Asset Based Financing in Canada – 3 Things You Must Know

More and more Canadian business owners continue to hear about and in some cases start to investigate asset based lending as an alternative method to generation additional working capital and cash flow. This type of financing is predominantly used in the U.S. and is become much more available and popular in Canada.

When we meet with clients to discuss the benefits of asset based lending and asset based lines of credit we highlight three things they need to know. Those 3 things are as follows :

1. You need to know what an asset based line of credit is and what it is not

2. Understanding the qualifications and daily mechanics of the facility is important

3. Asset based financing pricing differs - here’s why

Let’s examine some of the key data you need to know to determine if this type of financing is form your firm, and that you can benefit from the facility. First of all in terms of what we are discussing an asset based line of credit is not an asset loan per se - There is no additional debt that appears on your balance sheet, if, for example, you were thinking this asset loan is in fact term debt. It is not. It is simply what we can call cash lending, or cash flow monetization - your firm is utilizing asset based financing as an alternative method to generate business financing. Due to tight credit conditions and the generally improving prospects of Canadian firms it is becoming an increasing attractive method of financing your firm.

An even better way to thing of it is to view it as a direct competitor to chartered bank lending in Canada, on an ’ operating ’ or revolver basis. Your firm would consider this type of financing in one of two circumstances - you don’t qualify for bank financing, or, as in many cases, you have financing in place but it simply does not supply with the amount of cash flow and working capital you need.

Let’s move on to # 2 - qualifications and methodology. In general asset based financing in the form of a revolving facility is available to any firm. We tell clients that a solid entry point with respect to financing needs is in the area of 250k and above. If you didn’t know it some of Canada’s largest corporations utilize this type of financing - if they do why shouldn’t your firm consider this alternative. On an ongoing basis you simply supply, usually monthly, reports on your receivable and inventory levels. You are then advanced funds against these two asset based balance sheet accounts.

The only difference is that in general, 99% of the time you receive higher advances on your receivables and inventory than you would from a bank. The reason is that the banks focus on traditional balance sheet, income statement and operating metrics - while an asset based line of credit focuses predominantly on one thing, the asset!

Pricing in Canada is all over the place with respect to these types of facilities. We tell clients this is for a number of reasons , one of which is simply that the Canadian market is under developed in this area and consists of some large U.S. firms, and a number of smaller Canadian firms, privately owned, who are in some cases geographically constrained or have certain limits themselves with respect to their own capital based .Pricing in Canada varies form 9% per annum, and can in fact go up to 2% per month if in fact your firm has significant challenges but could benefit from the financing . Your ability to turn assets quicker and generate more cash and profits can significantly offset any cost. For this reason we recommend to clients that you deal with a trusted, credible, and experience advisor in this area who can confidently walk you through the ’ ABL ’ (ASSET BASED LOAN) maze.

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Working Capital Financing – Commercial Financing Solutions

Working Capital Financing is forever a major challenge for small and medium sized business in Canada . And that is certainly not to say that larger corporations don’t have that challenge, it’s simply a case of having more assets and resources to deal with the same challenge.

As a business owner or financial manager the level of working capital that you need, and the method in which you achieve that financing is really what drives the solution to your challenge. It is important , in understanding your cash flow needs and solutions, to determine if your working capital financing is required due to the capital intensive nature of your business - or if you in fact simply need to ’ monetize’ , or ’cash flow ’ your assets in an effort to generate more working capital and faster turnover of those funds .

Your focus on working capital becomes even greater if your sales and profits are increasing. However, at the same time the ability to obtain business credit in Canada remains a challenge.
Bank financing has become more difficult to acquire, and many firms are looking at non traditional or alternative sources of financing to secure the funds they need for working capital.

Another hard reality of working capital financing is that most small and mediums sized business are searching for more cash flow on an unsecured basis. This type of financing is very difficult to achieve in the Canadian marketplace, certainly in the Chartered bank environment.

So what are the sources of financial capital that Canadian business owners and financial managers can investigate and potentially utilize? Let’s cover off some of the basic options - These include:

Personal savings (not high on a business owner’s priority list!)
Business Credit Cards
Factoring
Government Working Capital Term Loans - Financing Business Loan (These are cash term loans with fixed payments and rates)
Factoring financing
Asset Based lines of credit

When you are looking for working capital financing one of the key areas you can start with is your own key financial metrics. You don’t need to be a seasoned financial analyst to determine at what rate your receivables are turning over. The bottom line if you haven’t realized it yet (we are sure you have) is that receivables and inventory ’ eat ’ cash.

