financing loan strategy.

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Working Capital Financing – Does My Firm need a Working Capital Loan

Clients we meet with often want to need if they require additional working capital financing for their overall business growth and survival. They also, as prudent business owners, want to know what alternatives are available for financing consideration.
Lets answer question # 1 first – we can some facetiously say that the answer will be similar to your lawyers answer to most questions – you may need a working capital facility or loan, or you may not ..!

What do we mean by that? The key issues in working capital financing is understanding what it is, why it is needed, and what alternatives you have as a Canadian business owner of financial manager to access that additional capital .

Let’s get back to our key point, which is simply that we need to first understand what working capital is. We can go by the textbook definition, which is simply go to your balance sheet, take current assets, subtract current liabilities – and voila ! You have your working capital amount. Let’s bore down a bit and truly understand this number and what it really means to your firm on a day to day basis.

Your current assets are of course your inventory and receivables; your current liabilities are your payables and what you have upcoming in loan and lease payments everyday. As a business owner you know that these numbers change everyday, and that as your business grows you require a larger investment in accounts receivable, inventory, and a buffer of cash on hand for miscellaneous issues, emergencies, etc.

Now let’s examine a very key point that will help you understand the thrust of our message. Higher working capital is preferable, but if your inventories and receivables aren’t turning then higher works against you, because you have built up assets that aren’t turning, and it cost you money to build up those receivables and inventory.

So the reality is that you have three options in assessing your working capital financing needs. They are as follows:

1. Focus on higher turnover of receivables and inventory – and stretch your payables as long as you can so as not to lose your valued supplier relationship

2. Monetize your working capital in a more efficient manner – i.e. negotiate an operating line of credit with your bank based on receivable and inventory margining – Alternatively supercharge your current assets by what is known as an asset based lending facility

3. Consider a permanent working capital term loan – this is a long term, generally 3-5 years cash loan that is repaid in specific installments. Essentially you are committing long term working capital into the business which will help alleviate growth needs.

So in summary, what is our bottom line? Its simply that you need to understand what working capital is – you need to determine if you can generate working capital internally or externally, as per our options # 2 AND # 3 above. Speak to a trusted, credible and experienced advisor in Canadian working capital solutions and you will be on the way to increased sales and profits via a proper business financing strategy.

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Equipment Leasing in Canada – Canadian Solutions for Commercial Equipment Acquisition

Canadian business owners and financial managers quickly realize the benefits of lease financing when it comes to paying for equipment acquisitions. Whether your firm is a start up or an established company many of the benefits of lease financing will apply to your firm. One of those key benefits is simply the fact that you realize that somewhere in the near future you will have to replace that asset, and that is not the time when you wish to have a burdensome asset on your books that you must fully replace with valuable cash and working capital.

In Canada any asset class can be financed, including in some cases even soft costs or non tangible assets. Computer software might be a good example.

Cash flow is what most business owners are most cognizant of, and you quickly realize that paying for the use of an asset over its expected useful life makes much more sense that writing a large cheque for an asset that effectively depreciates the minute you purchase it. As consumers we can relate to that statement when purchasing a vehicle for our selves or our family!

Business owners have the luxury, when lease financing, of strutting a financial vehicle around the ultimate use of the asset – By that we mean you can have a significant say in the rate, term, and type of lease you enter into.

Clients always ask us about the rate in lease financing, as in some cases they have heard that leasing is a more expensive option to a bank loan or outright cash purchase. Textbooks have been written on that whole subject – but let’s try and summarize that whole textbook into a few common sense statements! They are as follows –

- Using up bank credit lines for an equipment asset strategy can be a bad decision based on your overall ability to borrow in the future and the covenants the bank lender might place on your company.

- Writing a cheque for payment in full of a depreciating asset, and depleting your cash on hand is never a recommended strategy for our clients

- If you could match the benefits and the useful economic life of the asset to monthly cash outlays why wouldn’t you take advantage of that option

- Many business owners prefer to have multiple sources of business financing – they don’t want all their ‘eggs in one basked ‘so to speak – Wouldn’t your firm want to do that?

Canadian business owners can choose from two types of leases –

Lease to own

Lease to use (commonly called an operating lease)
We recommend that clients view all asset acquisitions as a potential form different financing strategies. Work with a trusted, respected and credible advisor to ensure you understand that the rates, terms and structures reflect your overall credit quality and the type of lease that makes most sense for you Canadian asset acquisition . That’s a solid business financing strategy.

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Receivable Factoring – The Two Things You Need to Know !

Canadian business owners and financial managers can make some big, painful, expensive and time consuming mistakes when they choose the wrong factoring facility. In a previous article we highlight three popular misconceptions about factoring – they were:

-Factoring is the pledging of receivables

- Factoring is expensive

- All receivable financing services and facilities are essentially the same

We provided information that clearly showed that there are a number of fallacies and myths about the factoring of receivables in Canada, and that the prudent business owner needs to investigate the true costs and ‘how to’ of factoring in Canada.
Let’s now share two other major misconceptions around this method of business financing in Canada. They are as follows:
- Factoring is very intrusive to my customers and suppliers (NOT NECESSARILY!)
- All factoring companies are essentially the same (WRONG!)

