The ‘411' on Working Capital Finance in Canada - Cash Flow Financing Loans and Solutions
Canadian Working Capital Financing Alternatives To Stay Afloat
YOU ARE LOOKING FOR WORKING CAPITAL FINANCE SOLUTIONS
FINANCING OF WORKING CAPITAL
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WORKING CAPITAL BUSINESS LOAN SOLUTIONS IN CANADA
You're a Canadian business owner or financial manager... you've just dialled '411' for info on working capital financing! What alternatives, types of loans and cash flow financing are available for your firm as an alternative to long-term debt financing?
BUSINESS FINANCING SOLUTIONS FOR SMALL BUSINESS OWNERS
Let's discuss your question, with a focus on 'solutions'! Before getting to our answer let’s all agree it’s important to understand the question and subject. Our terms of reference are simple today - operating liquidity around current assets- it's the other half of working capital, balanced also by your fixed assets as part of your total equity structure.
But enough finance and accounting lingo... As a business owner, you will know that you have lots of sales and assets, and still be struggling every day to meet your current obligations around current liabilities such as accounts payable, salaries and wages, lease and loan payments, etc.
If you weren’t struggling you've solved your working capital and cash flow challenges, but we're assuming you haven’t, that’s why you're here.
WORKING CAPITAL LOAN REQUIREMENTS
If you have access to bank credit (many small and medium-size firms either don't, or don't have enough) your banker defines positive working capital finance as the difference between your cash, receivables, and inventory subtracted from your payables and other short-term obligations.
But can a firm or business have negative working capital... actually yes. If you are a retail-oriented business, or have very short credit terms and turn inventory and sales quickly you actually are winning, not losing. You have negative working capital but have won the cash flow game... essentially you collect quicker than you owe, so to speak. Click here for an excellent article on how to read a cash flow statement by the Harvard Business Review.
We encounter many clients that have retail or service-oriented businesses but still have cash flow challenges, mostly around growth.
A unique new working capital loan solution called the Merchant Cash Advance small business loan available through commercial finance companies and online lenders is a great way to solve that cash flow financing challenge based on criteria around annual revenue and business owner's personal credit and personal guarantee.
Repayment terms and loan terms are structured around the actual cash flows of the business and loans are typically a 12-month term around repayment terms. Some business owners also utilize business credit cards to augment day-to-day business needs and purchases.
What are the solutions to the management of positive working capital - it's a bit of a misnomer because when you think about it the more positive working capital you have ( i.e. inventory and receivables are growing) the more cash-strapped you are.
CANADIAN SMALL BUSINESS LOANS
The more common solution clients consider is simply 'bank credit' - i.e. traditional financing. If you want to know if you qualify for bank financing for operating lines of credit financing you should ensure your firm is profitable, is perceived as stable and growing around your business credit profile ... and your balance sheet ratios should be in order. Thousands of firms can't meet those fairly simple tests. What's the solution?
If your cash conversion cycle (the time it takes a dollar to flow through your company) is high you need a working capital facility that finances both your inventory and A/R.
HOW DO YOU QUALIFY FOR A WORKING CAPITAL LOAN / WORKING CAPITAL LINE?
Requirements for a working capital loan depend on various factors such as the type of facility and size of the loan - For small businesses, the business owner's personal credit score is key for both traditional banks such as bdc working capital loans and alternative finance lenders.
Credit bureau scores in excess of 600 are the normal requirement - as well as the owner's ability to provide a personal guarantee - Interest rates vary for small businesses - as well as requirements around time in business and the ability to provide proper financial records such as financial statements, business account bank statements and tax returns are key.
A business plan will often help a business loan application. 7 Park Avenue Financial prepares business plans that meet and exceed the requirements of banks and commercial lenders.
For large firms, an asset based line of credit is a working capital operating loan that makes total sense. The majority of these types of facilities are non-bank in nature and offered by specialized finance firms that specialize in cash flow solutions. Oh, and by the way, a lot of those 'bank requirements' we spoke of don’t apply when you consider an asset-based line of credit - Why... simply because the focus is on your assets - inventory, receivables, and in some cases your ability to borrow against fixed assets.
TYPES OF WORKING CAPITAL LOANS
The main offerings of Canadian working capital financing are asset-based lines of credit, inventory and accounts receivable working capital facilities - Receivable financing can be augmented in some cases by purchase order or inventory financing.
These solutions typically are outside of bank financing, and come with a higher cost, but provide thousands of Canadian firms with all the financing they need to grow sales and profits.
If utilized properly you have the ability to significantly reduce the costs associated with these types of financing. An alternative to cash advances is the financing of business invoices via factoring solutions - At 7 Park Avenue Financial, we recommend Confidential receivable financing solutions allowing you to bill and collect your own invoices while receiving cash immediately on the same business day as you generate sales!
CONCLUSION - UNDERSTANDING WORKING CAPITAL LOANS
So what's our bottom line advice on the information you asked for on working capital loans for small business and the solutions available in the Canadian marketplace?
Simply that you need to understand your firm's unique operating and cash flow requirements, and you have to be able to have some sort of measurement on whether you are winning or losing (the cash conversion cycle formula works best - check it out).
Remember also that equipment leasing/equipment loans for capital expenditures is a solid use of business credit for business growth while conserving credit lines.
Speak to 7 Park Avenue Financial, a trusted, experienced and credible Canadian business financing advisor to keep you from falling off the slippery slope of working capital financial pressures with the best solution for your company needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What Is a Working Capital Loan?
A working capital loan is a business loan solution that allows a company to fund everyday operations. Purchases of long term assets/capital expenditures should be made through long term debt financing versus short-term funding solutions such as financing day-to-day operations.
Those needs revolve around salaries and wages, rent and other lease or loan payments and accounts payable owed to suppliers and vendors around business production activity.
The ability to mobilize working capital needs is a challenge for businesses that have illiquid assets on the balance sheet such as commercial real estate, fixed assets around equipment, and in some cases intellectual property.
What is the difference between a term loan and a working capital loan?
Term loans solutions for businesses have longer amortizations around debt repayments , typically 3-5 years. These lump sum loans are usually larger in nature and have fixed installments based on a choice of variable or fixed interest rates. Short term loans are tailored to flexible payments based on cash flows of the business and the company's everyday operations.
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' Canadian Business Financing With The Intelligent Use Of Experience '
7 Park Avenue Financial/Copyright/2023
Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil