Understanding Working Capital: Key to Successful Business Financing

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YOU ARE LOOKING FOR WORKING CAPITAL AND BUSINESS FINANCING!

Business Financing 101: How to Manage Your Working Capital

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

Let us help your firm just like our hundreds of other satisfied clients.

        Financing & Cash flow are the biggest issues facing businesses today

   ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

Or Email us with any questions on Canadian Business Financing

EMAIL - sprokop@7parkavenuefinancial.com

 

 

Unlocking Your Working Capital Potential: Innovative Business Financing Solutions

 

If you're like most of us Mom never really gave us a lot of advice on working capital!

 

That's why for such an important business financing subject we recently read an older article in Canadian Business magazine that covered a total of 15 - yes that’s 15! - ways to finance your business. Perhaps these were the secrets of the Holy Grail that Mom never taught us, we thought. Turns out some were, but most were not! So let's dig in and get serious on the subject of cash flow financing your business needs.

 

CASH FLOW FINANCING SOLUTIONS

 

Cash flow financing is a business finance option for businesses that are growing and require either business loans or upfront investment to generate further revenue as well as to fund ongoing operations.

 

That ability to fulfill existing debt obligations and to have the financial capacity to grow the business requires solid cash flow forecasting and short-term financing strategies for funding cash flow to run and grow the business.

 

Cash flow loans can include working capital term loans, business lines of credit,  receivable financing strategies and other innovative traditional and alternative finance solutions. Financing your business properly enhances the chances of business growth with proper working capital efficiency!

 

"In business, the rearview mirror is always clearer than the windshield." - Warren Buffett

 

  

WHAT IS A WORKING CAPITAL LOAN?  

 

A working capital loan is a type of financing in a term loan structure that allows a business to fund ongoing day-to-day business expenses such as accounts payable,  rent, purchasing of inventory, and other miscellaneous overheads.

 

This method of financing covers short-term gaps in cash flow and provides businesses with essential capital to run a business smoothly.

 

The majority of working capital loans are unsecured and require no collateral - loans are ' backstopped' by the cash flows of this business - as well as the guarantees of business owners- Loan amounts and repayments are structured based on the type and amount of financing - so amortization is on an installment basis and may be short term or several years in duration.

 

Working capital loan financing is provided by banks, business credit unions,  online lenders, and other alternative financing providers. Typical information required to process such a loan includes the financial statements of the companies, tax returns and other basic business information on the business - in some cases, a business plan will benefit the chances of approval.  Cash flow projections will typically be provided by the borrower to show the overall stability of the business as well as repayment capability.

 

 

DO YOU UNDERSTAND YOUR CASH CONVERSION CYCLE?

 

The cash conversion cycle,  aka  (CCC)  is a financing measurement tool that allows a business to assess its working capital needs and uses - that allows the business to assess the cash needs of day-to-day operations. The cash conversion cycle calculation measures the amount of time it takes for a company to both meet obligations as well as factor in cash inflows from collections - A shorter timeframe is generally accepted as a better number.

The calculations used in the measurement include asset turnover ratios such as inventory, receivables, and payables - All information is based on information in the financial statements such as cost of goods, dso, sales, and ending payables.

 

WHAT ARE SOME COMMON USES OF WORKING CAPITAL FINANCING

 

Working capital financing has a wide range of uses such as the ability to invest in inventory and other required materials.

Many businesses are seasonal or cyclical in nature and will often require upfront capital to meet requirements during off-peak periods - Also in the business many short-term opportunities arise such as purchasing material or inventory at better prices /costs.

Staffing and labour costs can also be met by working capital finance solutions.

 

WHAT IS MEZZANINE DEBT?

 

Mezzanine debt is an unsecured cash flow loan provided by private finance firms. In almost all cases, it focuses solely on cash flow as the repayment vehicle. The bad news on mezzanine debt is that it typically is available for larger transactions in excess of several million dollars, which certainly doesn’t work for most small and medium business owners. For the record mezzanine financing rates are higher, and often in the low to mid-teens.

 

  

DOES YOUR BUSINESS QUALIFY FOR VENTURE CAPITAL FINANCING ( SPOILER ALERT- PROBABLY NOT!)  

VC money is often bandied about and sought by many corporations. Venture capital in Canada is struggling in the 2023  environment, any fundings seem to be going to firms that have been previously funded and are getting additional capital (to stay alive?). 

 

Any Venture capital firm expects a high rate of return relative to the risk they are taking in financing your firm on an equity basis - in fact traditionally, as the article stated, the venture capitalists are looking for a 5 times return.  Unfortunately for many Canadian business owners, these types of funding go to the sexier industry segments such as biotechnology, high tech, etc.

 

 

CONCLUSION -  WORKING CAPITAL IS THE FOUNDATION OF BUSINESS FINANCING

 

The common types of cash flow and working capital financing for SME businesses will include term loans, business credit lines, invoice financing such as factoring, and short-term working capital loans known as a ' merchant cash advance '. Small business loans under the Canada small business financing program now include working capital facilities based on changes to the program that Industry Canada made in 2022.

 

Many businesses use business credit cards to cover small operational costs,  while term loan structures for cash flow are for more established companies that can prove positive cash flow for repayment. Line of  Credit facilities are useful for any business requiring the need to address cash flow gaps around the investment a company makes in a/r and inventory and the company will pay interest only on funds drawn under the facility.

 

Short-term merchant advances are smaller installment loans geared to a formula around company sales and the business owner's personal credit scores and are readily accessible but come with higher interest rates.

 

Call 7 Park Avenue Financial, a trusted, credible and experienced business financing advisor who can provide you with an up-to-date realistic alternative to business funding and business loan needs.

 

 

FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

 

 

 

How do you calculate working capital?

