Factoring Accounts Receivable – Cash flow Strategy 101!

Factoring accounts receivable is fast becoming one of the most popular ways to generate cash flow and working capital for your business. Thousands of firms in Canada utilize this strategy as a primary method of funding their business.

Let’s examine why this business financing strategy works and how you can best assess if a factoring receivable solution is the best choice for your firm. We also point out to clients that the Canadian landscape for this type of financing is somewhat different from the U.S. models of this type of financing, and one of the most important decisions you can make after choosing to enter into such a strategy is simply picking the best partner for your particular needs .

Factoring is becoming more popular for Canadian business financing simply for one reason – which is that some of the other more traditional forms of business finance have dried up and are not available due to the world economic meltdown of 2008-2009.

Business prospects have clearly improved, but business access to capital has been very slow to catch up. Most Canadian business owners and financial managers turn to banks when they need financing; if your firm is established, has decent financials, is profitable, and means a number of ratios and metrics required by the banks then this clearly is your option of record for business financing – certainly from a cost perspective.

However, if your firm can meet, or qualify for traditional business financing (we are referring mostly to business lines of credit for receivables and inventory) then you must search out and explore additional sources of working capital.
One great piece of mis information out there is embodied in the question many clients come in and ask us about – namely ‘Are there any government grants or loans for my business?”. The reality around that is that there are two programs that consistently deliver on the governments promise to fund small business – one is what is commonly known as the Small Business Loan; the other is the government’s research and development non repayable grant, commonly called the SRED program. That’s great news, you say. Well yes and know, because neither of these programs touch on nor affect our subject matter, which is working capital. The SBL loan covers only equipment and leaseholds, and the SRED program covers a refund on your R&D, if in fact that is applicable.

So we come full circle to how does factoring work and why are it a potential solution for your firm. It works in a very simply manner - you sell you invoices, either one at a time, all at once, or regular periodically at your choice . The key word is selling. When you sell something you get cash, and factoring receivables is your method of obtaining immediate cash.

The complexity of factoring, if we can call it that, is simply how it works on a day to day basis within your own business model, and more importantly, how it affects your customer base. Using traditional factoring as our explanation your firm issues an invoice, you are advanced immediately approx. 80% of the funds, i.e. almost the same day!, and when your customer pays you get the rest of our funds immediately, less a financing charge .

That aforementioned financing charge becomes the most important point of focus for many of our clients – as rates in Canada on a monthly basis range from 1-3% per month .When clients address that issue of cost we point out to them that if they have solid gross margins, can turn over receivables, and have the ability to purchase more effectively with the new cash that the cost of factoring inevitably becomes somewhat of a non event, based on the fact that this facility provides you ‘ unlimited’ working capital on a long term basis.

In Canada the challenge becomes finding the firm that works best for you with respect to the receivable strategy we have outlined. Many of the small nuances around how factoring is marketed, explained, and works on a daily basis becomes the bone of contention for our customers. Seek out a trusted, repeatable, and experienced business financing advisor who can guide you through the factoring maze relative to price, size of facility, and most importantly, how the facility works on a daily basis to augment your cash flow and working capital.

Factoring accounts receivable, when done properly, is a solid tool for you cash flow and working capital needs.

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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 .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/factoring_accounts_receivable_factoring_receivable.html

SR&ED Financing – How to Cash Flow Your Sr&ed Tax Credit for Cash Flow and Working Capital

First of all lets get the name calling out of the way, you can call it SR&ED, or you can call it SRED ; whatever you call it you can finance your research tax credit !

Canadian business owners and financial managers in a variety of industries have the ability to of course file sred claims, and at the same time, if they choose, they can finance their claim and generate immediate cash flow and working capital from this valuable government grant program. And it is of course a grant because those funds are non repayable.

You can’t take advantage of the program if you do not file a claim, so understanding the basic around a claim, as well as the characteristics that claim needs to be financed is valuable information for Canadian business owners and financial managers. You essentially want to ensure you are getting your piece of the multi billion dollar ‘pie; that is held out to Canadian business for this program.

As we stated, your claim must be filed and substantiated under the normal program guidelines. Canadian firms recoup, as we said, billions of dollars each year for research and development and experimental work for their products and services. One of the misnomers around the program is that your R&D has to be successful in nature, and that’s actually not correct, you just have to be in a position to document what you did and how you did or tried it.

