Factoring and Working Capital Financing in Canada - What is the Difference? -By Stan Prokop -7 Park Avenue Financial
When business owners and financial managers think of 'cash flow 'two terms are almost synonymous, factoring, and working capital. Is there a difference. Yes, a major difference.
We believe that when Canadian businesses think in terms of working capital that is often in the context of permanent working capital. This can be in a couple forms, a term loan, a mezzanine loan, or subordinate debt. These are the key terms of 'high finance' for working capital loans! With loans such as these businesses typically use the working capital derived from the loan to invest in sales and marketing, implement new products and strategies, and purchase inventory and materials for further corporate growth.
There are numerous advantages to a working capital term loan. Repayment of the loan is typically in the 5 -7 year range. As such that clearly frees up cash flow. Let's do a quick example - If a Canadian business borrowed $ 150,000.00 and was successful in getting a term loan in place the monthly payments over a 5 year period would be approximately $ 3000.00 per month. (We used an interest rate of 8% just as an example).
Depending on the flexibility of the lender payments can be structured, or even potentially deferred, based on the nature of the customer's needs and overall financial situation.
Naturally any financing scenario as positioned above is long term permanent working capital, which is generally viewed positively by business owners and their lenders. It is in effect a form of 'patient working capital '.
Long term working capital loans in effect 'compliment 'your existing secured creditor relationships. For the purposes of this article we won't dwell too much on the aforementioned subordinated debt and mezzanine debt - we will simply say they are unsecured ' cash flow ' loans, long term in nature, with rates substantially higher than chartered bank rates due to the general unsecured nature of the loans. The lender is simply taking a position that your firm will be able, based on historical and present financials, to repay the loan out of cash flows.
We've discussed the 'permanent ' working capital loan and have seen its characteristics, i.e. term loans, longer repayment schedules, fixed rates, terms and structures.Now lets look at totally immediate working capital/ cash flow, which many customers in Canada are achieving by a factoring or working capital cash flow facility.
The factoring solution is immediate. Transactions and facilities can usually be approved in a much shorter timeframe. Every customer is different of course, and in many different industries, but based on a review of your financials and your tax returns customers receive immediate significant advances (typically 90%) of their invoices.
Since the heart of any business cash inflow comes from collected receivables business who 'struggle' with the collection process often face cash flow shortages due to slow paying customers. Conversely, as receivables and inventory build up for good reasons (good reasons = more sales) the companies investment in receivables and inventory grows.
Factoring, or receivable discounting as it is also known, is based on the overall size, quality, and collection experience related to your billings. It is very safe to say that current invoices are more easily factored (sold) than 65 day unpaid invoices from slower paying customers.
Many factor firms assume the role of your collection department, some business owners actually welcome this as they have in fact utilized the very popular concept of 'outsourcing're their collections.
So is factoring all goodness. Certainly not, what type of financing is. In factoring there is a much higher cost to finance you're A/R portfolio. In Canada there are tens and hundreds of nuances and administrative procedures around the factoring process that many business owners struggle with. Factoring should be used for growth, not survival, and other strategies can be explored at a lesser cost and less intrusiveness to your business.
In summary, business owners considering the ' working capital/cash flow ' conundrum can consider long termloans or short term receivable financing strategies for growth. There are a number of options around both of those financing, and in fact other options (example: a sale/leaseback of your assets or a real operating margined facility with a Canadian chartered bank) should also be potentially explored.
Review al options, and worked with trusted, credible, and experienced business financing advisors to find your optimal financial solution.
Canada's Ultimate Working Capital Combination Alternative Financing Solution - By Stan Prokop - 7 Park Avenue Financial
When business owners and financial managers are looking for financing in today's challenging commercial financing environment they are in many cases contemplating alternative types of financing outside traditional Canadian chartered bank solutions.
So why are these companies looking for alternative solutions. There is a fairly strong consistent profile that emerges in Canadian firms looking for alternate working capital solutions.