Before we examine these two popular business misconceptions lets take a very brief step back and recap what receivable factoring is.

Canadian business, more than ever, needs cash flow and working capital to survive. Many traditional sources have either disappeared, dried up, so to speak, or simply are not available in the current business climate. Primarily we are of course referring to generous bank lines of credit for receivables and inventory. Business must go on, so how do business owners resolve these temporary cash crunches. One alternative is factoring. The other alternative is a term loan, which has fixed payments, and generally extends for a period of three to five years. So the business owner must decide whether to focus on short term working capital – i.e. a factoring solution, or permanent working capital via a term loan or more owner equity.
So now let’s debunk out two myths surround factoring.

In a traditional what we will call the U.S. model of factoring we will agree that factoring, otherwise known as receivable discounting is in fact intrusive. The factor firm has the ability to in essence take control of your entire receivables function, including invoicing your customers with notification from themselves, dunning letters and calls for collection, and the insistence of payments being made directly to their firm. Is this intrusive – we certainly think so.

Is this the only alternative for Canadian business – absolutely not? Prudent business owners will seek the advice of an experienced, trusted, and credible advisor in business financing who will structure a facility that allows them to collect their own receivables. Under this scenario they will reap the benefits of factoring ( Immediate cash, increased working capital ) while at the same time preserving customer good will . So the bottom line is, yes, if you enter into the wrong type of facility, factoring will be deemed intrusive, but you have options and you should investigate those with professional assistance.

Now let’s cover our final misconception – ‘all factoring firms are the same’. The reality is that if you are not an expert in this unique form of business financing then you can probably be forgiven for having talked to a few firms and drawn the conclusion they have the same product and service offering.

The reality – Nothing could be further from the truth. Factor firms in Canada are sorted by geography, ownership (many are just branches of U.S. and U.K.operations) their own capital and borrowing structure, and, most importantly, how they do business on a day to day with you and your customers. When we talk to clients about factoring solutions we recommend they focus on firms that have a nominal holdback, competitive rates, and , most importantly, are comfortable in allowing you to do your own billing and collecting . Naturally at the same time you are in a position to reap the key benefits of receivable financing, which is cash flow and working capital leverage you did not have.

Talk to an expert, sort out the good from the not so good, and focus on a receivable financing facility that meets your cash flow and growth needs. That’s solid business financing.

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Equipment Capital – Financing Options you didn’t know you had

Equipment Capital and the financing that’s required to complete asset acquisitions is a large part of the Canadian equipment financing puzzle . Business owners in Canada want to stay ahead of the competition and technology curve – to do that they require computers, machinery, and other assets that can help to grow revenues and profits.

Lease financing is one key method that allows that to happen. At the heart of the equipment capital lease financing solution is the premise that business owners want to use equipment and assets for a specified period of time, while at the same time not wanting to outlay huge amounts of capital and use line of credit facilities that otherwise might be used in day to day working capital facilities .

To put it simply, business owners and financial managers want to use assets, but they don’t necessarily want to pay to own them – and they certainly don’t want to mis – appropriate large amounts of capital as down payments or payment in full for ownership of a depreciating asset.

The hard reality is that equipment capital and lease financing is available to every business in Canada, whether you are a start up or a major Financial Post 100 corporation.

In today’s competitive environment it’s all about staying ahead of the curve, and business owners want to ensure they have the fixed assets in place that will allow them to grow profits and revenues.

Accountants and miscellaneous financial advisors will also tell you about the other benefits of equipment capital financing, which include balance sheet benefits and income statement benefits re taxes, depreciation, etc. Those truly are great benefits, but the bottom line is that when you acquire assets through a leasing you are profiting form use, not ownership, and we advise clients that is a very powerful statement.

All business owners and financial managers know that it’s all about cash flow, and your ability to both save on capital outlay and acquire much needed assets is the key benefit of equipment capital leasing.

When you are well informed about lease financing options in Canada you have the ability to enter into lease contracts which have several other benefits – i.e. you can finance delivery, installation, maintenance, etc. Prudent business owners will match the term of their lease to the expected use of the equipment. For example, why would you buy computers outright, or mistakenly lease them for 5 years, when in fact the reality of computing is that you will replace them every 24 months or so, if not sooner . That’s what lease financing flexibility is about. In many industries prudent business owner’s use lease financing as a roll over strategy – they continually on a regular pre determined basis acquire new assets which are rolled over into a new lease arrangement.

Utilize equipment capital and lease financing wisely – understand your options, and work with a trusted advisor in this area of Canadian business financing. Use asset acquisition as a key strategy to remain both competitive and profitable.

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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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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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