Working capital is calculated by subtracting current liabilities on the balance sheet from the company's current assets also listed on a balance sheet 

 

 Why is working capital important? 

Working capital is important because it represents the funding that the company has available to service day-to-day operations. Positive working capital that includes good asset turnover in balance sheet accounts will ensure the ability of the company to pay bills and invest in growth opportunities. When working capital turnover is poor businesses struggle and may be perceived as having credit risk to business lenders who focus on calculations around the working capital cycle and debt service coverage ratios.

 

What is a good working capital ratio?

 

A good working capital ratio is in the 2 range if asset turnover is reasonable - If the working capital ratio, also known as the current ratio, is negative then the company may be breaching loan covenants and may be considered insolvent.  - When the ratio is exceedingly higher than 2 it suggests asset turnover around days sales outstanding, inventory turns, and payables are poor.

 

Can working capital be negative?

Working capital can be negative in certain circumstances,  It is not always cause for concern as many businesses and business models such as retailers selling on a  cash basis can operate with negative working capital efficiency ratios.

 

 Is  SR&ED Financing A Source of Working Capital 

The sr&ed program provides billions of dollars of capital for any firm in Canada that qualifies for research spending and adheres to the program guidelines. SRED claims can also be financed, similar to a receivable, as soon as they are filed, which supercharges the program even more from a working capital business financing perspective.

Click here for the business finance track record of 7 Park Avenue Financial

Guide To Business Funding Sources Of Capital In 2023 In Canada

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YOUR COMPANY IS LOOKING FOR  SOURCES OF FUNDING FOR

BUSINESSES

CANADA BUSINESS FUNDING SOLUTIONS

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS  FINANCING OPTIONS?

CONTACT:

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

 

TIPS AND STRATEGIES TO SECURE BUSINESS FUNDING

 

Business funding sources in Canada often have business owners/financial managers looking for the right ' connection' they need when looking for capital and financing solutions.  When it comes to entrepreneurship finance, often the situation seems clear as mud... or molasses?

 

Let's dig in for those sources of funds for business and funding programs that will work for your business. Whether you are looking for startup  business funding or growth financing & business lending to continue your business success, we have the necessary solutions.

 

Financing solutions for your business might revolve around business loans from banks or commercial financing companies as well as asset-based lenders - It's essential to focus on eligibility criteria and the information required in the application process - in some cases government funding solutions might be an alternative to bank loans and other forms of equity capital.

 

 

Molasses? We're referring to the Great Molasses Flood of 1919 in Boston - where a large molasses tank burst, streets were flooded, and 21 folks lost their lives!  That isn't the same anxiety that business people experience around finance choices, but it often sure feels like it.

 

IDENTIFYING SOURCES OF FINANCING / SMALL BUSINESS FUNDING OPTIONS

 

How then does the owner/mgr, particularly in the  SME  (small to medium enterprise) space make those right ' connections'  relative to sources of funds for business,  and, as importantly, what can they expect? It's critical to know what any source of capital delivers on. That changes with the current financial profile of your company and the perceived risk that lending sources associate with your business... or industry as you search for sources of funds.

 

WHAT ARE THE MAIN SOURCES OF BUSINESS FUNDING FOR YOUR COMPANY?

 

Ultimately your company has only three main choices of finance solutions regarding how to fund a business  - internal cash flow,  taking on debt, or equity injection.

 

When owners/managers start the financing process and are looking for sources of funding a business and the right connection to the capital, they are often most concerned about the cost of that capital.  These days, depending on the risk profile your company generates, that rate can be 2.5% per month or 2.5% per annum. Most clients we meet want the latter!

 

 

WHAT ARE THE KEY FACTORS THAT AFFECT BUSINESS FUNDING APPROVAL?

 

Size of your company

 

Stage of Growth - i.e. start-up, early stage, growing, mature, etc

 

Assets on the balance sheet

 

Cash flow generation potential

 

Industry and your reputation

 

 

"Capital isn't scarce; vision is." - Sam Walton

 

 

GOVERNMENT FUNDING FOR SMALL BUSINESS ( THE BEST FUNDING FOR A SMALL BUSINESS STARTUP?)

 

CANADIAN GOVERNMENT FUNDING PROGRAMS

 

Looking for Startup & Entrepreneur Funding?  Needless to say, funding for business startup scenarios is also challenging

 

 

THE CANADA SMALL BUSINESS FINANCING PROGRAM

 

At 7 Park Avenue Financial, we often recommend a Government of Canada Small Business Loan, which provides a significant amount of capital and a guarantee on your loan by the federal government of Canada for economic development initiatives to support businesses and general economic stimulus. The loan can also be used to buy an existing business or franchise.

 

Start-up business funding is always a challenge in traditional and alternative finance. Thousands of firms utilize the Government Guaranteed Business Loan yearly to get the required capital.

 

All small business owners should look into government programs when available as personal investment is limited based on similar requirements by banks and other traditional lenders / financial institutions.

 

Talk to the 7 Park Avenue Financial team to learn more about how federal funding works for a business owner via  the CSBFL small business loan.

 

  

CANADIAN GOVERNMENT GRANT AND FUNDING PROGRAMS  

 

Some entrepreneurs look into Canadian government grants, which can be a long process with no guarantee of results around your business development - although numerous  Canadian government funding programs  & grants exist , including minority business grants.

 

While many entrepreneurs explore small business grant funding/government loans, this is a long and tedious process without guaranteeing that your grant loan will be approved. The majority of government grants for small businesses are reserved for established SMEs (i.e. 3+ years incorporated, 5+ payroll employees, $500,000+ annual revenue)

 

GRANT  PROS AND CONS

 

Entrepreneurs should ensure they understand the pros and cons of grants - while they provide much-needed money that is not repayable, achieving grant financing is challenging and can take a significant amount of time when applying for industry-specific grants

 

Many owners/financial managers we meet are often incorrectly focused on the type of business funding solutions & financing they need. They don't even understand the wide level of choices they have in cash flow financing and debt financing.