One key point needs to be made here, if your sales are growing at 15% and your receivables are growing at 15% that’s not a bad thing. (To calculate simply measure the ratio of these two data points) However, if your sales are growing at 15% and receivables are growing at 30% your cash flow and working capital is being consumed by the investment you have made in A/R and inventory that is not turning over. Collections and inventory turnover are a key aspect of working capital financing.

Commercial financing from a bank is the optimal solution for small and medium sized business - as have noted that is difficult to achieve. Funding a business can be complex and we urge clients to seek the advice and guidance of a respected, trusted and experienced commercial financing expert to ensure they pick the right tools to solve working capital challenges.

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Equipment Leasing Companies - Three Things You Must Know About Equipment Leasing In Canada

Most Canadian Business owners know all about the advantages of leasing business equipment and other assets in the Canadian marketplace . If you don’t know those advantages you should .

But what are the 3 things that you need to know to achieve maximum rates, terms and structures for your firm. Here are those three critical elements and information you can use to your advantage in negotiating the best lease financing for your equipment acquisition.

Here are the three things you need to know:

1. Customers get to pick their own lease rate

2. Any asset can be financed

3. Who you deal with will ultimately decide whether you have been properly successful in negotiating the best lease financing

So, clients ask - How is it possible that we as clients get to pick our own lease rate? Isn’t that impossible? Here is what we mean by that, as clients are always surprised by our comment. In fact they jokingly confirmed they would like the lowest rate – wouldn’t we all?

When we make the ‘pick your own rate ‘statement what do we really mean. Simply that all leasing firms have to be competitive to stay in business. In leasing your rate, and in fact the overall structure, is determine by your credit quality. No one knows your firms credit quality better than you the Canadian business owner or financial manager - the best rates in Canada are achieved if you have growing sales, growing profits, and growing cash flow. In fact, whether you like it or not, your ability to show historical and future cash flow generation is in fact probably, in our opinion, the largest factor in final lease approval and achieving the best rate. So, by understanding where your firm is at re balance sheet, profits, and sales growth will allow you to properly project the fact that you deserve a market competitive rate. Leasing companies do a poor job of conveying rate sometimes, they use rate factors and terminology such even industry people get confused on – those terms might include things like ‘ residual, full payout, down stroke, bargain purchase option, effective rate, ‘ etc, etc .

In most cases when assets your are acquiring are significant it is strongly recommended that you utilized the service of a trusted, credible and experienced business lease financing advisor who will work on your behalf to wade through the terms and the rates and proposed structures on only your behalf.

Let’s move on to Critical point # 2 in our info – all assets can be financed. Many firms are not aware the both new and used equipment can be financed. The financing of used equipment in Canada is a huge business. Another key point we can make here is that soft costs can often be included in your lease.

One of the largest soft cost components in leasing today is software – many are not aware that software can be financed. And when it comes to equipment for shops and plants you can often include maintenance, warranty, installation, and delivery as part of your overall lease financing strategy. Customers lay out thousands of dollars only to be told by us that they could have saved that valuable cash flow and included it in the lease.

Finally, point 3 – Leasing in Canada is fragmented and diverse. Companies do business geographically, in some cases only by asset type – i.e. computers, technology, and firms in Canada might do business here but be foreign owned and funded. Investigate who you are dealing with to ensure you have a proper match with your required lease financing benefits.
Being a well informed lessee in these three critical areas will undoubtedly guarantee you lease financing success.

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Stan Prokop - founder of 7 Park Avenue Financial - http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 6 years - has completed in excess of 45 Million $$ of financing for Canadian corporations .
For info on Canadian business financing & contact details :
http://www.7parkavenuefinancial.com/equipment_leasing_companies_equipment_leasing.html

Factoring Finance – Don’t Make This Mistake when Considering a Factoring Program in Canada

Factoring finance in Canada continues to get strong positive traction as a financing tool for Canadian business. In fact, and we see more of this everyday, a once alternative financing vehicle with negative connotations is now a mainstream form of business financing in Canada with positive connotations!

So what changed that, and what is the one mistake Canadian business owners and financial manager make when entering into a factoring program.

