Factoring Financing – Three Things You Need to Know About Receivable Financing In Canada

You have made the decision to consider factoring financing as an overall business financing strategy. In some cases you may be factoring and receivable financing currently, but are not happy with a number of key issues that weren’t discussed when you set up your facility. Let’s explore the three things you need to know around factoring financing in Canada, and debunk some of the myths and mis information that is out there on this subject.

These are:

1. All factoring Companies are the same

2. Factoring is expensive

3. Factoring is intrusive to my customers and suppliers, but my firm has to live with that

The reality in Canada is that as a country we came late to the factoring party. Factoring started in the U.S. and Europe, and has been established for hundreds of years. As a result the factoring that tends to dominate Canadian business financing, both in business model and pricing is heavily influenced by a small number of foreign firms.

We should probably do a very short ‘primer’ on factoring to ensure we’ve got the basics in place. Factoring, or receivable financing is the sale of your invoices or accounts receivable to a third party. It is very dominant in certain industries, i.e. trucking and transportation, staffing, etc, but quite frankly is now prevalent throughout Canada in many industries. What differentiates factoring is really the three points we’ll discuss – who is offering it to you, what it costs, and how does it work.

We recommend to clients that they deal with Canadian firms when considering a factoring option. Because this business financing is somewhat unique, and mis understood we strongly recommend you work with a trusted, credible, and experienced advisor in this area who can guide you through what many consider the factoring maze.

So let’s get back to our three key areas: First factoring firms vary in Canada by size, geography, and financial capability. You need to align yourself with a party that is most suited to your type of business, the size of your receivables portfolio, and the ability to deal on a one on one basis on any issues that come up .As we stated, it seems common sense that your best partner will be a Canadian firm who as direct representation in your geographical area.

Lets move on to point # 2 - Is factoring expensive? We always hate saying this, but the answer is that it depends. Receivable financing certainly has the aura of being expensive, and unfortunately most clients we meet are always focus on rate. A few key points need to be made, so let’s be clear on this issue. First of all factoring in Canada has a discount rate of between 1-3% per month. We use the term discount rate because the industry itself doesn’t view the rate as an interest rate; it views it as essentially a reduction in your overall gross margin. Let’s use a quick, clear example. Let’s say you have an invoice for $ 100,000.00. Factoring allows you to get approx 90% of the funds on that invoice the day you generate the invoice. (The balance, 10%, is paid to you when your customer pays,) and out of that holdback comes, say a 2% discount fee to the factor firm) the factor industry view that 2% as a commission for financing your invoice. If your customer pays in 30 days Canadian business can be forgiven by saying – I paid 2% per month, that’s 24% per annum that is expensive.

One of the main points we can make when advising clients on a proper factor financing facility is that the funds you get on immediate cash conversion can be used to purchase inventory at a better price for cash, or alternatively, you can take the many 2% net ten day discounts many suppliers offer . If that was the case on all your business we can make the statement that you are recovering 100% of your financing costs via this strategy, plus you have unlimited working capital .That’s financial power.

For our third and final point we address the issue of customer intrusiveness. We alluded the U.S. and U.K. firms who follow a very clear process on the receivable financing for your firm – they send your invoice to your customer on your behalf, they corresponded with the customer , and they call your customer for money .But , and this is a large ‘ but’ did you know that with proper negotiations and the use of a proper advisor you can negotiate and implement a facility that allows you to bill and collect your own receivables, while at the same time getting all the benefits of factoring – i.e. immediate working capital and cash flow?
In summary, factoring can be easily mis understood.

Assess what you think is wrong or might not work with this method of financing, and develop a receivables financing strategy with the knowledge that you will not be making the mistakes of others who are less and ill informed.

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Small Business and Medium Sized Business Inventory and Purchase Order Financing in Canada

Inventory and Purchase order financing are two of the most sought after and challenging financing strategies for Canadian business owners and financial managers. The reality is that if you can ensure you don’t have adequate working capital and cash flow to finance inventory, and of course receivables, your business will be ham strung in respect to your ability to grow sales and profits.

The essence of an inventory financing strategy is to ensure that you have capital and cash flow as part of a revolving facility or loan to purchase inventory from your valued suppliers, and convert that inventory into receivables, cash, and of course profits.
Inventory financing and purchase order financing in Canada comes in various forms. The most traditional form it comes in is of course as a component of your bank operating facility. Canadian chartered banks ‘margin ‘receivables and inventory. The challenge in the global financial climate of 2010 is of course your firm’s ability to negotiate such financing on terms favorable to both yourself and the bank.

In our experiences banks tend to me for focused on lending on receivables, which can easily be converted into cash. The harsh reality is that many banks and lending institutions in Canada don’t understand the true value of your inventory, and quite frankly we think they can be forgiven for that , given the multisided of industries in Canada, as well as the fact that inventory comes in three components .

The three components of inventory are raw materials, work in process, and of course finished goods. The mix or ratio of those three components is going to vary in each firms industry.

Our own experience is that when our clients can generate inventory financing as a part of their overall operating credit strategy is they usually come up with something in the 40% range. That is to say that your bank will advance, at any given time, up to 40% of the inventory that you are carrying at your cost. This tends to be a comfortable buffer for the banks, but in many cases doesn’t provide the cash flow and working capital you need to grow sales and profits. We hasten to add of course that bank operating facilities that include an inventory component are closely tied to the overall financial health and financial perception of your firm.
Are there other solutions for inventory and purchase order financing in Canada .Yes, there are, we can also certainly say they are limited.

We suggest you align yourself with a business financing expert who can explain to you those methods, which include a straight separate purchase order or inventory financing facility that is outside of your banking arrangements. In those cases the experienced p.o. and inventory lender will determine a valuation on your particular inventory and lend against that. In most cases this simply involves paying your suppliers up front for your inventory needs, while they collateralize your inventory and the receivables that will flow out of that inventory. This type of financing is expensive, but has to be benchmarked against the possibility of your firm losing sales, contracts, and competitive stance in your marketplace.

At the end of the day Canadian business owners and financial managers have to simply address the following issues:

- Is my firm losing valuable sales and contract opportunities to competitors due to our inability to finance and pre pay inventory

- Are we prepared to lower our overall gross margin by 2-3% points in favor of increasing sales and profits?

Speak to a trusted, credible and experienced business financing advisor in this area : A rational inventory financing strategy can then be developed around those two key points.
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Financing Films – Use your Tax Credits for Film Cash and Working Capital

Despite several major positives on the 2010 horizon financing films, the job of getting film cash and working capital is still a challenge for Canadian productions. Utilizing your tax credits in a creative and timely fashion is one method of raising capital in three of the main entertainment segments in Canada; they include film, television and digital animation credits.

Owners of productions in these segments can be forgiven for feeling lost or having difficulty in moving a production forward.
The challenge is even keener when as an owner of creator of a production you don’t necessarily have the ability to finalize distribution or pre – sales in today’s complex global environment. More than ever it is necessary to align yourself with a trusted, credible and experienced advisor in this unique business and financing area of the entertainment industry.

Let’s focus on how you can in a straightforward yet creative way ensure that you are maximizing capital, and cash flow via the utilization of the current generous tax credits available in Canada. When you think of the various sources of financing for your production you should always consider tax credits, and the financing of them, as a key source of film financing and film cash. And as we noted, this applies to both televison productions as well as digital animation, which is fast coming up from the rear as a major entertainment and business segment in the industry.

Tax credits should be an integral part of your overall financing strategy, and we clearly need to emphasize the need for an overall ‘strategy ‘in order to get your project completed. Identifying your tax credit financing partner will assist you in raising valuable capital and eliminating potential financing gaps in your production.

A reputable tax credit financing advisor will help you navigate the maze of financial organizations that participate in financing of your tax credits – these include independent finance firms, private funds, and in some cases organizations related to accountants and lawyers in the industry .

Many Canadian production owners do not realize the financing of your tax credits can be done at two different times in the life cycle of your project. Naturally once your credit has been filed and certified it is financeable at that time – generally we can say that you can received from 60-80% of the tax credit value in immediate cash and working capital, allowing you to recover a significant portion of your expenses. If we use 40% as a broad guideline (it varies between type of tax credit and type of production) you can see the cash flow and working capital power that immediate capital brings to your production.
However, did you know that in many cases you can receive a type of pre- financing for your tax credit? This allows you to generate often needed working capital immediately after it has been determined that you have an eligible project , as well that its ability to be properly document re budgeted expenses and ‘ points ‘ required to be properly certified .

