EMAIL - sprokop@7parkavenuefinancial.com
THE WORKING CAPITAL LOAN SOLUTION
Business loans in Canada, for some business owners / financial managers, must seem 'spectacularly appalling' sometimes when it comes to traditional financial institutions to access enough cash for your company.
How then can your company reverse that 'leap backward' feeling when it comes to working capital financing and business cash flow solutions for everyday operational expenses and economical development and business growth?
QUESTIONS TO ASK YOURSELF WHEN BUSINESS FINANCING IS REQUIRED
When sourcing business loans, two key factors come into play when seeking to reverse negative working capital trends -
1. What is the need for additional financing?
2. Is a re-financing strategy in fact required?
There's no question the current borrowing environment makes it challenging for business owners and financial managers to often access the right amount of capital they need. No secret there.
When we talk to clients discussion tends to revolve around what type of financing they require, and as a business owner, you should understand the options and benefits that come from various types of working capital and debt financing.
A good way to address the issue is to simply focus on why you feel you need additional capital.
Reasons might be as follows:
Refinancing existing debt
Leasing new equipment
Monetize current assets such as A/R and inventory into a permanent working capital line of credit
You need all the help you can get in assessing those needs and the benefits that arise from them - as a result, we recommend you work with a credible, trusted, and experienced advisor in business finance.
WHICH OF THESE POSITIONS IS YOUR COMPANY IN?
Ever wondered what category you're in?!
Category 1 - You have a bank relationship but can't access the true amount of financing you need via a traditional line of credit
Category 2- You can't and haven't accessed traditional financing via traditional lenders such as banks, are self-financing, and require additional capital to maintain and grow your business.
Cash flow financing can be a saving grace during slow periods in sales or seasonality of operations .operations, but are not the solution for every need your business might have. Consider how funds will be used and decide which solution is the best viable option among many that will work for your firm to cover any short-term gap.
WORKING CAPITAL LOANS FOR SMALL BUSINESS
If we get straight to the heart of the matter options for a working capital financing loan option are as follows:
- A working capital term loan
- Additional bank operating facility
- A true asset-based lending/working capital facility - (this is a non-bank facility)
- Receivable discounting, also known as factoring your receivables/invoice financing for trade credit a/r - A solid solution for the growing pains of a business to get your business running smoothly
- Inventory financing via a supplemental inventory loan (this traditionally works best when it is combined with a receivable facility
- Sale-leaseback options to release working capital in assets via a short-term loan / lease back
Other ' cash flow ' or ' debt ' solutions you might also consider include:
P O Financing
Equipment Leasing - loans terms structured to your asset acquisition needs
SR&ED Tax credit bridge loans (if applicable to your R&D capital strategy) - flexible repayment terms
Royalty Finance
Business Credit Cards / Short Term Working Capital Loans / Merchant Advances - Working capital loan requirements include the necessity of a good business owner's personal credit score and years in business- financing is quick to get approved and available but comes with higher interest rates
Canadian Government Small Business Guaranteed Loans - positive features include a limited personal guarantee, but asset categories that can be financing are only equipment and real estate and leasehold improvements - this is a term loan structure, so some businesses might consider a bdc working capital loan which is a cash flow lump sum loan - bdc loan requirements include years in business and a reasonable profit and loss position.
We encourage customers to think about the terms of traditional financing and nontraditional financing around a business loan. If you are thinking of exploring traditional financing with a new or existing bank then you should anticipate, in our experience, at least a 1-2 month timeframe.
This might not be suitable for your timing purposes if you have increased payables to address or new orders and contracts which require a buildup in A/R and inventory.
THE ASSET-BASED LENDING SOLUTION
If timing and increased additional working capital are your priority you should consider an interim solution to the always long-term problem of business financing for small businesses - that solution might be a working capital facility from a private finance firm among Canada's alternative lenders, one that provides you full margining of your receivables and inventory - ie. an asset based lending solution.
Typical entry advances for A/R and inventory are 90% and 40% respectively, and if you work with the right partner that specializes in inventory financing then you can even enhance those ratios. All that simply means is more working capital!
One point of confusion that we like to clarify with clients is that the government small business loan program finances only equipment, leaseholds, and real estate, i.e. hard assets - as such this program should not be confused with a true working capital solution.
So what is our bottom line for small business loans (unsecured) and working capital financing? It is simply that you must realistically recognize the commercial lending landscape has changed:
Traditional financing is harder to access!
Collateral requirements and guarantees are at a higher bar for approval
A Working capital loan for new business ventures is rarely available.
CONCLUSION - KEY TAKEAWAYS
There are alternative methods to securing working capital financing for small business owners in Canada- these might come at a higher cost, but should in most cases provide you with the cash flow you need to effectively run and grow your business while taking advantage of financing your business needs.
Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor for Canadian small businesses, we'll assist you with your funding requirements & working capital needs around business credit.
FAQ: FREQUENTLY ASKED QUESTIONS /PEOPLE ALSO ASK / MORE INFORMATION
What is asset based lending?
Asset-based lending, also called ' ABL ' is a form of financing that allows a business to borrow money based on the balance sheet assets of the business under a revolving business line of credit, or in some cases a term loan structure - these assets typically include accounts receivables, inventory, and fixed assets and equipment. Financing is based on the liquidation value of balance sheet assets, unlike cash flow/mezzanine financing loans which focus solely on the cash flows of the business.
Businesses pay interest on only the amount of the facility that is being used at any one time as the company covers short term expenses/ current liabilities on a day-to-day basis.
What is working capital from an accounting perspective?
The traditional definition of working capital is the difference between current assets and current liabilities, leading to either a negative or positive working capital relationship.
How do you qualify for a working capital loan?
Qualifications for most working capital/cash flow loans include a solid personal credit score in the 600+ range - a major necessity when considering traditional lenders such as banks - other factors that may be reviewed include years in business, proper financial statements, tax filings, etc.