With the information we are sharing here we want to be able to ensure you understand how the quality and size of your claim affect its overall financeability. SRED claims are applied for in all sorts of amounts, we have seen clients file as low as 20,000 – 30,000$ per annum, and as high as 1.5 million dollars, and we are sure there have been higher claims

The actual claim preparation has an effect on your claims financeability – as your goal, should you need the cash flow and working capital, is to monetize that claim into a short term sred loan – with the sred itself being the collateral for the loan.

Although claims prepared by owners and management can be considered for financing, the reality is that if you are applying for sr&ed financing it makes a lot more sense to have your claim prepared by one of two parties, either your accountant , or what is known as a ‘ Sred Consultant ‘. Claims require special documentation and wording, and the reality is that just very recently the government introduced paperwork and online processes in their effort to ‘streamline ‘the program. We tell clients that we are all for the government streamlining things, but if you don’t understand the ground rules things can get confusing.

Depending on the type of expenditures and the exact nature of your claim you should be in a position to get as much as 40% and in some cases the 60% range of your funds back. When you choose to finance a claim the general advance is made at 70% - so let’s do some rough arithmetic around a sample claim and it’s financing.

Let’s say your firm, in tandem with your accountant or sred consultant file a claim for expenditures of $ 575,000.00 – Lets further pick the mid range of our estimate on what your final tax credit rebate will be, so lets assume 50% - That’s a sred tax credit rebate of almost 280,000.00$ .

As a business owner you can wait anywhere from 1-12 months to get your cheque in from the government, which is reimbursed at the federal and provincial levels. Or, if you choose to utilize those funds now under a sred loan, you can get an immediate advance of 70% of that claim, or in our example: 200,000.00$. Could your firm put 200k to go use for either working capital purposes, equipment purchases, or even more on going sred activity?

Furthermore, if you have successfully financed sred claims in the past you could be very eligible for sred accrual financing – which is a special program that reimburses your for your sred expenses as you go along during the year.

Traditional financing institutions such as banks and business credit unions are poorly equipped to understand and finance sred tax credits .As a result we recommend you work with a trusted and credible business financing advisor to ensure your claim can be financed quickly and with a modest amount of preparation. Quite frankly we tell clients that as esoteric as a sred claim might be they should view as simply as any other Canadian business financing – i.e. complete an application, provide back up on your sred claim itself and of course you’re firm, and to be prepared to collateralize the sred for your sred loan funding.

If you feel you are in a position to file a sred claim of any significance then think what the discounting, or cash flowing of that claim could do to your firms working capital .Oh, and by the way, no payments are made on your sred loan, financing costs are calculated at the back end of the claim when you receive your funds, including the previously mentioned 30% that was held back on the financing.

So our bottom line is simply that you should apply for sred tax credits if you qualify, and, as importantly, consider cash flowing those claims if you need funds now.

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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 .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/sr_ED_FINANCING_SR_ed_tax_credit_sred_loan_.html

Financing Your Film Tax Credits Canada

Canadian film , television, and digital animation producers and owners continue to leverage Canada’s generous tax credit program , and are increasingly being joined by their partners and investors in U.S. and other parts of the world as the momentum in filmtax credits gains traction almost on a daily basis .

The overall challenge however, hasn’t really changed – Simply put –how do owners put together a sensible financing package that includes a proper combination of debt, equity, gap, and tax credit financing that properly leverages and monetizes their production.

As consumers we tend to gravitate towards ‘ experts ‘ in any field, and that should clearly be the focus of your production when you are considering afilm tax credit financing strategy in connection with your overall financing . We therefore recommend to all clients that they seek the advice and guidance of a trusted, credible, and experienced advisor in this area of entertainment finance.

One of the reasons for dealing with an expert is that, while Canada’s tax credits are currently among the best and most generous in the world, the reality is that it is a combination of a federal and provincial effort in Canada’s ten provinces – each province has varying credits, and some are more generous than others! As an example B.C.’s film incentive tax credit is currently 21%, with a 33% production services credit on labour that qualified.Although in conversations with clients we tend to more often than not discuss film tax credits, we should not forget the sister credit, ‘ digital media tax credit ‘; again using B.C. as an example that credit is 17.5%.As an example, Ontario’s production services tax credit is 25%, so you can see the subtle difference in choosing various geographies for domiciling or completing your projects.

Film tax Credits in Canada can primarily be financed in one of two ways, you can arrange financing on completion and certification of your project, or, more popular with clients, you can arrange for an accrual financing. Under this accrual financing of your tax credit you receive funds as you spend them, therefore significantly augmenting your overall working capital and cash flow strategy for your project.