Your ability to present a proper financing plan, demonstrate a realistic budget, and ensure that you have a team in place to document all that can generate a major part of your initial financing . Pre-financing of such a tax credit could often achieve immediate financing of at least 40% - if not more, in upfront working capital. Those funds, in connection with your other resources are often what can take the financing of your project to the goal line.

Talk to an advisor in this area, ensure you understand the power and benefits of tax credit financing, and the fact that these claims can be financed prior to and during your project! That’s a winning film / TV, and animation financing strategy!

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SRED Tax Credit Financing – 3 Things you need to Know

Canadian business owners and financial managers who are not as conversant with Canada’s SRED program as much as they would like to be pose three major questions when we sit down with them and talk about SRED ( aka (Sr&Ed) and Sred financing . Typical questions include”

1. What is the program – am I eligible

2. How long will I have to wait for the money

3. How can I monetize of cash flow my sred claim for immediate working capital now?

Let’s examine the basic thing you need to know around those three key areas.

1. Canada’s sred program is without a doubt the most powerful program when the business owner asks themselves – ‘ What assistance is available in the form of government loans and grants ‘ – a typical question often asked by every Canadian business owner . And the good news is that not only is the sred program available to virtually every type of industry in Canada, the funds coming to you under that program are non – repayable . The program basics are simply that sred was set up to encourage innovation in products, technology, and business processes. A very heft ‘rebate ‘comes back to your firm in the form of a large percentage of the actual expenses you have incurred in the research and development area. Naturally for many businesses R&D is the key driver that allows your firm to stay competitive and ahead of the pack, so the ability to recover a large part of those expenses at the governments cost is a huge benefit to Canadian business. And when you are able to both file a sred claim and be armed with the knowledge that it is financeable is clearly a powerful win win strategy.

Many business owners are also not aware that the credit can be claimed for the previous two years, so this is one case where playing catch up is a good thing. To determine eligibility for a sred speak to your accountant or what is known as a sred consultant.

2. ‘So when does our firm get the actual money ‘?’ is one of the next major questions customers pose. Here are the basics around that issue. Naturally do receive funds you have to file your claim – this is done at the time you and your accountants submit your year end corporate tax filings. In fact the sred claim must in fact be filed at this time to maintain your eligibility. The key issues you have to know about are that you want to ensure you have a claim that is filed in a timely fashion, as per above. At the same time focus on the quality of your claim – by now you should be working closely with your accountant or sred consultant to ensure you claim is properly documented . Recent new process at Canada Revenue Agency are clearly, in our opinion, focus on weeding out the ‘wheat from the chaff’, so to speak. You want to ensure your claim has been filled out with the proper form – there is even an online process you can utilize. Your ability to succinctly make your claim, and, as importantly, back it up with the proper documentation will ensure much higher probability of approval. In some cases the claim might be partially disallowed if rationale, submission style, and back up info don’t conform to what the sred folks want to see.

3. Now lets focus on what to most of our clients is the most important aspect of the sred program process – which is ‘getting the money ‘! Here we advised clients you have two options, you can wait for the cheque which may take months and in some cases a year, or you also have the option to finance your claim immediately. We are all familiar with consumer programs which provide immediate cash for their personal tax credit rebates – essentially we are talking about the same thing. Select a trusted business financing advisor who is credible and experienced in sred financing. That will allow you to complete a basic financing application, undergo the standard due diligence that any business financing might entail, and then proceed to documentation of the sred financing, in essence you ‘ sell’ your tax credit in return for immediate cash now . Clients ask ‘ how much can we get ‘ and the rule of thumb in sred financing is generally 70% - the balance is held back and remitted to your firm on final approval of your claim by CRA . No payments are made in the interim (that’s a good thing) and you receive the remaining 30%, less financing costs at final closure on the claim.

So now you have taken a double advantage of one of Canada’s best programs for business – you have filed and received approval for a non repayable grant for a significant portion of your r&d expenses, and , as importantly you have monetized or cash flowed that claim . That’s great Canadian business follow through.

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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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