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OPERATING LINES OF CREDIT ,  or ASSET BASED LINES OF CREDIT via ' non-bank' lenders,  are fast becoming one of the most flexible and popular methods for small, medium, and large customers to finance their operations . Asset based lending is getting increasing popular with Canadian firms.  Terms are more accommodating, and are usually  ' non covenant'  based . Unpredictable cash flows and seasonality are often other reasons why an asset based line of credit has substantial appeal to business owners and CFO's. These operating loans are totally focused on the assets of the business , most predominately reeivables and inventory .  The total focus of the facility is the ' Current asset ' portion of your balance sheet, ie receivables, inventory. In certain cases equipment, real estate, and intangibles can be financed . Credit line facilites are set up based on your borrowing requirements relative to your receviable and inventory assets . Generally receivables under 90 days are financed, as those > 90 days infer uncollectibility .  Although some focus is placed on over all viability  and secondary sources of repayment  overall the focus is on the business assets . Rates vary based on size of facility, overall  asset quality, and the lender pricing model.

This type of financing  provides the firm with significantly more  liquidity as the Canadian chartered banks usally lend only 50-75% on current asset categories such as receivables and inventory .

More and more Canadian businesses in the small and medium sized enterprise space are  finding it difficult to achieve the operating lines of credit they need from our traditionsl  lenders such as the Canadian chartered banks.  These firms are turning to asset based lenders . In our experience many companies are not even aware that such a financing option exists .

Asset based lending places less emphasis on  proven track records and financial strength , instead focusing on  key business assets such as accounts receivable, inventory, and in some cases equipment and real estate .

True asset based lending should not be confused with ' factoring '.  In a factoring environment  the company in effect sells their receivables  to another firm at a discount . Asset based lending allows the company to bill and collect  its own receivables . The loan is paid down and reduced , in a fluctuating manner , as the company collects its invoices . 

This type of financing can in effect become a strong lifeline in the current liquidity and credit crisis . Banks traditionally margin receivables in a more conservative manner , and further significant reliance is placed on the customers over all financial health with respect to the current balance sheet and income statements . 

The one negative aspect of this type of lending is that it comes with a higher cost  . The lender usually has a higher cost of capital and is looking for a significantly higher return than a traditional chartered bank .  

In most  cases more reporting by the company is often required . That is to say they are more often submitting updated reports related to current receivable and inventory levels .  Overall a more rigorous due diligence is in place . 

The current asset based lending market in Canada is still quite small , but the industry is clearly growing .

In summary, small and mediums sized businesses should check out asset based lending as an alternative to traditional bank financing . Due to the complexity and relative lack of knowledge around this industry the firm should work with a trusted business financing advisor . Asset based lending can provide unlimited liquidity to firms who are growing - because it focuses on the assets, not the balance sheet and income statement !

Business owners and managers should seek qualified assistance in locating an asset based lender that suits their industry and overall financing requirements re loan size, etc . A study done by the CIBC several years ago indicated that business owners who sought out trusted financing advisors had revenues 76% above those who did not seek a business financing specialist or trusted advisor .  Traditionally these types of loans or operating facilities  are for firms with under 50 employees . 

Asset based lending in Canada is a classic case of a source of capital at the right time, given the current turmoil in the financial and credit markets . Many special situations can be addressed by a cosntructive asset based line of credit - these include buyouts, cross border projects,  and debt restructuring . Many firms that are even in bankruptcy or receivership can avail themselves of a true asset based lending agreement .  Althought it is often a more expensive type of financing the case can be made that the asset based financing is much cheaper than the firm issuing additional equity and diluting ownership . Key benefits are improved cash flow, stronger reporting capabilites and the maximization of  receivables and inventory financing .  Stan Prokop

RECEIVABLE FINANCING/ FACTORING : Article by Stan Prokop - 7 Park Avenue Financial

Most people agree that  Canadian business model and the Canadian psyche differ from those of our friends in the United States .

Factoring  goes back to the 1400's and is an accepted way of doing business . Simply speaking it is the ability of a company to immediately obtain cash for their receivables , thereby augmenting cash flow .   Factoring is generally viewed as expensive  , as the company views the discount rate as the ' interest rate ' on the transaction .

In both the U.S. and Canada very typical  rates on factoring range from  1 1/2 % to 3% per month.  Issues that drive the overall rate are the over all transaction  size,  the credit quality of the debtor , and the historical time that the debtor has taken to retire invoices .