 

 

A  BUSINESS PLAN WILL HELP TO SECURE FUNDING 

 

Always ensure you have a business plan and cash flow projection that positions your company properly with a bank or commercial lender. No personal assets are required to be pledged under the SBL Loan program.

 

At 7 Park Avenue Financial business plans, we prepare for clients are all about financing, not marketing! We focus on financial statements and cash flow projections.

 

Always ensure you have a business plan and cash flow projection that positions your company properly with a bank or commercial lender. No personal assets are required to be pledged under the government SBL Loan program.

 

SOURCES OF BUSINESS FINANCING - TRADITIONAL AND ALTERNATIVE FINANCING OPTIONS

 

Funding A Business and funding a small business is challenging, but here at 7 Park Avenue Financial, you'd be amazed at the choices we can deliver on funding businesses.

 

Canadian  chartered banks

Receivable and Inventory Finance providers

Asset-based lenders - financing both assets and credit lines

Leasing companies  - equipment purchase financing for small and medium-sized businesses

Sale-leaseback specialists

Mezzanine finance

Royalty finance solutions

PO / Contract finance

Merchant cash flow advances

Commercial real estate financing

Funding SR&ED tax credits  for r&d funding opportunities around the refundable tax credit

 

A NOTE ON VENTURE CAPITAL FINANCING

 

Many firms spend too much time looking for VC financing, angel investors, etc., - only the smallest percentage of firms in Canada qualify for VC funding with venture capitalists or an angel investor and they typically seem to be in areas such as software, digital media, biotechnology, telecom, etc. We caution clients on pursuing this road to funding if they are not prepared and cannot demonstrate huge revenue growth and demonstrable traction in the early stages of revenue.

 

Naturally, some solutions and sources of finance are shorter-term focused and provide a temporary fix. In contrast, other solutions can bring working capital and cash flow finance in the millions and could be considered long-term financial strategies.

 

Safe to say it's essential to know whether you need a temporary ' fix ' or a long-term capital solution. That allows you to position your company and negotiate from a level of strength with a funding company or bank.

 

"The best time to plant a tree was 20 years ago. The second best time is now." - Chinese Proverb.

 

 

CONCLUSION - BUSINESS FUNDING OPTIONS

 

Most business owners are unaware of the many financing options available to their firms and the business financial planning required to access funding for Canadian businesses.

 

If you're looking to avoid that ' clear as molasses' feeling we described in sources of funding business, speak to 7 Park Avenue Financial for advisory services expertise -   a trusted, credible and experienced Canadian business financing advisor who can assist you with financing and capital needs for small businesses ( and large ) in Canada.

Regarding how to get funding for a business, we're on your side and here to help with traditional bank financing,  financial support from government business funding, and alternative finance solutions. For more information on other types of financing your business needs, talk to us here at 7 Park Avenue Financial.

 

 

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION /PEOPLE ALSO ASK 

 

What are three sources of capital?

 

The three main sources of financing capital in Canada are personal / owner equity, debt financing,  and specialty finance solutions in alternative finance. These funding sources influence the final decision to finance the business potential for a business venture. The challenges of finding a first investor for equity are significant when start-ups are concerned.

 

What are the types of financing?

 

All types of financing are related to either equity or debt financing - they allow businesses to fund ongoing business needs, finalize purchases and make investments in the business. Equity financing is the most expensive type of finance but brings no debt to the balance sheet.

 

What is commercial business funding?

Commercial business funding is financing from financial institutions such as chartered banks, business credit unions, and equity capital via angel investors or venture capital firms. Funding is in the form f loans or equity investments in the business.

 

 How can I qualify for commercial business funding? 

To qualify for commercial business financing, borrowers should be able to provide a business plan and demonstrate to lenders the business credit history and owners' personal credit history. The ability to establish sales revenue growth and profit potential is essential. A business lender will also review factors such as the type of industry the company is in.

 

  

What are some common types of commercial business funding?  

Common types of commercial business funding include traditional bank loans, business credit lines, invoice financing/factoring, equipment leasing and merchant cash advances/short-term working capital loans.

 

 What are government loans for business funding? 

Government loans for business funding via private and public sector financing are business loans provided by the government or, in some cases, guaranteed by the government that help SMEs succeed in economic development activities to access capital and commercial loans at competitive interest rates with longer amortizations.

 

  

How can I qualify for government loans for business funding?  

To qualify for government loans for business funding purposes, borrowers must meet the eligibility criteria of the loan program, with typical criteria for loan guarantees being sales revenues and profit potential. The borrower should be prepared to provide a detailed business plan for the company - The business development bank / 'bdc'  is a crown corporation focused on loans to entrepreneurs with programs to support underrepresented entrepreneurs such as aboriginal businesses/  and indigenous entrepreneurs / aboriginal entrepreneurs, as well as women-owned businesses - bdc offers small business financing money via working capital loans, real estate loans, and consulting services for business support.

 

 What are government grants for business funding? 

 

Government business grants for business funding are financing from government agencies that do not require repayment and are typically awarded to businesses that are developing products, services, or a business idea and technology that contribute to economic development. Many grant programs are  ' matching programs' that require capital investment from the business grant recipient. Grants typically require companies to meet eligibility criteria in their area of research and development, and often, detailed budgets and proposals are required. Some firms hire ' grant writers' familiar with the grant funding process.

 

IRAP - The industrial research assistance program is one of the most popular and accessible grants for government financing programs. Tax breaks and wage subsidies are very accessible in Canada for businesses willing to review the types of grants they might be eligible for. Some programs, such as Community Futures, are tied explicitly to regional economic growth.