Well first of all, what changed is very clearly too all Canadian business owners, financing has become a major challenge for funding future growth and profits. Therefore all forms of business financing should be considered by every business owner and financial manager.

Let’s get back to the subject of our article – what is the single biggest mistake you can make when considering a factoring facility. The answer is:

Entering into a factoring program without understanding how it works and the limitations of the program! That’s a broad comment so let’s get right into what mistakes clients make when we sit down with them and work towards a solid factoring and working capital facility that makes sense for their firm.

First of all, you should not consider factoring as a ‘loan ‘per se. Also, it’s not the same as how a Canadian chartered bank would run such a facility, if your firm was eligible for bank financing. When you enter into a factoring program you are selling your receivables – however under a true bank arrangement you are collateralizing your receivables and borrowing against them. That’s a big difference.

So, clients ask, if we are selling our receivables, how much do we get? Well the reality is that is one of the major mistakes uninformed clients make when they enter into such a facility. Some firms in the marketplace will hold back part of the receivables they fund, but your pricing will be based on the total sale of the receivable or the group of receivables you are financing. Also, whats the cost of factoring?

Most clients make the mistake of focusing totally on price when it comes to factoring – yes that’s important , but at the same time, the way your facility is structured and how it operates on a day to day basis can be many times more important that ‘ price .

Speaking of price the reality is that most customer equate price in receivable financing as an annual interest rate. The industry actually does not view it this way, preferring to call the sale of the receivable a ‘discount ‘to its original value.

We can talk all day about that one, but if you are in fact focused on price you need to understand the per diem rate you are paying everyday that receivable is uncollected. How that rate is communicated to you, and when the rate terminate on collection is one of the single most expensive errors you can omit to research when working on a receivables financing facility.

In summary, our boy scout motto of ‘be prepared ‘is highly appropriate to a factoring financing program. Work with a trusted, credible and experienced advisor who can guide you through the technical maze of factoring to ensure you side step our warning around entering into a facility that is not properly priced or explained to your firm with respect to overall cash flow impact and day to day dealings on your receivables . After all, your receivables are more often than not your largest financial asset – doesn’t it make sense to understand what type of financing you place around this asset? We think it does.

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

Inventory Loans – Financing Inventory Assets

Inventory loans or the financing of your inventory as a component of working capital are critical to the success of your business if your firm has a strong inventory component in working capital.

Inventory is one of the two components of working capital – the other is of course receivables. More often than not the receivable asset is typically larger, on a monthly basis than the inventory assets – but some firms based on the nature of what they do have a very heavy investment in inventory.

Inventory converts into receivable which convert into cash. We all know that. The crux of the matter though is the time in which this happens. Your ability as a manufacturer, wholesaler, etc to purchase inventory, re work it , bill your customer, and then, ( unfortunately ) wait for your account receivable to get paid in many cases can take 2-3 month . The financial analysts call this whole process the cash conversion cycle – the only way you can slow that cycle down and improve cash flow is, unfortunately, to delay payments to suppliers as long as you can . That’s not a desirable operating strategy.

Inventory financing and inventory loans work best when they are often within the context of a true asset based lending arrangement for a combination of inventory and receivables. However the bottom line is as we have stated - financing in this critical area of business financing is available, it’s specialized, but when properly put in place can significantly grow sales and profits.

So is there a solution. There is of course, and in Canada it is a highly specialized solution involving the financing of inventory as a key driver to improve your cash flow and working capital. If done properly you do not incur extra term debt – the reality is that all you are doing is ‘monetizing ‘inventory to generate additional cash flow and working capital for your growth and profits.

One or two critical challenges continually obstruct our client’s ability to properly monetize their working capital. Let’s examine some of those challenges and determine how they can be overcome.

The first challenge is simply that it is becoming increasingly difficult to obtain inventory financing from traditional sources such as the Canadian chartered banks. In fairness to our friends at the banks it simply is difficult for them to properly value and monitor and understand each company’s different inventory financing needs and the cash cycle around that inventory that we have discussed. One further technical issue arises here, which is simply that if your firm has an operating lender in place that lender has probably, sometimes unknowing to yourself, taken a security on the inventory as a part of their security agreement. That‘s not optimal, your inventory is collateralized, but you don’t receive any funding or margining against it.

We meet with many clients who are in this position, and need to work with them to unravel their current financing to properly allow for the monetization of their inventory via an inventory loan or margining facility.