Many companies, despite the difficult 2008 and 2009 financial economic challenges are encountering many opportunities to grow. Yet as those growth opportunities emerge they find themselves challenged by traditional debt to equity ratios and lower tangible net worth's than are required by traditional financial institutions such as the Canadian banks. We quickly add that if Canadian businesses are enjoying profit, a clean balance sheet, and adequate capital rations they are absolutely candidates for Canadian banks. However, not all firms find themselves in this situation! Instead firms are challenged by bank lines that have been capped or constrained, debt covenants that restrict, and higher cash flow needs due to higher investments in accounts receivable and inventory required to fulfill those great new contracts and purchase orders.
So what's the alternative? There is a' triple threat solution' available to many firms who may not even know this type of financing is available. We will call it the 'holy grail 'of working capital financing, because it covers purchase orders, inventory, and accounts receivable. Business owners clearly recognize those as key elements of their 'operating cycle. That is to say they get an order, they purchase or manufacture product, and convert the sale into an account receivable. That's the good news; the bad news is that that entire process probably takes 90 days, even more sometimes. Cash flow is needed in the interim!
Customers are turning to factoring or accounts receivable financing as the most immediate and obvious solution to their problem. By partnering with the right firm they convert their receivable to cash the day they are able to invoice and recognize revenue. This same working capital allows the Canadian business owner to strengthen supplier relationships, which is critical in a negative economy. In some cases your firm might be able to, (for the first time ever perhaps?!) To take prompt payment discounts. It might not be obvious to some owners that the ability to take prompt pay discounts can offset a very substantial part of the higher cost of factoring.
We have talked of a combo of alternative financing solutions that are interdependant on each other. Canadian business owners may not necessarily be aware that purchase orders can be financed also. With good purchase orders from solid customers financing can be obtained on the strength of the purchase order itself. This continues to be a relatively unknown financing concept in Canada that is gaining some popularity.
We spoke of receivable financing, a.k.a. factoring, purchase order financing, and let's not forget the final piece of our puzzle, inventory.
Solid financially stable businesses with bank credit line can in fact obtain inventory financing or margining of their inventory. Many smaller and more 'frail' firms cannot, and aren't aware there is a growing number of inventory financing options. On balance we can say that a reasonable commodity type inventory, (i.e. saleable) can in fact be financing for anywhere from 40 cents to 80 cents on the dollar.
In summary, Canadian businesses that do not qualify for full fledged bank operating lines can choose one, or all three of three different alternative working capital solutions - those being factoring, purchase order financing, and inventory financing. Work with a trusted advisor with experience in these alternative facilities and your firm will have an arrangement that takes your financial success to the next level.
Thinking about obtaining working capital financing for your business?
7 Park Avenue Financial wants to help you find the best working capital financing plan for your Windsor Ontario business. We base our reputation on providing each client with an actionable and timely solution that will help push their business forward in the industry’s competitive marketplace. We know what to do and how to do it, and we have the track record to prove it! Between March 2008 and April 2008, we arranged above a million dollars in financing for our clients.
Our professional and experienced team offers something different than many of the ‘volume-based’ financiers: we approach each deal separately, finding specific solutions that work to individual situations. We believe in listening to the customer, learning about your goals for the business, and then taking that information into developing a personalized solution for your business. Your financing needs come first – it’s our job to make it happen.
At 7 Park Avenue Financial, we believe that trust is something that must be earned, and we’ll work hard to earn yours. We want to become a trusted advisor for your business financing, securing you the working capital you need to help your business grow in all the ways you’ve hoped for. You also have the assurance that your voice is getting heard at the top – we’ve developed a number of relationships with senior level executives at top financial institutions, allowing us to approach these decision-makers directly as we build a financing solution for you.
We know what kind of disaster awaits the business that gets paired with the wrong lender or a solution inappropriate for their needs. Losing that time and money isn’t something you can afford, and that’s why we go to bat for you with all our tools, creativity, resourcefulness, and years of experience.
Your Windsor Ontario business deserves the right kind of working capital financing that will grow the business, not set it back.
To learn more about 7 Park Avenue and our customer-first approach to financing, please give us a call today.
Phone: 905 829 2653
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