To be clear, when we talk about the participants in a factor transaction, there are three, the company selling the receivable, their customer ( the debtor ) and the finance or factoring firm .

Customers choose factoring , or are forced into considering factoring, when they do not have bank financing, or the financing that is in place is not sufficient to fund working capital .

Companies in Canada have been slow to utilize factoring - there are numerous smaller finance firms that offer the service, and more predominantly, the landscape is covered with branch firms of U.S. and U.K. companies who are established leaders in their respective countries .

A  few  in Canada offer factored facilities, a fact not generally known to the Candian business market .

More often than note smaller and medium firms who dont have access to traditional bank lines of credit utilize factoring . They use this financing facility to  grow their business,  maintain acceptable levels of cash flow, and ensure debt and government payments re taxes, etc . are made on time .

Typical advance rates on factored invoices are in the  80-90% range . Firms utiluizing factoring are often not aware of the mechanics of how these facilities are priced on a daily or monthly basis.   Two different business models exist within  the industry, recourse, and non- recourse . If the debtor does not pay the invoice a  recourse transaction forces the company to pay back the factored amount, or replace it with another invoice .

As stated, many firms do not properly focus on the many nuances of the factoring transaction . These include the amount held back by the factor firm, when the holdback is released,  and most importantly the paper flow involved in the transaction.

Canadian firms have tended to view factoring as very intrusive . They , unlike their U.S. and U.K. counterparts , have not apprecated that their customers are contacted regularly by the factor firm to verify invoices, demand payment, etc.

Ultimately the Canadian market seems to desire a non-notification factor model  which is not widely available .

Prudent business owners and financial executives , both in the U.S. and Canada , can enhance their use of factoring by negotiating arrangements specific to their business , re receivable size, quality, customer time to pay, etc . Many firms also quickly realize the cost of the factoring can be significantly offset by the use of additonal cash to negotiate supplier discounts, take trade discounts offered by suppliers, and in general , improve supplier relations . Key benefits of factoring, also known as invoice discounting, are  improved cash flow and maximized cash flow .

COMPUTER AND TECHNOLOGY LEASING ( IT EQUIPMENT LEASING  :

Many companies are not aware of the significant benefits  related to acquisition financing in computers and technology segments .   The proper term for this type of financing is ' Technology lifecycle management '. Most business owners simply consider the following question :  ' Should I buy or lease my firms new computers and software and related products and services ? '

Two old adages related to leasing still ring true when it comes to the technological aspect . That is that one should finance something and depreciates, and one should buy something that appreciates in value . Most business owners, and consumers as well know very well that computers depreciate in value . Systems we paid thousands of dollars for years ago are now hundreds of dollars . Walk into any ' big box ' retailer and see the dramatic moves in technology .

Business owners who finance technology  demonstrate a higher level of cost effectiveness . The company wants to reap the benefits of the technology over the useful life of the asset , and , importantly,  more evenly match the cash outflows with the benefits . Leasing and financing your technology allows you to stay ahead of the technology curve ; that is to say you are always using the latest technology as it relates to your firms needs .

Businesses that lease and finance their technology needs are often working better within their capital budgets . Simply speaking they can buy more and buy smarter .

Many companies that are larger in size have balance sheet issues and ROA ( ' return on assets ' ) issues that are compelling . They must stay within  bank credit covenants and are measure often on their ability to generate income on the total level of assets being deployed in the company .  Lease financing allows those firms to address both of those issues . Companies can  choose to employ an ' operating lease ' structure for their technology financing . This is more prevalent in larger  firms, but works almost equally as well in small organizations . Operating leases are ' off balance sheet ' . The firm adopts the stance of using technology, not owning technology . The lessor/lender owns the equipment, and has a stake in the residual value of the technology . The main benefit for the company is that the debt associated with the technology acquisition is not directly held on the balance sheet . This optimizes debt levels and profitability ratios .

At the end of those operating leases, which are usually 36 months long, the customer has the option of:

1. Returning the equipment

2. Buying the equipment (  not likely though )

3. Negotiating an extension of the financing for continued use of the computers, technology, etc .

Companies that have recently acquired computers and technology can in fact negotiate a' sale leaseback  ' on those same assets. This financing strategy brings cash back into the company , as the firm has employed a leasing and financing strategy building on our above noted them -  using technology, not owning  technology .