5 Things You ( Probably ) Didn’t Know About Canadian Business Receivable Finance & Advantages Of Receivable Financing For Business

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YOUR COMPANY IS LOOKING FOR  BUSINESS RECEIVABLE FINANCE!

CHOOSING THE RIGHT RECEIVABLE FINANCING OPTION FOR YOUR BUSINESS

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing business today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

 

 

Cash Flow Financing Via Factoring Clarified!

 

Cash flow financing for Canadian business owners and financial managers is about knowing what options are available when external finance solutions are being evaluated. Looking for one solution that's incredibly misunderstood in the Canadian business financing landscape. We've found it. Business A/R Finance!  We've got your questions, as well as the answers! Let's dig in.

 

 

WHAT IS BUSINESS RECEIVABLE FINANCE 

 

Business receivable financing ( aka receivables financing ) is a method of business financing that allows a business to transform accounts receivables via a financing facility via a bank or commercial finance company. Funding is for invoices issued to customers for products and services provided to clients with payment not yet made - allowing for the financing of structural cash flow gaps in the company business model.

 

 

TRANSFORMING RECEIVABLES INTO CASH! 

 

Accounts receivables will often be the most significant balance on the balance sheet under the category of current assets - those current assets will also include inventories.  These are short-term assets representing liquidity in the business.

 

Receivables financing is a benefit to businesses that sell on credit terms to customers, which becomes a cash flow gap in the business as payments are not received while inventory purchases and other short-term liabilities, such as accounts payable, must be paid; when a company extends longer payment terms to clients, the situations are exacerbated as those regular ongoing sales create cash flow gaps that widen further as the business sells more.

Funding solutions for startups and new businesses are also accessible.

 

Many businesses operate in seasonal or cyclical industries that create large increases in cash outflows during peak periods, creating potential cash flow crunches as collections have not yet been made.

 

Receivables finance may be a challenge if a business is experiencing unusually high bad debt volume or who have sales that are disputed by clients around issues such as service, damage, quality, etc - Also, businesses with fast turnovers, such as e-commerce clients of some retailers who have short payment term cycles are not the best candidates for A/R finance.

 

Business lenders in receivable finance will focus on the general creditworthiness of the customers, and funds are drawn down on outstanding invoices. Factoring companies that are non-bank in nature fund receivables immediately as sales are generated and charge a discount fee for the financing service.

 

Businesses need to understand the benefits of receivable financing and the potential drawbacks when they commit to a bank or factoring facility.

 
5 EXAMPLES OF RECEIVABLE FINANCING 
 

What amount of funding can you expect to receive from your A/R base? 

 

Typical advance rates for most facilities revolve around the 90% mark... which assumes you are dealing with the right commercial financier - More on that later. That additional 10% is in effect a holdback of sorts. We would point out that Canadian chartered banks only margin A/R at 75%, so commercial business receivable finance offers more liquidity. One other key point on funding is that your access to capital is virtually 'unlimited' as long as you have sales and legitimately earned receivables.

 

 

How does a firm set up a receivable facility?  

 

We generally advise that it takes approx 2-3 weeks to set up a proper facility - that is a general guideline. You will know, by the way, very early on in the process if you are approved. After that, it's simply a question of documentation. Legal documentation and the paperwork process are very similar to bank financing and full-fledged A/R facilities are secured in the same manner as banks, typically a General Security Agreement.

 

By the way, stop us if you’ve heard us say this before. Still, you should consider CONFIDENTIAL RECEIVABLE FINANCE, allowing you to bill and collect your own accounts with no notification to suppliers, customers, etc. Want to be the talk of the town? You will be among your competitors as this type of NON-NOTIFICATION financing will have competitors wondering how you can finance your business so successfully.

Talk to the 7 Park Avenue Financial team about how confidential non-notification a/r financing can benefit your firm.

 

What's the cost of receivable financing /factoring?

 

 Fees and costs. Various factors come into play here, the credit quality of your firm in general (it does not have to be as solid as you think), the size of your facility, the nature of your industry, etc. On balance, a solid business receivable finance fee in Canada is .75-1.15%% if you're billing and collecting on a 30-day term.

If your company can absorb a 1 or 2% decrease in gross margins to in effect obtain all the cash flow/working capital you need, that in effect, should be your consideration.

 

  

 What receivables can be financed?   

 

The key point here is that only ' business’, i.e. B2B a/r can be financed in Canada, so those companies with a consumer A/R base cannot take advantage of cash flow financing. Retailers typically look to other forms of finance for finance options in the consumer marketplace - i.e. Working capital loans, inventory loans, Merchant Cash Advances, etc.

 

Any North American receivable can be financed, and if your firm has overseas receivables, a credit insurance policy can assist in the financing of those receivables.

 

  

Age of receivables that can be financed   

 

As a pretty general rule, only A/R that is under 90 days in age can be financed via this method of Canadian business financing. One can safely assume of course, that if you haven’t collected your accounts by that time there is an element of uncollectibility or bad debt in your A/R portfolio. There are potential exceptions to the rule but your ability to turn over receivables based on your published selling terms is critical to successful ' factoring ' finance.

 

 CONCLUSION  - CASH FLOW FINANCING FOR GROWING COMPANIES

 

Has confusion gone away? We hope so. The bottom line?  When considering working capital finance via business receivable financing ensure you've got the right information at hand to make an informed decision.

Call  7 Park Avenue Financial,  a trusted, credible, and experienced Canadian business financing advisor for your ability to get on track with cash flow finance with business loan solutions tailored to your business needs.

 

 FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK  /MORE INFORMATION

 

What is business receivable finance?

 

Business receivable finance is also known as accounts receivable financing or invoice financing and ' factoring ' . Using this type of financing allows businesses to generate cash flow based on the use of outstanding invoices the collateral for the financing facility.