In order to have your film tax credit in Canada properly financed, and as important, in a timely fashion you should focus on some key elements of criticality in advance. First of all you should be in a position to present an overall fiancé plan for your project – that should include timelines, a budget, and your ability to produce proper records around the projects special purpose entity, i.e.Ensuring your filings is up to date. Most productions we see are domiciled under a separate legal entity for the project.

When submitting a tax credit for financing consideration, either when filed, or using our accrual financing scenario you should ensure the numbers have been vetted by a proper accountant, one with entertainment credibility and experience. That simply helps validate the numbers and ensure that you can obtain maximum loan to value for your project.Generally tax credits are financed, when filed, at 70% or more of their overall value – accrual financing tends to be a lower loan to value because of some of the final uncertainties around the size and quality of the filing.

Film, TV, and digital animation productions in Canada can be significantly assisted by a proper tax credit financing strategy.

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

Franchise Financing – A Canadian ‘ how to’ Model !

Franchise financing – you’ve made the decision about your future as a Canadian entrepreneur and selected your franchise of choice. Now the only minor detail involves how to pay for and finance this major investment on your part!

The purchase of a franchise is an investment in your future, the ability to operate your own business and generate personal income and wealth – it therefore makes sense to ensure you finance that purchase in the right manner.

If you have purchased the right franchise you should first feel comfortable that you have selected a solid business model, and, where applicable, a good location. Franchises have a strong ability to generate sales and profit from the beginning because they have proven marketing plans, solid training for franchisees, and sources of supply and support. All of these factors are necessarily harder to obtain if you are starting a business that is a non franchise.

So we agree you have aligned yourself with a winning franchise model. How do you finance that franchise when you in fact read that business financing is as challenging as ever in the 2010 environment. The ‘ trick ‘ if we can call it that, ( its actually hard due diligence and working with the right people ) is to match the proper amount of debt and equity that leaves you with the right financing options for both the purchase of the franchise and future growth .

Let’s look at a real world example - We recently worked with a client who wanted to open a high end grocery chain. The client was under the impression that the entire 1 Million dollars + he needed was readily available from various single financing sources. The reality is that many lenders still view franchisees, as proven as they are, as start ups, and no one is ever going to lend one million dollars for a new venture. So what do I do now, asked the client? A practical solution for this client is what we call the ‘ cobbling together ‘ of various financial mechanism that will allow the franchisee to meet his goals, in this case that was a government small business loan, a term loan for equipment and working capital, and lease financing .

So we can’t over emphasize that franchise financing in Canada is about ‘options ‘. Investigate those options thoroughly, match benefits to risk and reward and cost of financing, and pick a suitable combination that works for your risk appetite. The largest corporations in the world have Chief Financial Officers that wrestle everyday with two terms – debt and equity. That is, how much do they borrow, and how much do they ask their shareholders to put in.

Guess what , you’re now the CFO of your own corporation and you are wrestling with that same conundrum – how much of your personal resources will you put in, and how much can you, and are you willing , to borrow . The proper balance of debt and equity in your Canadian franchise is what will bring you financial success.

Buying a franchise and then financing a franchise successfully is the key to your overall business success. Speak to a trusted, credible, and experienced franchise finance expert who will guide you through the maze of franchise finance options. Be prepared to make the proper amount of personal financial investment into the business, but at the same time don’t be afraid to take on good debt that makes sense for proper leverage and growth .That’s a solid financial strategy!

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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 .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/franchise_financing_buying_a_franchise.html

What is the Solution to Finance Inventory for Canadian Business?

Canadian business owners and finance mangers are continually challenged to finance inventory as a component of their overall business financing and cash flow needs. There are solutions to this challenge and we’ll discuss and review some critical factors around inventory finance in Canada.

Inventory financing is the collateralizing of your inventory for financing purposes .Where it gets trick is that it has to work for all parties, yourself, and the lender, when you in fact have existing financing arrangements in place re your overall business finance strategy.

Working capital in Canada generally consists of receivables and inventory – if your sales are growing , and you are collecting receivables and turning over inventory you have a continuous need for more working capital as those two ‘ current assets ‘ grow .
The key to facilitating a solid inventory financing, or purchase order financing in Canada is to help your lender get the feeling they will never have to realize on that inventory to collect their loan or financing proceeds! You want to be able to demonstrate that your inventory is marketable, and that you have the ability to control and count the inventory. A perpetual inventory accounting systems helps a lot in that process – so investigate that with your accountant.

