YOUR COMPANY IS LOOKING FOR INVENTORY FINANCING!
FINANCING INVENTORY FOR SHORT TERM FINANCE NEEDS
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Financing & Cash flow are the biggest issues facing business today
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Inventory financing in Canada. What are the methods that Canadian business uses to ensure that working capital investment is maximized? Let's dig in.
When business owners/financial managers are challenged on how to finance inventories it's important to focus on two areas - we'll call them ' tips' and ' traps'!
TRADITIONAL FINANCING TENDS TO AVOID FINANCING INVENTORY FOR A VARIETY OF REASONS
Financing inventory typically revolves around either retail or commercial concerns and typically may involve a line of credit combination. Smaller retail businesses have a huge challenge as banks and other commercial lenders are reluctant to lend against inventory. Compounding the problem is the fact they view that type of business as an ' all-cash ' business - so why would it need financing?
Typically when inventory is financed by a bank or commercial concern it's important to realize that it's always financed at cost. Another good thing to know is that in certain types of financing actual physical counts, inspections, or appraisals will be required by your lender - again typically a bank or non-bank commercial lender. That won't always be required, but on occasion, it’s an absolute must. The lender needs to determine the ' margin formula ' that they will lend against on an ongoing basis.
THE MARGIN FORMULA IN INVENTORY FINANCE
Margin formulas vary significantly based on several key factors. They include an analysis of which one of the three stages your inventory is in (raw materials, work in process, and finished goods). Businesses that are able to demonstrate they have perpetual inventory systems in place stand a much better chance of ' borrowing power ' when it comes to financing inventories as part of your overall ' current assets'.
Your overall gross profit also plays a key point in financing. Ultimately important is the lenders/banks opinion on how marketable your goods are under a worst-case ' forced sale ' scenario.
THE GOVERNMENT SMALL BUSINESS LOAN PROGRAM DOES NOT FUND INVENTORY AND RECEIVABLES
Many business owners consider the Canadian Small Business Loan Program for the financing of their business. They wrongly assume that the program covers some sort of working capital, cash and inventory components. That is not the case! In that program, only 3 classes of assets can be financed - equipment, leaseholds, and real estate. The program is a term loan versus a revolving credit facility typically required for the financing of inventories.
CREDIT FACILITIES THAT COMBINE INVENTORIES AND ACCOUNTS RECEIVABLE
How does the business owner use inventory financing to make sure to maximize sales and profits? Is there a winning way that we constantly recommend and implement for clients looking for inventory finance? The answer is that most successful financing in this area is in the context of a combined credit facility that also financed receivables. Two sources of financing exist here - The Canadian Chartered bank, and, in some cases even better: Non-bank asset-based lines of credit.
NON-BANK ASSET BASED LENDERS ARE GREAT AT FINANCING INVENTORY
While the bank or commercial non-bank lender places a higher emphasis on receivables due to their more immediate liquidity they also fully realize those sales are generated from inventory turnover. While banks differ in Canada on inventory margins it is non-unusual in ' ABL ' (asset-based credit revolvers) to achieve anywhere from 30 - 75% borrowing power. Inventory management and asset turnover are the key to asset-based loans of this type. Having a good management system in place is key, such as FIFO / LIFO based programs
Oh, we almost forgot. Why can't used submarines be financed? We would offer up that they can't be readily liquidated, and valuation is extremely hard to determine. Although we suppose the financing company lender could utilized a ' FLOATING DEBENTURE '!
If you want to beat the challenge of inventory finance in Canada seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record, allowing you to achieve the business loan funding you require.
Click here for the business finance track record of 7 Park Avenue Financial
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