 

  

What is cash flow financing?  

Cash flow financing is any type of financing that helps a business access funding based on the anticipated cash inflows of the business. Solutions for cash flow finance include receivable financing via banks, factoring invoices via non-bank commercial finance companies and business lines of credit from asset-based lenders.

 

 How can business receivable finance help my business? 

Business receivable finance helps a business by providing access to working capital that can b used to fund daily operations and allowing the business to manage growth and expansion plans - Funding is based on sales revenues and helps companies with cash flow management.

 

  

What are the benefits of cash flow financing?  

 

The benefits of cash flow financing solutions included better liquidity and the flexibility to access working capital when needed when cash flow gaps occur in the business's cash flow cycle. Financing receivables speeds up the cash flow cycle of a business and reduces  DSO ( days sales outstanding )

 

Receivables financing is a solid cash solution for small businesses that are growing faster than the borrowing capacity of the business. Companies can accept larger orders and fund seasonal peaks in the business using cash flow techniques in a/r finance management.

 

  

How do I know if business receivable finance or cash flow financing is right for my business?  

If a business is selling on trade credit terms and has cash flow gaps in the business based on the investment the company makes in carrying receivables, receivable financing can assist in funding working capital.

 

 What are 4 forms of receivable financing 

 

Four common types of receivable financing include :

Invoice factoring

Invoice Discounting

Asset-based lending credit lines

Supply chain financing

 

Invoice factoring allows a business to ' sell ' an invoice to a third-party finance company, known as a business factor. The company receives immediate cash for the money owed, and traditional factoring firms will collect the receivable and keep a percentage of the invoice in exchange for the company receiving the cash upfront. Typical advances from factoring companies are in the 90 percent range, much higher than bank advances on accounts receivable.

 

Invoice discounting is similar to factoring as commercial finance companies/factoring company advances a percentage of the invoice value on invoicing by the company so it cans receive early payment on the sale of products and services.

 

Asset-based lenders use receivables to collateralize lines of credit or loans. Funding for an accounts receivable loan is made on a pre-agreed advance rate and as payments are collected by the company the loan facility is reduced. Asset-based credit lines for receivable loans often combine inventory and equipment assets on the company's balance sheet into one credit facility.

 

Supply chain financing/purchase order financing allows suppliers to receive payment earlier than typical trade credit terms which can help small businesses.

 

 

What is the difference between accounts receivable financing and invoice financing?

 

Both accounts receivable financing and invoice financing/factoring are similar in that they both fund outstanding invoices, which are the collateral for the financing. The main difference between the two methods is the ownership of the invoices in the financing agreement/financing facility.

 

Under invoice financing /factoring, the finance agreement specifies the sales of invoices to the financing company, and the finance company typically assumes collection- In receivable financing, using banks as an example, the business retains ownership of the invoices, which are used as collateral.

 

In certain types of non-recourse invoice financing, the finance company assumes bad debt and collection risk. In contrast, receivable finance solutions specify the client is responsible for collection and non-payment. Businesses also have the option to purchase accounts receivable insurance/credit insurance in a commercial relationship with the finance firm.

 

Invoice financing and factoring are typically more costly than account receivable financing, but advances in factoring and invoice finance are higher, providing higher loan-to-value funding.

 

Invoice financing is the transfer of control of the collection process, while typical bank receivable financing is the company still responsible for collecting payment and client interaction.

 

Factoring Financing For Working Capital Needs Factoring Finance In Canada - A Lot Easier To Understand Than Bitcoin!

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YOUR COMPANY IS LOOKING FOR FINANCING VIA  WORKING CAPITAL  FACTORING!

YOUR GUIDE TO CAPITAL  AS A WORKING CAPITAL SOLUTION IN CANADA

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

        Financing & Cash flow are the biggest issues facing businesses today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

 

THE BENEFITS OF FACTORING FOR IMPROVING WORKING CAPITAL

 

Factoring for working capital needs in Canada is quickly becoming a recognized and traditional strategy for cash flow financing. We say traditional because for many years factoring via Canadian factoring companies in Canada was viewed as a non-traditional and alternative financing strategy.

 

 

 

A bank is a place where they lend you an umbrella in fair weather and ask for it back when it starts to rain." - Robert Frost 

 

Poet Robert Frost probably wasn't talking about factoring accounts receivables to obtain cash, but he highlights the risk around being too heavily reliant on traditional financing options such as bank credit!

 

INTRODUCTION - ACCOUNTS RECEIVABLE  FACTORING AS A FINANCING SOLUTION IN CANADA

 

Small businesses in Canada constantly struggle with cash flow management issues - that challenge of covering operating expenses, the purchasing of materials, and asses for the business is a challenge - Factoring services helps those cash flow issues business experiences, allowing the company to finance accounts receivable at a slight discount to third party business factors.

 

 

The simple explanation around this financing tool is that it allows Canadian firms to access financing and cash flow immediately to smooth out the ups and downs of any company's business cycle.

 

WHAT DOES A FACTORING COMPANY FINANCE

 

Firms in Canada utilize the strategy for short term working capital needs. Invoice factoring is not a term loan. Most business owners don’t realize that factoring as a financing strategy brings no debt on the balance sheet. We could comfortably argue that your balance sheet looks better when using this financing tool. It, in effect, allows you to satisfy short terms needs for payroll, purchase of inventory, etc.

 

WHAT IS THE IMPORTANCE OF FACTORING IN WORKING CAPITAL MANAGEMENT?

 

Factoring is a valuable tool to manage working capital in your business because businesses can instantly convert sales, i.e. accounts receivable, into cash.  By financing ( selling ) invoices to the factoring company, the enterprise receives immediate same-day cash to fund day-to-day business needs around suppliers and current liabilities on the balance sheet - The bottom line?  Cash flow is improved, and the business can operate more efficiently and effectively.

 

By reducing the need for traditional financing via term loans or lines of credit, the company can maintain liquidity at times when conventional channels for funding are limited for a business - A factoring company focuses on the creditworthiness/credit quality of your accounts receivable base versus the financial health of your business - Many companies cannot access some of all of the traditional bank financing they need to run and grow a business which is why accounts receivable financing is a valuable solution.

 

Using traditional factoring solutions, businesses also can transfer both credits and collect risk to the factoring company if they so choose - At 7 Park Avenue Financial, our focus is often on recommending a Confidential Receivable Financing factoring agreement, allowing a business to bill and collect its customer payments while reaping the immediate benefit of factoring -  CASH FLOW!

Most factoring solutions will also allow the business owner and financial manager to finance the receivables invoices they choose to finance, so this finance solution is the ultimate in short-term cash flow gap solutions. Any business requiring ongoing cash flow needs to operate successfully and manage asset turnover, and credit risk should consider receivable financing as a Canadian Business Financing solution.

 

 

BENEFITS OF FACTORING -  IMPROVED CASH FLOW / QUICK ACCESS TO FUNDS / IMPROVED RISK MANAGEMENT AND ASSET TURNOVER  

 

A factor financing strategy has significant benefits if utilized properly (more about that later). Some of these benefits include:

 

• The ability to purchase more inventory on a short-term basis at preferred pricing and quantities

 

• Access a working capital credit facility that many times are significantly higher than what your firm could achieve with bank financing.

 

• Increase sales with the right customers by offering better payment terms than your competitors (cash flow is king for your customers also!)

 

• Take advantage of payment discounts offered by suppliers – many firms offer discounts such as 2% ten days – by taking advantage of these discounts, you can remove a huge portion of your factor financing discounts

 

EVALUATING FACTORING AS A WORKING CAPITAL SOLUTIONS

 

We can’t overemphasize the need to ensure you understand the Canadian factoring market. It differs significantly from the U.S., and some enhancements to a factor financing strategy can supercharge your cash flow. For instance, by combining an A/R facility and an inventory financing scenario, you can often at least double all your firm's previous liquidity. That’s a powerful cash flow statement.

 

Also, for firms that are factoring now, we are quite convinced, after talking to clients, that they either don’t understand factoring pricing or in some cases have been misled about what they are really paying for this type of financing. Even improving your factor facility by ½ % can drive profits straight to the bottom line.  Clients are encouraged to seek a trusted, credible, and experienced advisor such as the team at 7 Park Avenue Financial  in this area , who can help them achieve the right factoring facility for their firm.

 

We also encourage clients to seek out factor facilities that don’t lock you into long term contracts, as our experience indicates your firm might be a candidate for other forms of financing at some point down the road.

 

WHEN SHOULD A  COMPANY  CONSIDER FACTORING?

 

 

5 REASONS TO CONSIDER FACTORING FINANCE 

 

1. The ability to cash flow slow-paying customers will allow a business to fund daily operations and invest in growth

 

 2. Companies with a limited credit history or who do not have the financial strength to access financing via traditional financial institutions such as banks can access business funding for ongoing capital needs

 

3. Businesses that have cyclicality or seasonality to some aspects of their business can benefit from  overcoming cash flow fluctuations that help smooth out the cash flow cycle of a business

 

4. Growth opportunities such as expansion into new markets or international markets can be funded by sales financing and receivable factoring

 

5. Service-oriented businesses  that do not have assets or collateral required by banks can still access working capital

 

 

We spoke previously of properly utilizing a factoring financing strategy. By that, we mean that you should ensure you understand what you are paying, as some firms have methods of presenting factoring in a method to confuse the customer about overall ‘all in' cost.  Things to look for are clear per diem pricing – you want to ensure you only pay for what you use in your facility. Open contracts make more sense for your firm; why would you let a finance firm lock you into a contract? Other things to look for are the advance rates on your transaction.

 

Most business owners understand the basic mechanics of factoring – they are of course:

 

• Your firm ships or delivers your goods and services
• You invoice and receive same-day cash for your invoices – usually in the range of 80-90%
• Your customer pays the invoice and at that time you receive the original amount that was held back, minus the factoring discount fee

 

U.S. Based firms that offer factoring in Canada are heavily involved in the entire process that we just walked through. They often insist on verifying your invoices, talking to your customer about payment, etc. Our recommended solution to eliminate this intrusiveness is a factoring or working capital facility that allows you to bill and collect your own receivables.

 

 

KEY TAKEAWAY - WORKING CAPITAL FACTORING 

 

Factoring improves cash flow by providing immediate cash for  outstanding invoices generated by business-to-business sales

 

Cash flow access is immediate - often the same day or the next day at the latest

 

Obstacles to traditional financing are eliminated as  receivable finance is a viable alternative to traditional bank loans that have significant requirements around  personal guarantees,  collateral,  and the  bank requirement for strong financial statements.

 

Companies can better manage  credit risk by utilizing non-recourse financing solutions, credit insurance,  or  utilizing the collection expertise of business factoring companies

 

Factor financing is often tailored to a business or industry's particular needs around the cash flow gaps in the business.

 

Any business selling on trade finance/credit terms to business customers domestically or internationally can access factor financing working capital solutions.

 

Increased buying power - cash flow from receivable financing can be used to maximize inventory purchases.

 

Factoring will often be an intermediate solution for a company to improve the business credit history and make the journey back to traditional financial solutions.

 

  

CONCLUSION  

 

Factoring for working capital is a proven strategy. The challenge becomes being an educated business owner. Find out what benefits apply to your firm when utilizing this type of financing, and investigate the best facility for overall ease of doing business and pricing. That’s cash flow 101! For working capital factoring.

Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor to discuss your business financing needs.

 

  

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION  

 

What is factoring, and how does it work as a working capital solution?

Factoring is a business financial transaction in the area of asset based lending which allows a business to finance its sales by selling unpaid invoices to a third-party commercial factoring company at a discount to obtain immediate cash instead of waiting for payment from the client. This form of financing allows a business to finance daily operations and cover business needs around current liabilities and short-term obligations.

 

  

How can factoring benefit businesses in terms of working capital?  

 

Factoring benefits businesses by providing access to cash needed to cover the investment a business makes in working capital accounts such as accounts receivables and inventory - Cash flow is improved when the company cannot access traditional financial options from banks for short-term working capital loans or business credit lines to fund business operations. Companies cash choose between non recourse invoice or traditional recourse factoring based on credit and collection policy and bad debt experience.

 

 What potential drawbacks or risks are associated with factoring as a working capital solution? 

 

Factoring financing is more costly than bank financing based on the factoring fee that the invoice factoring company charges. Firms using traditional notification factoring have a potential loss of control in the collection process, and customer relationships can become a concern.  Not all businesses are suitable for factoring.

 

 What types of businesses can benefit from factoring as a working capital solution? 

 

Any business that sells on trade credit in any industry has the potential to benefit from factoring. Longer payment terms can be offered to clients that can be financed via a factoring solution.

 

 

  

How can businesses determine if factoring is the right working capital solution?  

 

Businesses should consider factoring receivables for working capital by assessing factors determining their working capital needs with a business advisor to determine if they can benefit from factoring as a working capital solution for immediate cash flow as a line of credit alternative.

Click here for the business finance track record of 7 Park Avenue Financial

How Asset-Based Lending Cash Flow Asset Finance Solutions Can Help Your Business

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YOUR COMPANY IS LOOKING FOR CANADIAN ASSET FINANCE ASSET-BASED LENDING CASH FLOW  FINANCING! 

UNLOCK THE POWER OF YOUR BUSINESS ASSETS - LET ASSET BASED LENDING HELP YOUR CASH FLOW NEEDS

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        Financing & Cash flow are the biggest issues facing businesses today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

 

  

ASSET-BASED LENDING - YOUR ALTERNATIVE FINANCING SOLUTION!  

 

Asset based lending in Canada often brings a straightforward question from our clients - namely: Can you explain asset finance cash flow solutions to us?

Businesses all over Canada in every industry keep hearing about nontraditional lending solutions for their businesses - in many cases, their competitors are already taking advantage of them. They want to know more... so... let's dig in.

 

WHAT IS ASSET BASED LENDING?

 

In today's challenging business environment, it's all about access to business loans and cash flow for a company's ability to thrive .. and survive!  Asset-based lending is  secured lending finance, allowing a business to use its sales and business assets such as :

 

Accounts receivable

Inventories

Fixed assets/property plant and equipment /rolling stock

Commercial real estate owned by the business

 

These assets become collateral and a  ' borrowing base ' for a loan or line of credit availability. That allows the company to maintain the liquidity needed to fund day-to-day operations and cover short-term expenses. Businesses utilize asset-based lending as an alternative to traditional bank financing. Asset-based lenders are experienced in valuing business assets on the balance sheet and use that expertise to provide the maximum amount of funding as a line of credit or business term loan solution.

 

 

WHAT IS THE DIFFERENCE BETWEEN ASSET BASED LENDING VS. TRADITIONAL BANK  LENDING? 

 

The key differences between asset-based loan solutions and unsecured loan / cash flow based loans and lending by banks revolves around the focus of each type of lending - For asset-backed loans, it is all about assets - for banks, it is all about cash flow. Banks view cash flow performance as the key to repayment - Asset-based lenders view business assets as sources of repayment.

For any business, it's all about the ability to borrow capital, and companies have different options and choices.
 

 

IMPROVING CASH FLOW AND WORKING CAPITAL

 

So is business financing via asset finance a difficult concept to understand?  Hardly.  Asset-based financing, often called 'ABL' by those in the industry, is simply the method of obtaining the maximum working capital you need from your assets, which include typically receivables, inventory, and in many cases some equipment and/or real estate. That's as simple as it gets.

 

So how can monetizing your assets be your business's ultimate working capital tool?

 

Although it's been in existence for many years, in the past asset finance or asset based lending (we also call it a 'working capital facility') is coming into vogue.

 

It doesn't take rocket science to understand then, given traditional financing almost totally collapsed in the 2008-2009 global meltdown, that companies began searching for options and alternatives to their business financing needs. In our post-pandemic/covid interest rate and business lending challenged market, access to business capital is as crucial as ever.

 

Lenders like asset based financing simply because they are using their expertise and knowledge in your assets to help you cash flow your business.

 

USES OF  ASSET BACKED FINANCING

 

Although many companies turn to asset based lending when they can’t access traditional bank financing the reality is that this type of financing has some unique characteristics that allow you to utilize the financing for other reasons - Those include:

 

Major expansions

 

Buying another business

 

Bridge financing your business while you undergo restructuring or turnaround.

 

In many cases, it's 'buffer' financing, allowing you to return to more traditional 'bank type' financing.

 

 HOW DOES ASSET BASED LENDING " ABL ' WORK?  IMPROVE CASH FLOW WITH ASSET BASED FINANCE

 

As we stated, it's very simple for us to explain to clients what an ABL facility is, it's a bit more complicated to get them to understand how it works. The best way to explain it though is to simplify it all and say that you should consider asset finance via a working capital facility as simply a 'revolving line of credit around all your business assets'. Can that be any simpler to understand?  We don't think so.