Inventory financing in Canada is specialized – as we’ve noted. We strongly recommend you seek and work with a trusted, credible, and experienced advisor in this area .What are the benefits of such a relationship. First of all your inventory will be properly ‘understood ‘and valued, allowing you to borrow against its value accordingly. It is an unwritten but generally acceptable rule that most banks lend approximately 40% against inventory assets. Two points here – if you can get bank financing on inventory and get that 40% advance we would pretty well recommend you take it ; however if that becomes insurmountable, as it does for most clients, you actually can get anywhere from 40-75% from a true inventory financier .

Are there any special requirements to get proper inventory financing? In general no – a standard business financing application applies, and you must be able to demonstrate, preferable via a perpetual inventory system , that you can account for and report on your inventory on hand, usually on a monthly, but perhaps on a weekly basis .

If your business relies heavily on inventory as a key component for sales and profit growth consider the structuring of a proper inventory financing arrangement either separately or within the context of a true asset based lending or working capital facility .

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

Financing films via Film Tax Credits

Financing film, television and animation projects could hardly be described by an outsider as risk free, but in the current Canadian environment the non repayable tax credits and your ability to finance and monetize them are about as close as we can get to any from of risk free financing.

The current generous tax incentives provided by federal and provincial governments in Canada assist productions as an integral part of the overall financing strategy that any project employs.

Film, TV, and animation projects are financed in exactly the same manner as any type of business financing in Canada – by that we mean there is an equity component, and a debt component. It is of course incumbent on the owners to determine the optimal amount, or ‘mix ‘of owner capital and borrowed funds. The financing of tax credits is a part of the overall debt side of the production, but it is critical to note that the financing of your tax credit is not a debt or a loan – it is simply the monetization of the tax credit that is owed to you by the government. You are essentially factoring, or monetizing that asset.

Let’s use a quick example of a production that is financed, say for a million dollars. You as the owner assume a 500k equity position and the other 50% will come from international distribution and pre –sales. Your tax credit on the production could well be in the 400,000.00$ range based on the current generous legislation in place. You have therefore recovered, and are able to utilize a very significant portion of your over all budget.

Financing a tax credit can be done at two different time periods – naturally the logical one is of course at time of filing and final certification .However, many of our clients are surprised to hear that tax credits can be financed on an accrual basis if your project qualifies. The qualifications are for an accrual type financing are not as harsh as one would thing – they are actually common sense qualification. They include your teams experience, successful utilization in the past of tax credits, and, as important your proven ability to budget and document your projects.

We again re iterate that tax credit financing is available for the three major revenue streams of the industry – name film, television, and digital animation – the latter being non existent years ago and becoming more popular all the time with the advent of new media. Growth in these three areas of entertain continues to be explosive and partially resistant to the global economic slowdown.

Hollywood North, aka ‘CANADA ‘continues to view the tax grants available in Canada as a great way to subsidize any projects production cost. The utilization of a tax credit naturally enhances overall equity returns on invested capital, and it is safe to say many productions in film, TV and animation might never see the light of day without the monetization and receipt of tax credits.
Naturally tax credit financing itself is only one component of an overall financing strategy – other components include:

Lease back deals on copyrights

Your ability to pre-sell projects overseas

Product placement

Equity injections

However, it is very safe to say tax credits are an integral component of an entertainment financing strategy.
So how do you finance your tax credit? Clients ask … again we stress common sense fundamentals. Locate a credible, experienced, and trusted advisor in this niche area of business finance. Ensure you have a proper team in place, i.e. accountant, lawyer, etc , preferably with a track record in assisting your documentation and certification of your project .Financing of tax credits can generate anywhere to 40- 80% of your actual or projected tax credit filing . Funds can be used for a general purpose, and are repaid in full when the government clears and pays your tax credit claim. Maintaining proper paperwork and up to date certifications and filings is essential.

We strong recommend a tax credit financing strategy to enhance the overall cash flow and working capital viability of your independent or studio projects in TV, movies and digital animation- talk to a film tax consultant today!

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Stan Prokop - founder of 7 Park Avenue Financial - http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 6 years - has completed in excess of 45 Million $$ of financing for Canadian corporations .
For information on Canadian business financing - contact details :
http://www.7parkavenuefinancial.com/financing_films_film_tax_credits.html

Sr&ed Tax Credit Financing – The Only Two Things You Need To Know about sr&ed finance

SR&ED Tax Credit Financing is somewhat misunderstood, or in fact not really considered by many Canadian business owners and financial managers in Canada. We use the word ‘considered ‘simply because many SRED claimants are not aware that their SR&ED claims can be financing as soon as they are filed – in some cases prior to filing!

