How To Finance A Franchise – Your Options and Risk

Entrepreneurs who wish to purchase a new or existing franchise are always asking us ‘What are my Financing Options?”. The ability to choose the right financing option (in reality it is the right mix of financing options) is one of the most important aspects of your entry into the purchase and running of a successful franchise in Canada.

It is of course very rare that a franchise can be purchased for all cash, as the amounts involved can be very significant. And in fact, as we will demonstrate, in many cases that would actually be the wrong thing to do. Even the largest and most successful corporations in the world take on debt, there is good debt and bad debt of course (as consumers we now that also. By utilizing the right mix of debt and your own equity you can properly ‘leverage’ the business for greater rewards and returns.

We will use a quick and somewhat blatant and unrealistic example just to illustrate our point. Let’s say that you wish to purchase a franchise for 250,000.00, which is certainly not an uncommon amount. You have the option of paying cash for it (lets pretend!), or you can put 10,000.00$ down and borrow the rest. At the end of one year your franchise nets 20,000.00 in net income, let’s assume. If you had only put in 10,000.00$ of your own money you have generated a 200% return on equity. Even Warren Buffet would be jealous of you. However, had you put in 250,000.00$ of our own money you can clearly see you have many years to go before you get a positive return on your significant initial investment.

So whats our bottom line – it’s simply that debt and the right amount of leverage can be a good thing, and it’s an excellent way to measure the potential returns in any business, including your investment into a Canadian franchise.

Let’s return to our core topic, financing your franchise. The reality is that are several options in Canada to finance your purchase. Those options can relate to either a new or existing franchise – both are quite financeable. One of the main reasons you might wish to consider purchasing an existing franchise is that in some cases the track record and the assets in the business might present an easier case for financeability.

Franchise financing in Canada is absolutely a specialized type of financing. When we sit down with clients to evaluate their options d and focus on the quickest and best way to achieve franchise financing success we can summarize your financing options in the following manner –

-Government Small Business Loan – (By far the most common and popular)

-Your own personal equity or down payment (typically from 10-50%)

- Equipment and asset financing

- Working Capital Term Loan

- Operating facility for ongoing requirements

- VTB – (Vendor take back) – in some cases the franchisor or the seller of the current franchise will waive full payment and agree on a final pre agreed upon payment to be made at some point in the future

Whether you consider yourself financially astute, or if you are concerned and worried that you don’t know enough about financing in general, it is strong recommended you align yourself with a trusted, credible and experienced advisor in franchise financing. Understanding your options, picking your options, and executing on those options within your timelines is the key to franchise financing success.

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

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

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

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