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Financing & Cash flow are the biggest issues facing business today
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How To Finance A Business In Canada - that's a common challenge for every type of firm, from start-up to an established growing business. It's no secret at 7 Park Avenue Financial that business owners and their financial managers often feel shackled when it comes to working capital, cash flow, and debt financing options. That's even when it comes to larger established corporations, let alone new clients we meet in looking for SME COMMERCIAL FINANCE options. (SME = small to medium enterprise).
Even more of a challenge is how the entrepreneur has to properly evaluate and recognize those options.
A good start? Simply that one must differentiate between short term cash needs (that’s working capital by the way) and long term debt and financing solutions. That short term cash flow we're talking about is the cash flow you use on a day to day basis to finance a business - those routine everyday parts of a business - payroll, purchasing supplier inventory, covering your fixed costs, etc.!
Naturally, if your cash flow is decreasing your firm is unable to meet the obligations you have to suppliers and lenders, including your bank, of course, assuming bank financing is in place.
It all boils down to 3 reasons as to why your firm needs working capital; first, you might be a start-up, secondly, it's those firms that are growing more rapidly than they planned, and finally simply the inability to cash finance day to day business. That latter situation typically involves around the challenge of managing and financing receivables and inventory.
When it comes to smaller businesses in Canada, those that we referred to in the SME category it is not uncommon for banks and commercial lenders to place a good amount of emphasis on the owner's personal credit history. As your firm grows it is therefore of critical importance to start properly positioning your company as a business borrower, one with borrowing power based on your balance sheet, income statement, and cash flow statement. By the way, sales and cash flow projections don't hurt also!
Many firms are often unwilling to take on debt, but the good news is that working capital and cash flow financing is often just a monetization of your current assets (a/r and inventory), as well as your sales. You don't want to over-borrow on sales and assets, as that can typically lead to a false sense of security.
Therefore what is the best business line of credit? One that fluctuates!! It's generally a negative situation if your line of credit for your company is close to 'maxed out' all the time. That typically leads to the financial challenges we alluded to earlier - the inability of your company to run smoothly on a daily basis.
Incurring debt is of course not all bad. It makes perfect sense to borrow and incur debt outside the working capital needs - a good example might be the need for more equipment. Paying for a long term asset out of current operating capital is not recommended. If the equipment generates profits and has a longer term useful life you have made the correct financing decision.
WORKING CAPITAL OPTIONS IN CANADA:
In Canada, working capital options range from traditional to alternative. A bank working capital facility will margin 75% of receivables and potentially, but certainly not always, a portion of your receivables. Larger firms have access to non-bank asset based lines of credit that provide a very healthy margin of cash flow by utilizing 90% of your receivables and anywhere from 30-70% of your inventory.
There are some very effective 'subsets' of alternative financing such as a/r financing, factoring, confidential receivable financing. If properly used they can turn your company into an ATM like machine for cash flow and growth financing. Again, it's all about effective management and financing of assets such as a/r, inventory, and sales.
Other Alternative Financing Methods
Not everyone knows that you can cash flow SR&ED credits as well as financing purchase orders and contracts. Those 2 alternative finance methods alone allow you to maximize your r&d capital investment and take on larger orders, respectively.
Businesses who can properly represent themselves via their true financial position and growth potential should never feel shackled when it comes to working capital financing. Never 'over-borrow' and ensure you have access to the traditional and alternative financing options that allow you to run and grow your company.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success, one who can assist you in identifying immediate solutions... unleashing those shackles of the cash flow challenge.
Stan Prokop
