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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Balance Sheet Business Financing and working capital solutions – Save time, and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
What Is Balance Sheet Business Lending
Balance sheet financing, done correctly, can remove the feeling of “handcuffs” that business owners and financial managers have when they realize that proper finance solutions, reflected in the business balance sheet, are, in many cases, what’s holding back growth—let alone survival.
Four ways exist to “mine” the balance sheet to resolve the problem. We’re… you guessed it… reviewing the situation. Let’s dig in.
Understanding Options for Balance Sheet Financing
Understanding your options for financing your balance sheet with a business loan is critical. While the majority of solutions you have available, such as pure debt, are recorded and affect your balance sheet, we should mention that some firms still rely on “off-balance-sheet financing.”
Reviewing your company's financial statements to determine the best financing options available is essential.
How does balance sheet lending differ from traditional bank loans?
Balance sheet lending evaluates your entire financial position rather than focusing solely on revenue or credit score. This approach:
- Considers total asset value
- Examines debt-to-equity ratios
- Analyzes working capital efficiency
- Review historical financial performance
The Role of Off-Balance-Sheet Financing
Typically, this is done via an "operating lease" strategy, although international accounting rules have certainly dampened this financing mechanism's popularity.
The transaction's essence is as follows: the lease shows no debt or equity, just expenses via the monthly payments.
Flexibility of Operating Lease Choices
The flexibility of end-of-term operating lease choices allows you to either return the asset or purchase it at that time.
Some of the world's largest name corporations have used this strategy for decades to enhance the leverage they need to show to owners and shareholders.
Advanced Off-Balance-Sheet Financing Methods
Some more sophisticated methods of off-balance-sheet financing include R&D partnerships and joint ventures. Typically, these are not suitable for SME commercial finance needs.
Sale-Leaseback Strategy
The other "off-balance sheet" strategy is the sale-leaseback, which allows you to "sell back" an asset (typically equipment or real estate). This monetizes your equity in the asset, allowing you to reduce other debt or use the cash flow for working capital needs.
Transitioning to On-Balance-Sheet Financing
We’ve covered two “off-balance-sheet financing” methods – the operating lease and the sale-leaseback.
Now, let’s turn our focus to the “on” button! Understanding your company's balance sheet is crucial for making informed on-balance-sheet financing decisions.
The Role of Banks and Commercial Lenders
Banks and Commercial Lenders play a pivotal role in the balance sheet process. They meticulously analyze balance sheets to gauge a company’s financial health and creditworthiness, which is crucial in deciding whether to approve a business loan.
Banks and Commercial Lenders assess a company’s financial stability, growth trajectory, and debt repayment capability by scrutinizing its balance sheet.
They look at various factors, including asset balances, retained earnings, liquidity, and how effectively the company uses its assets to generate revenue and repay debt.
Banks and Commercial balance sheet Lenders rely heavily on balance sheet insights to determine loan amounts, interest rates, and repayment terms.
They evaluate the risk associated with lending to a company by reviewing its balance sheet alongside other financial documents, such as the profit and loss statement and cash flow forecast.
A robust balance sheet is often a key determinant in loan approval, showcasing a company’s ability to manage its finances proficiently.
Beyond lending, Banks and Commercial Lenders offer services such as balance sheet lending and portfolio lending.
Balance sheet lending involves providing loans secured by a company’s assets, which are recorded on the lender’s balance sheet. In contrast, portfolio lending offers loans based on the company’s financial health rather than specific assets.
Banks and Commercial Lenders are integral to the balance sheet process, providing essential services that enable companies to access capital and manage their finances effectively.
Unlocking and Managing Cash Through Balance Sheet Accounts
Knowing your balance sheet accounts, including accounts receivable, allows you to both unlock and manage cash.
Strategy 1: Asset Turnover
Your ability to better turn over receivables and inventories, key current assets, is crucial. This lowers your required investment in these two accounts and generates cash.
The tremendous popularity of A/R Financing is, in effect, an “off-balance-sheet” finance solution—taking your receivables and turning them into instant cash as you generate sales.
Example of Asset Turnover
A quick example? Take a company that has a million dollars in sales and receivables of $125k. That equates to a 45-day turnaround in collections. If you could get that to a 35-day turnover, the extra cash generated is $27.5k.
Strategy 2: Financing Long-Term Assets Properly
Your ability to buy equipment, technology, or even real estate, which are significant components of your company's assets, drains your business of cash.
Never, we repeat, should you finance these assets with short-term operating cash. Equipment leasing and term loans should be considered.