Similar to inventory financing a purchase order financing solution is very complimentary in nature. It is a case of your firm having product to ship but are in effect lacking in your ability to replenish inventory and fulfill orders and contracts.
When clients ask us what can go wrong in an inventory financing scenario we often simply state that you must be in a position to be able to turn inventory over and demonstrate your products are marketable in a worst case scenario .

Inventory and purchase order financing in Canada is specialized – seek out the services of a trusted, credible, and experienced business financing advisor who will be in a position to present your overall financial situation and prospects in the best light – this will include an overview of your current financial position, most importantly also your prospects, and the ability to define a facility based on the overall market value of your particular inventory.

We talked earlier about the challenge of managing through an inventory financing facility based on your current borrowing arrangements. In a perfect world (we know it’s not a perfect world!) you secure both inventory and A/R financing via a chartered bank. The alternative to this is an asset based lending facility, or what is known as an ABL line of credit. This facility margins inventory and receivables to the maximum value, which great increases your ability to draw down on cash flow needs.
In a working capital or asset based line of credit situation you will usually have a larger drawdown on receivable, but a proper inventory financing scenario can easily secure 60-80% of your overall inventory values – that is a lot of additional cash flow if you need to draw down on it.

The key benefits of a properly structured inventory financing facility are that it supplements your overall working capital needs. The facility should revolve, and you should only be paying for what you use. You should also have defined borrowing limits on inventory, and the ability to repay, or draw more financing at your option.

Your best inventory financing ability will ultimately come from your ability, as we said, for you to demonstrate proper accounting and reporting of inventory, as well as information on customer prospects, contracts, etc.

If you structure a proper inventory finance facility you will have access to significantly more working capital , inventory will easily be replenish able, and you should have additional purchasing power based on increased access to cash . Pricing on inventory and purchase order financing varies with the size of the facility, lenders interpretation of the marketability of your product, and your ability to turnover inventory at equal to or better than industry standards based on your own business model.

A proper inventory finance application should be no different that any other type of financing you apply for, so don’t view it as a mysterious type of business financing. Focus on demonstrating clearly how inventory financing will grow your sales and profits, that’s a win win situation for you and your inventory lender.

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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 .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/finance_inventory_financing_costs.html

Why An Asset Based Loan Might Be Your Best Business Line of Credit Solution in Canada

Canadian business owners and financial managers fully realize that based upon their working capital and cash flow needs a business line of credit is a necessity for the overall financing needs of the business.

An asset finance strategy can sometimes be the best solution for your overall business financing needs. Clients we speak to have trouble differentiating this type of solution from a regular Canadian chartered bank line of credit.

The difference is simply the overall focus of the financing – an asset based line of credit focuses solely on the variety of different business assets youhave – they include predominantly inventory, receivables, equipment, and in some cases real estate .

When you successfully set up an asset based loan facility you are in effect monetizing these assets to their maximum, and borrowing against them as you need funds, on a daily basis.Naturally the main and most liquid assets in this type of financing tend to be receivables and inventory, but those other hard assets can nicely shore up an even higher credit facility for your firm.

So let’s get back to the difference between this type of facility, which some companies have never heard of, and a bank revolving line of credit. Your asset based business line of credit, unlike the bank facility, focuses 99% on the value of the assets in your business – so the bottom line is that as those assets grow you have unlimited working capital to grow ! – And that’s a good thing.

Another way of looking at this or explaining it more clearly is the manner in which these loans are set up and approved. Asset based loans for a business line of credit in this asset finance strategy focuses on collateral and its value. If you have now, or in the past secured a bank facility on the other hand you of course recognize the banks puts a lot of emphasis on non asset issues such as overall financial statement quality, external collateral, personal guarantees, etc. That is the main difference between these two types of financing. If you can demonstrate positive cash flow and cash flow from operations to a Canadian chartered bank it is unlikely you can obtain a business line of credit that suits your overall needs. Asset finance on the other hand is collateral based – if you have A/R, inventory, and perhaps equipment and real estate you can draw down on a daily basis against the value of those assets!

One other critical difference is that less covenants and ratio requirements are in place in an asset based line of credit.So if your firm has ongoing liquid and fixed assets you are in an excellent position to negotiate a business line of credit for an asset based financing facility.