In summary , the key benefits of computer and technology lease financing are :

* The company can stay ahead  of the technology curve

* Computer leasing and financing has significant balance sheet and income statement benefits

* The firm has flexibility with respect to buying new product, returning existing technology, and generating cash flow for purchases already made

Many of the benefits we have discussed relate to leasing in general . However, technology and lease financing are very perfectly suited to the business financing strategy of leasing .

SOFTWARE LEASING /FINANCING - Article by Stan Prokop

 Many businesses, both small and large do not realize that software can be leased or financed  . Although software financing is unique in some manner, in general it has many similarities to equipment leasing.

It is also proper to ensure that right finance firm is utilized , as many lenders are somewhat risk averse to financing this asset . However, many others are looking for business in this area !

Contrary to popular opinion software as an asset in many cases has more value that a depreciating hard asset .  It has also been confusing for lenders when it comes to the registration of collateral under Canadian PPSA ( PERSONAL PROPERTY SECURTY ACT ) legislation .

In its broadest term the financing or leasing of software that can't be transferred  to another user . The business owner does also of course  not own any development rights in the software .  Software financing is treated as a financing mechanism, it is not a true lease per se .

Some additional key points around the technicality of software leasing/finance are as follows :

The right of a customer to use the software gives the company no right in the intellectual property surrounding the developers rights in the software code. The best example of this is when we look at our EXCEL spreadsheets  that we use in finance and home matters . We use the software, but Microsoft of course owns it .

The problem in the past around the financing of software revolved around the fact that lenders did not know how to collateralize  and register their security . Under current PPSA legislation intangibles  and software can be collateralized. Therefore the software financing lender/lessor can be very confident that the software can be collateralized.

At the heart of the software financing issue is the true value of the software to the business owner . He runs his business on it , i.e CRM programs, office software,  manufacturing software, etc.  Software lease payments tend to be made since the asset is indispensable to the value and on going concern of the business .   Unless companies are liquidated in total bankruptcy most lessors and finance firms recover fully on their software leasing - Source - Journal of Equipment Leasing
In many business bankruptcies the software lessor or lender is treated as a secured creditor .

Also key to the software financing issue is that many software firms offer maintenance , support, and updates around their product . This enhances the lenders asset as it is used for longer lengths of time, and often constantly upgraded.  Quite frankly it becomes less obsolete than computer hardware!

Many software lessors and lenders also finance the service and maintenance contracts associated with their customers software acqusition.

We do acknowledge in this article that it is more difficult to finance customized software  although it is possible based on the overall credit strength of the borrower . Many customized software deals are done with only investment grade borrowers where credit risk is minimal . Many smaller ticket lessors and lenders however do now lease software .  In general these transactions are full payout capital leases .

In summary , software lease financing is available and should be considered by every business owner  in the same context as a capital equipment finance transaction .  The computer hardware industry has grown with leasing , and the software industry is doing that also .  The same considerations an owner gives to   lease vs buy apply to a software finance acquisition .

 PURCHASE  ORDER FINANCING -  Article by Stan Prokop

Purchase order financing is a relatively new addition to the Canadian business landscape .  When utilized successfully it allows companies to take advantage of major opportunities that might otherwise not be possible .

Typically purchase order financing is  most relevant to companies that are unable to obtain capital either in the amount required  or at  favorable rates . The financing is especially suited for firms such as  importers, distributors, and manufacturers.

Other forms of financing highlight a clients historical financial results . Purchase order financing  looks to the future, without the collateral need that the former results require. 

How does the financing work ? In essence the purchase order financier purchases the materials required  by the client for their order or contract .  Many transactions are time sensitive for the client , and the type and amount of financing required do not lend themselves to traditional lending timeframes re due diligence required , etc .  In essence the client is using the lenders capital to finance future growth .

A simple breakdown of the transaction flow on a purchase order/contract financing is as follows :

*  Company obtains a large contract or purchase order
*  Payment is made by lender to the supplier directly
*  Suppliers ships goods/product
*  End user customer acknowledges receipt
*  Company's receivable lender ( usually a bank or factor firm ) pays purchase order finance firm

It is important to note that purchase order financing usually focuses specifically  on the order or contract . The client requires an additional credit facility in place in order to retire the receivable and payback the purchase order financier .

Our experience is that  a purchase order finance firm is looking for a longer term relationship, this is not a one shot deal business .

