Best Business Financing Working Capital Loans Finance Solutions

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ACCESSING THE RIGHT BUSINESS LOANS IN CANADA

Business Financing in Canada, when it comes to working capital loans and debt finance solutions comes with a lot of... do's and don'ts for the business owner of small business in Canada, aka the ' SME sector!

EVALUATING THE BEST BUSINESS FINANCE SOLUTIONS

We've been doing some fact-checking, (which seems to be happening a lot these days!) so let's dig in.

Most owners of small businesses and their financial managers recognize that the search for capital and funding for their business is never-ending.

1. Working capital needs are both short term and long term - It's key to know which one (or both?) that your company needs - business credit cards aren't the best way to finance a business! But which financial institution or commercial finance firm can serve your needs?

2. Once your company has determined the type of working capital or debt you need what are your options and how to do pursue those successfully and in the least amount of time?

BEST WORKING CAPITAL LOANS?

We've stated that working capital is both a short term and a long term need. Let's examine that key point. When we talk to clients about working capital needs it becomes apparent they are often confused by 'textbook issues' as compared to real-world issues.

The textbook of course tells us that working capital is a simple calculation - go to your balance sheet, subtract current liabilities from current assets, and, voila! There's your working capital. The perfect answer, right? The reality is that business owners must consider two key elements not often covered off in the textbook.

They need to know their cash flow needs based on past issues, current, and future needs. Also, the turnover of current assets is critical and many Canadian business owners and financial managers don't know how to measure turnover. If accounts receivable and inventory aren't turning properly your working capital is going to feel 'sluggish'! And if those two assets are building up not in relation to sales that's a bigger problem.

We're talking about short term needs vs. long term needs as we have stated. You may have had historically enough cash flow for working capital to satisfy your overall sales growth needs. But what if you have a large new order or contract you need to fulfill. That more often than not necessitates a short-term need for cash flow to fulfill purchase orders, contracts, etc.

The good news is that with the right help and knowledge it's relatively simple to measure cash flow needs. Don't forget though that sales and profits rarely relate perfectly to cash flow! When that issue becomes painfully obvious it's somewhat too late to put the proper fix in place.

UNDERSTANDING WORKING CAPITAL LOANS

Two options are in fact available for your firm when considering a working capital solution. One of those options is to take on more debt, and enter in a working capital term loan - this is simply a cash term loan with a fixed repayment and term - typically three to five years.

Interest rates are dependent on overall credit quality - short term working capital loans have emerged in Canada as an offshoot of merchant advance loans - these short term loans in some cases are offered by online lenders tend to be under 200k and are approved based on sales volumes and the business owner's personal credit history. It's a short term working capital line of credit.

For larger firms, this might be called subordinated debt, or mezzanine financing, but for smaller and medium-sized companies in Canada we can simply say 'it's a working capital loan'!

This type of financing puts permanent working capital into your business and allows you to feel comfortable that you can meet short-term obligations such as lease payments, etc. If there is a disadvantage to this type of financing its simply that in reality, you are adding more debt to the balance sheet, as the working capital loan is debt.

You can also monetize existing assets to maximize cash flow. Typically these assets are A/R, inventory, and fixed assets. Yes, you are leveraging those assets, but the reality is that your balance sheet ratios stay intact. Capital expenditures of long term assets are best financed through the lease financing of long term assets,

For smaller and medium-sized firms in Canada, these solutions come under several names, working capital facilities, asset-based lines of credit, or even a standard operating line of credit with a Canadian chartered bank that allows you to margin sales and invoice financing of receivables and inventory via unsecured loans and lines of credit.

Companies that employ factoring finance solutions can access cash from their sales revenues in one business day - this adds valuable cash flow to a company's everyday operations

ARE GOVERNMENT-GUARANTEED LOANS THE RIGHT SOLUTION FOR YOUR BUSINESS

Thousands of businesses in Canada annually take advantage of the Canada Small Business Financing Program, aka ' government-guaranteed loans ' similar to those offered in the U.S. by the Small Business Administration. These are not cash flow/working capital loans, but they are a solid solution to preserve and provide working capital by financing equipment and leasehold improvements, and even commercial real estate. Talk to the 7 Park Avenue Financial team about the application process and the interest rate benefits.

A good personal credit score is one key requirement of the program and loans are structured as term loans. Most financial institutions such as Canadian banks and credit unions participate in government small business loans, and the program is sponsored by Industry Canada.

CONCLUSION - BENEFITS OF THE WORKING CAPITAL LOAN

In summary, we have covered off the need for business owners to determine what type of working capital they need, albeit short-term or long term when it comes to debt payments that small business owners can handle and manage. Companies can use a working capital loan to help cover day-to-day operational expenses while they are between periods of increased business activity.

An unsecured loan is only available to businesses with a high credit rating, while other companies have to secure their loans with assets

THE BOTTOM LINE?

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

What is a working capital loan?

Working capital loans are used to pay operating costs and have shorter repayment periods than small business loans.

' Canadian Business Financing With The Intelligent Use Of Experience '

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

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