How does this facility work on a daily basis? Is a question we always get from clients? You still of course do your banking at a bank or perhaps a credit union – but you supply on a regular (perhaps a weekly or monthly basis) what is known as a borrowing base certificate for your assets. The asset based lender then advances funds into your account which you can use to finance your business.

Asset based loans, or working capital facilities as we also like to call them have different levels of pricing based on overall facility size and with whom you are financing the line with. We recommend you review the benefits of an asset based business line of credit and speak to a credible, trusted, and experienced business financing advisor to determine if this type of working capital arrangement suits your firm. Many Canadian businesses are moving to this type of facility to fund future growth and profits.

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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 .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/business_LINE_of_credit_asset_based_loan.html

What is the Financing Cost and Options of Different Sources of Financing

What are my available sources of financing and what is the financing cost of those sources and options ask our clients? When we are talking working capital it all comes down to your firm’s ability to raise and utilize cash flow on an ongoing basis.
We will discuss what some of those sources of financing are, and more importantly the costs and benefits associated with those different types of financing for Canadian business owners

When you understand what working capital is you are obviously in a better position to source it! You therefore need to know how to measure working capital in terms of your overall business needs. That’s part of the problem and challenge, because when we sit down and work with clients on working capital and cash flow needs we quickly determine that working capital and cash flow mean different things to different business owners .

The problem usually starts with the business owner assessing his working capital needs by looking at the ‘Total Cash ‘line in his bank account. That is of course cash on hand, and doesn’t reflect working capital, which is the funds he has tied up in receivables, inventory, prepaid, etc.

We can go to the text book definition also ( not our favorite way of doing things ) and finding out that working capital is simply current assets minus current liabilities, calculated by a quick look at your balance sheet . We are not a big fan of that calculation, simply because it doesn’t give you a true sense of the turnover of those critical balance sheet accounts such as A/R and inventory. A quick example simply is that most business owners assume the larger the ‘working capital’ numbers the better shape they are in – in fact the exact opposite is true because they require cash flow to fund that higher investment in receivables and inventory.

The best way to measure working capital efficiency is on a regular basis to calculate your receivable and inventory turnover. They are either getting better or worse, and your working capital improves or deteriorates in the same relation.
You should also focus on business liquidity because suppliers and creditors will bear the brunt of your inability to fund your business – and deterioration in supplier / creditor relations is the worst thing that can happen to your business.

So now you have a better handle on working capital – what next. Well you clearly recognize that cash on hand and growing inventory and A/R isn’t helping your cash flow at all – you need external financing. You achieve external financing by the profits you generate from your business, plus working capital facilities via a bank or independent finance company. Your needs might be seasonal, or on going, depending on what industry you are in.

So back to our sources of financing and the costs associated with those sources. You of course have the option of either generating a working capital term loan, or, if it’s a larger facility, it might be called a Sub debt or mezzanine loan. Essentially they are unsecured cash flow loans with rates in Canada ranging from 10-15% - they are traditionally on a fixed term, fixed rate basis – 5 years is common. You also have the option of putting more permanent equity into your business via an equity injection of bringing in a new shareholder. We are perfectly clear with clients that this is the most expensive form of financing, because you are giving up future ownership.

If you can’t raise capital for a working capital loan call your suppliers. Are you kidding, customers ask?! Well partly, what we mean to say is simply that your working capital increases when you slow payments to suppliers – that’s a double edged sword re supplier relationships, so tread cautiously on that one.

Other more traditional alternatives are bank operating lines of credit, these come with the best rates, current in the 4-5% range in early 2010 in Canada. The only problem – great rates but difficult financing to achieve as Canadian chartered banks demand solid financials when they are granting this type of facility. A better way to achieve full liquidity via this method is to consider a factoring or asset based facility – Rates in Canada range for 9% / annum to 1-2% per month based on your overall financial position and size of facility . But, they offer you 100% working capital for all your business financing needs, so that’s a good trade off.

Many clients approach us for other working capital sources, such as a sale leaseback of unencumbered assets, or a bridge or bulge loan on equipment and real estate to shore up working capital. These are great short term, but no long term fixes.
Understand what sources of financing are available to your firm, knowing their costs, and executing on facilities or solutions that make sense for your business is the true working capital and cash flow solution for Canadian business. Speak to a trusted, credible, and experienced business financing advisor to guide you to the right business financing decision.

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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 .Info re: Canadian business financing & contact details:
http://www.7parkavenuefinancial.com/sources_of_financing_financing_cost.html