In the current banking and lending environment, with more increased focus on risk, it has been very difficult for firms to get traditional bank type financing for  large new orders and contracts .  Most firms quickly realize that banks prefer more stable predictable growth, and large new contracts or orders are challenging to financing when they significantly increase a banks exposure . Needless to say that foreign aspects of many purchase order transactions only exacerbate that issue - i.e. how does a supplier in China get paid, or even ' vetted '.

Our experience is that purchase order/contract financing only works when the client has solid gross margins that can handle the additional financing expense .

Customers looking to finance purchase orders and contracts  need to focus on solid partnerships with firms that have capital, experience, and relative ease of doing business re paper flow, documentation, etc .  The proper mix of those attributes will foster a solid business relationship that is mutually profitable for all within the unique purchase order financing realm .

INVENTORY FINANCING - CANADA  ( By Stan Prokop)

More and more Canadian firms require inventory financing as a component of their business and sales growth . Inventory financing in Canada is relatively under utilized and most business owners don't understand how it works . This new form of financing is growing .

Inventory growth needs put financial pressure on the balance sheet as vendors and suppliers continue to dictate payment terms in order to meet their own business and profit goals . As more financial managers know the ability to turn inventory over as many times as possible is a significant operating  measure for any firm .

A company computes its inventory turns by simply dividing  the ' Cost of Goods Sold' by the amount of ending inventory  and ending up with a turnover rate .  The rate of inventory turns is never an absolute number , as  different industries have different acceptable inventory turns .  Also,  we should note that  there are sometimes different inventory components - i.e. raw  materials, work in process, and of course the final finished goods .

Many Canadian, ( and U.S.!) firms moved significant purchases to China in the last number of years ,  As China has changed its banking policy, and has also been a victim of the world liquidity  crisis , more and more Chinese manufacturers  are not willing to carry accounts receivable in the manner they did several years ago .

The crux of the inventory problem issue for any firm is the inability of the company to convert orders into sales simply because they don't have the inventory to satisfy their customers .  Without orders the firm has no financeable asset .  Day to day cash flow rarely is enough to generate significant additional inventory purchases.

The ability of a inventory finance firm to finance required inventory in turn allows a firm to generate receivables which are converted in true working capital .

An inventory finance firm will evaluate the company's overall prospects , its management, inventory controls, etc and determine   what per cent of the companies inventory can be financed . To take the matter further  a lender might, on occasion, require the inventory to be inspected at regular intervals, or in extreme cases, held in a separate location under the control of the lender .  The inventory lender is looking for an acceptable business model  which is replicable . Generally speaking inventory financing is never done on a ' one shot deal '  basis.

The risk in this type of financing is reflecting in the pricing . Normally the only other way a company could attract capital to generate high inventory levels is to issue additional equity . This is categorically more expensive than debt, or in this case the inventory financing cost .

They types of companies that require inventory financing are usually in the following categories :

1. Growing importers who sell wholesale in North America
2. Importers who sell to consumers
3. Intermediaries who purchase product  and ' flip ' the inventory to someone else
4. Manufacturing firms with  fast turnaround business cycles

They also have good gross margins which can withstand the more expensive cost of this type of financing .

In summary , inventory financing is a growing component of business financing . It works well in certain industries . Most firms who require inventory financing are either start ups, or those who cannot get traditional bank financing . ( In our experiences banks can rarely, if ever, meet a company's inventory margining requirements .

BUYING AND SELLING A BUSINESS -  

10 Advantages of Buying an Existing Business vs. Starting a New Business

 1)       The business is up and running from day one, the "new business"
costs and frustrations are bypassed.

2)       Established customers / clients and suppliers are in place from
day

3)       You have the opportunity to review actual financial statements
rather than projected financial statements.

4)       Trained employees, equipment, inventory, chattels, fixtures,
systems and processes are in place from day one.

5)       The seller of the business will lend support during the
transitional stage into business ownership which for many is exciting yet
may be overwhelming. The seller can act as your business coach.

6)       More financing options are available either through financial
institutions or even the seller directly.

7)       Higher chance of success - the "start-up" business guessing game is eliminated

8)       Reputation, credit, trust, respect and business name / brand are
established from day one.

9)       Your focus and energy can be spent on improving efficiencies and
profits

10)    A formula for success is already in place

Business Buyers

*       Choose a business that really interests and excites you - passion isa key ingredient to success;

*       Determine the best plan to finance the purchase of a business.

*       Determine the market value of your business - ideally by a
professional business valuation specialist - Source - M Haines www.manetwork.ca

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