 

  

CRITERIA FOR EVALUATING YOUR BUSINESS CREDIT NEEDS  

 

Typically the process is as follows - After the traditional 'application' process, there is an agreed-upon value put on all your business assets - as we said, 99% of the time the assets under this financing include receivables, inventory, equipment, and in some cases real estate.  The most common assets though are receivables and inventory.

 

Your firm provides regular monthly, and in some cases weekly updates on the values of these assets, and you in turn use your regular bank account to draw down on funds, as you need them, to run your business. Similar to a bank revolving line of credit facility your asset-based financing facility fluctuates every day as a dollar of capital flows through your business - you purchase  product, you generate a receivable, you collect your receivable, and of course, the process repeats itself.

 

  

ASSET BASED CREDIT LINES GROW AUTOMATICALLY - AS YOUR BUSINESS GROWS!  

 

If there is one simple advantage of asset-based lending it's that the financing grows as you grow sales and assets! You can truly say you have access to unlimited funding, albeit often at a higher cost.

 

Other forms of asset based lending such as SR&ED Tax Credit Financing, Leasing, factoring receivables, and PO Finance, are being routinely used by many of your competitors. Why not your firm?

 

Asset Finance strategies help you do that. 50% of Canadian businesses report that the inability of their sales growth to generate funds hinders their progress. Top experts such as Canada's BDC cite growing a business as the most common goal of the vast majority of firms.

 

  

KEY TAKEAWAYS - ALTERNATIVE ABL FINANCING  

 

Asset-based loans are a method of secured financing via business assets on the balance sheet - allowing a company  to access business capital

A Cash flow loan relies on a company's ability to generate cash flow as repayment

Cash flow loans are suitable for businesses that are not asset-intensive such as service-based companies that rely on higher profit margins

Asset-based loans are best suited to businesses that are more capital intensive and who have balance sheet assets -

 

  
CONCLUSION - UNLOCKING THE POWER OF BUSINESS ASSETS FOR CASH FLOW 

 

Asset-based lending will allow your company to borrow for lines of credit or short-term bridge loans based on balance sheet asset values. The traditional focus on cash flow is secondary, as the asset-based business lender funds are based on inventory, a/r, and fixed asset values. Even real estate owned by the business can be bundled into the facility or used as collateral for a separate bridge loan solution - Asset based lenders offer higher borrowing margins against the face value of business assets - As an example, 90% of receivables can be financed.  Receivables finance/factoring is a stand-alone business financing solution within the asset-based lending business model.

 

Call 7 Park Avenue Financial, a trusted, credible business financing advisor in this area to ensure you understand the options and of course, the benefits of this unique and creative method of business financing.

 

FAQ- FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

 

What is asset-based lending, and how does it differ from other forms of financing?

Asset-based lending is a form of secured business lending that allows a business to use key business assets such as receivables, inventory, and equipment as collateral for a line of credit o term loan. This method of financing physical assets via specialized asset-based lenders is the primary difference and determining factor versus bank financing cash flow lending techniques, which focus on various measures of business score around financial history, cash flow generation,  outside collateral, and loan covenants tied to an unsecured credit facility.  The majority of companies using asset-back financing are not able to receive some or all of the financing they required from traditional financial institutions such as banks.

Asset based loans typically are shorter in duration and are often seen as a bridge back to traditional financing.

 

What are the benefits of using asset-based lending for cash flow management?

Asset-based lending solutions can provide a company with a business revolving line of credit or short-term bridge loan based solely on the value of business assets - that allows a company to cover day-to-day operating expenses and maintain liquidity based solely on sales revenues and business assets.  Companies with good balance sheet assets but who might have lower profit margins and cash flow generation abilities are excellent candidates for asset-based lending solutions.

 

What types of companies are most likely to benefit from asset-based lending?

Companies that are asset rich and who have growing sales and accounts receivable and inventory are strong candidates for asset finance loans and lines of credit - Many services-based companies, including technology companies, are well suited to this method of financing. Companies that have seasonality or cyclicality in their business model and who have good balance sheet assets as collateral are candidates for ' ABL' financing as a working capital or bridge loan solution. While banks focus on key business ratios such as the debt-to-equity ratio asset backed lenders are ' covenant light ' and do not insist on loan covenants that banks might require. Some banks are in fact asset based lending banks but these are smaller divisions within the bank.

 

How do lenders evaluate a company's creditworthiness when offering asset-based lending?

Asset-based lenders evaluate overall creditworthiness with a focus on valuing company's assets as well as other general risk assessment techniques. In some cases,  asset appraisals of certain  key assets may be required for firms with asset rich businesses.

 

 

 

What are some potential drawbacks of using asset-based lending for cash flow management? 

 

One drawback of asset-based financing as a cash flow management technique is the fact that credit facilities are limited to the value of company collateral assets and the sales growth of the business. Interest rates and financing costs tend to be higher than traditional bank financing, and borrowers should understand that the collateral for pledged asset-backed facilities is subject to default/repossession when they borrow money under asset backed finance.

 

 type of financing isn't necessarily better than the other. One is better suited for larger companies that can post collateral or operate with very tight margins. The other may be better suited for companies that don't have assets (i.e. many service companies) but are confident in future cash flow

 

 What is cash flow lending? 

Cash flow-based lending solutions are an alternative to secured financing and asset-based loan solutions - Cash flow lending focuses on cash generation and significant cash flow potential and profits for loan or line of credit repayment. Traditional bank loans backed by a company's cash flow do normally not require collateral securitization and the loan approval and underwriting process is generally more time-consuming and detailed as the focus is on issues such as how the company will perform in any economic cycle when it comes to cash flows. Companies with profits, cash flow and good margins can benefit from lower rates in unsecured business cash flow based financing.

 

 

 

 

 

Click here for the business finance track record of 7 Park Avenue Financial