Strategy 3: Managing Payables
Manage your payables by using vendor terms, discounts, and pricing.
Strategy 4: Managing Term Debt
Investigating types of leases (capital/operating) and loans (secured/unsecured) will ensure you have the cash flows to support loan amortizations and finance long-term debt.
Balance Sheet vs. Income Statement
A balance sheet and an income statement are two cornerstone financial statements companies use to report their economic performance. While both are indispensable, they serve distinct purposes and offer different insights.
A balance sheet provides a snapshot of a company’s financial position at a specific point in time, typically at the end of an accounting period.
It lists the company’s assets, liabilities, and shareholders’ equity, offering a comprehensive view of its overall financial health.
Often referred to as a “snapshot,” the balance sheet captures the company’s financial position at a particular moment, highlighting what the company owns and owes.
On the other hand, an income statement summarizes a company’s revenues and expenses over a specific period, such as a month, quarter, or year.
It reveals the company’s net income or loss, providing a dynamic view of its profitability. Unlike the static nature of a balance sheet, an income statement offers a “moving picture” of the company’s financial performance over time, showing how well it has managed its operations to generate profit.
Both balance sheets and income statements are crucial for effective financial management.
While the balance sheet offers a static view of the company’s financial position, the income statement provides a dynamic view of its economic performance. They provide a holistic understanding of a company’s financial health and operational efficiency.
Importance of Accurate Financial Reporting
Accurate financial reporting is the bedrock of effective financial management and informed decision-making.
Financial reports, including balance sheets and income statements, offer stakeholders a clear picture of a company’s financial health and performance. Here’s why accurate financial reporting is indispensable:
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Informed Decision-Making: Accurate financial reports equip stakeholders with the information to make well-informed business decisions. Investors, creditors, and management rely on these reports to assess a company’s financial health and make decisions about investments, lending, and other business activities.
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Compliance with Regulations: Companies must adhere to various financial reporting regulations, such as Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Accurate financial reporting ensures compliance with these regulations, helping companies avoid penalties and fines.
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Transparency and Accountability: Accurate financial reporting fosters transparency and accountability within an organization. It provides stakeholders with a clear and honest view of the company’s financial performance and position, building trust and credibility.
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Risk Management: Accurate financial reporting helps companies identify and manage financial risks. By offering a clear picture of the company’s financial position and performance, these reports enable companies to pinpoint risk areas and take proactive steps to mitigate them.
Accurate financial reporting is essential for companies to manage their finances effectively, make informed business decisions, and comply with regulations. I
t promotes transparency and accountability and helps companies identify and manage financial risks, ensuring long-term economic health and stability.
Explore Financing Solutions with Traditional and Alternative Commercial Lenders
If you're interested in financing solutions such as:
Case Study:
An Ontario manufacturer faced expansion limitations despite strong assets. Through balance sheet lending, they secured $2.5M in growth capital within 3 weeks, leveraging their equipment and inventory value.
Result: 40% revenue growth in 12 months while maintaining operational control and improving cash flow management.
Key Takeaways
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Financial ratios demonstrate your company's stability through concrete metrics that lenders trust
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Asset valuation methodology determines your maximum borrowing capacity
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Working capital efficiency showcases operational excellence to potential lenders
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Debt service coverage validates your ability to manage new obligations
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Cash flow analysis proves sustainable business performance
Conclusion
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your balance sheet (on/off!) financing needs.
FAQ
How does Balance Sheet Lending improve my borrowing capacity?
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Considers total asset value
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Evaluates overall financial health
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Recognizes business stability
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Values operational efficiency
What advantages does this financing offer over traditional loans?
How can my business qualify for balance sheet lending?
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Strong financial statements
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Healthy asset base
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Positive cash flow trends
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Good debt management history
What terms and conditions should I expect?
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Competitive interest rates
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Flexible repayment schedules
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Customized loan structures
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Regular financial reporting
How quickly can funding be secured?
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Initial assessment: 2-3 days
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Documentation review: 1 week
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Final approval: 2-3 weeks
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Funding: 24-48 hours after approval
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What documentation is required for balance sheet lending?
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Financial statements
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Tax returns
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Asset registers
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Bank statements
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Business plans
How does seasonal business performance affect approval?
What role do personal guarantees play?
What makes balance sheet lending unique in the Canadian market?
How does this affect my existing banking relationships?
What are the long-term implications for business growth?
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Strategic expansion opportunities
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Financial flexibility benefits
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Credit profile enhancement
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Market positioning advantages
