Recipe For Business Financing Loan Cash Flow Success

YOUR COMPANY IS LOOKING FOR A BUSINESS LOAN!

ADDRESSING CASH FLOW LOANS & SHORT TERM FINANCING BUSINESS NEEDS

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Financing & Cash flow are the biggest issues facing business today

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

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

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Business Financing Loan challenges? When business owners and financial managers contemplate additional borrowing for cash flow for their firm they must think in terms of whether the business does, or will have, enough cash flow to make the debt repayments on any cash flow loan. We can further assure business owners that the bank or lending institution is thinking the same way!

BANK LOANS / DEBT / INTEREST PAYMENTS

When businesses enter into bank loans or other institutional loans the payments are, 99% of the time fixed and specified. The business owner and financial manager must ensure those payments can be made. If the company has over-relied on debt it is viewed as high leverage by the lender.

CALCULATING YOUR CASH FLOW AVAILABILITY

So how can a business owner determine if the company has the cash flow to support the debt? More importantly, how does the lender do that calculation?

USING THE TIMES INTEREST EARNED FORMULA

The calculation that banks and other term lenders focus on is called 'Times Interest Earned '. The business owner (and the banker) can calculate that formula very simply.

The Times Interest formula is calculated as follows:

Net profit before taxes, plus interest expense / divided by interest expense

The calculation becomes an absolute number. If the number is in fact '1 'that means that the company has in act made just enough to pay the exact interest expense for the year. We would point out that this calculation is always usually done on an annual basis.

So is '1' the magic number? The answer is no, and the answer should be intuitive to the business owner. That is because a times interest of 1 means there is absolutely no cushion for anything going wrong, and all business owners know about Murphy's Law!

So if earning decline or if the company takes on additional debt our ' times interest earned ' number becomes unsatisfactory - that is to say that we have determined there is not sufficient cash flow to service the debt.

We have determined '1' is not a great number then, well what is? The answer, as in many facets of business, is of course 'that depends '. Many industries differ and there is not really any specific number that is viewed as the Holy Grail by lenders. What we have found though that higher is better than lower. When the number is hovering around 1 both the business owner and the lender, should and will, respectively, have some concern.

We point out also that income, as a key component in our calculation varies between companies in final calculation re tax rate and other accounting adjustments. Some lenders and business owners also add deprecation to the profit because it is not a real cash expense. As we have seen there are numerous ways to address types of cash flow calculations, some more relevant to your firm than others.

CASH FLOW AS A PERCENTAGE OF DEBT

Another quick calculation business people can perform is to calculate the cash flow number as a percentage of debt. This calculation is often done by lenders to ensure long term debt is not being misused. If a company has a high percentage of total debt to cash flow it should be a strong indicator to the company owners that growth will be constrained, as all cash is going to debt, not growth. Therefore new equipment, inventory, receivables, etc will suffer in terms of growth.

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CONCLUSION

In summary, business owners, by doing actual current calculations, as well as projections, can easily calculate their 'times interest earned' and cash flow as % of debt. This will allow the business to position loan repayments positively with their lenders, at the same time providing them with insights into how the bank or other lender will view payment capability. A small business line of credit that monetizes current assets is an excellent business funding tool.

The owner's credit score is important to address Merchant cash advance solutions are explored. and short term working capital loans are a temporary measure to cure the cash flow conundrum versus a permanent working capital loan that has a typical 3-5 year term. Small businesses sometimes also revert to solutions such as a business credit card. Lines of credit will also allow you to take advantage of asset monetization strategies from 7 Park Avenue Financial around financing the balance sheet.

What type of cash flow loan could work for your firm? Business loans come at different interest rates and overall cost of capital. Don’t let your business financing needs turn out to be upside down. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of success in asset-based financing for traditional and alternative financial solutions in term loans of all types, as well as cash flow lending.