So let’s return to our topic – what are the two things you need to know about financing your sred tax credit. We’ll keep it simple –

1. You have to have a Sr&Ed claim to obtain financing for the claim!

2. A sred financing claim is in fact similar to any business financing application – frankly it’s quite simpler and more focused!

Is that it? Yes, it’s as simple as that. SR&ED tax credit financing is one of the most unique ways to bring valuable cash flow and working capital back into your firm. Just the very nature of sred itself suggests that your firm relies heavily on the credit to recover the capital you have spent under the government’s quite generous non repayable grant.

So let’s return to our point # 1 – to finance a claim, you need a claim. The SRED program in Canada is the governments rebate; in effect it’s a grant, back to Canadian business for any investment you make in research and development. More and more information is coming out everyday from government and private sources which suggest that many firms who are eligible for the program either aren’t aware of it, or even more disappointing, don’t know how to go about preparing and filing a claim. We are often amazed when some clients infer that it’s ‘too much trouble ‘to prepare a sred claim.

A couple of points can be made on this subject. We have met a small handful, and we repeat small handful! Of clients over the years who prepare their own filings. This of course is possible, legal, and in some business owners minds ‘cost effective. The hard reality is that most firms don’t have the technical and financial know how to complete a claim on their own. (Apologies to the firms which successfully prepare a file their own claims – you know who you are!)

The majority of claims in the sred area are prepared by what is known as sred consultants. We tell clients that these consultants are high specialized, are up to date on current government sred and accounting matters, and in most cases work on contingency – meaning that they prepare the claim at their own risk and time, and charge a fee which is totally based on success of the final claim approval. If Canadian business owners and financial managers don’t choose to pay a contingency fee then they can play a flat rate based on the sred consultant’s time on the claim and filing. Naturally more often than not the sred fee has to be paid as soon as the claim is completed, even if you still have to wait several months to a year to get your funds.

More importantly, as it relates to the financing of the sred claim, a claim tends to be more financeable when it is prepared by a reputable consultant in this area. And in fact when you claim is financed, either at time of filing or prior, the sred consultant can also be paid in full or in part out of the financing.

So the bottom line on our point # 1 is simply – make yourself aware of the program if you are not, prepare a solid claim with the use of a reputable consultant, and be knowledgeable that the claim can be financed during preparation or at time of filing .
Let’s move on to point # 2- Clients ask, is it really that simple to finance a Sr&Ed tax credit. There is only one answer, which is of course yes. You should treat your sred tax credit financing just as any other basic financing. Because this area of Canadian business financing is somewhat of a boutique are you should ensure you are working with a credible, trusted, and experienced advisor in this area.

Let’s cover some of the very simple key basics around the financing of your claim. Most firms are eligible, under the program itself, to receive anywhere from 20-50% of your expenses in the R&D area. Your sred claim will ultimately have a final value, which is made up of the federal and provincial portions combined. Let’s assume its 200,000.00 as an example. You and your accountant have filed your year end financials, and included a sred claim of 200k. What happens now if you want to finance that claim. The reality is that you simply have to fill out a standard business financing application – just as if you were borrowing for any other matter. In our case the ‘collateral ‘, if we can call it that, it’s the sred claim.

Important to note hear that you are not incurring debt or creating a ‘ loan ‘ on the sred – Your balance sheet stays intact, you are simply ‘ monetizing ‘ the sred claim in order to generate working capital and cash flow now . Generally you receive approximately 70% of the claim as an advance, with the 30% held back and payable to yourself in full when you final claim is audited, approved, and that cheque from the government is ‘in the mail ‘! The financing feels itself, associated with the tax credit financing are deducted from that final 30% holdback. You can generally create a sred loan for a period of a minimum of 60 days, but most sred financing generally last from 3-12 months, depending on the size of your claim, its eligibility with CRA, and whether you are a first time filer.

So whats our bottom line – it couldn’t be simpler:

- Make yourself aware of this great program – prepare a proper claim with someone who is experienced
- If you are focused on cash flow and working capital needs consider financing your claim and directly monetizing this great program

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