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Maximizing Business Cash Flow Funding: Canadian Strategies
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Introduction
Boy, do we at 7 Park Avenue Financial love a good term when we see one!
Whirligig. It’s the definition for a 'whirling or circling course of events'. Don't business owners often feel they are in a constant whirligig of business cash flow challenges - always looking for funding for working capital as their business grows? They certainly are always telling us that.
According to one study, over 50% of small businesses will fail within their first five years due to cash flow problems and business cash flow funding challenges!
What is cash flow funding?
Cash flow funding, also known as working capital financing, is a type of financial support provided to businesses to manage their day-to-day operations and cover short-term expenses.
It is designed to address the gap between a company's cash inflows (revenue, receivables) and cash outflows (expenses, payables). Cash flow funding helps businesses maintain liquidity and ensure they have enough capital on hand to meet their financial obligations, purchase inventory, and invest in growth opportunities.
Let's examine some ways to both measure and address working capital and cash flow shortages. Our primary focus is on the SME (small to medium enterprise) sector of business in Canada.
We should note that larger corporations have access to more sophisticated working capital solutions that include unsecured cash flow loans and mezzanine debt provided by Chartered banks, private equity firms, and specialized commercial financing companies in Canada. There are even some hedge funds in Canada offering this type of working capital solution.
Cash Flow Lending for Larger Companies
The cash flow lending offered by these firms to larger companies is based on multiples of cash flow and profits, not utilizing the actual assets of the firm as first-position secured collateral for the proper financing structure.
Suffice to say that interest rates on these types of loans are very attractive but at the same time come with rigorous credit and size criteria that of course SME sector firms simply can’t meet.
SME firms are focused on more mundane issues, reducing their payables, purchasing more inventories, and meeting employee obligations. When actual working capital runs low of course our whirligig kicks in! It’s a constant battle to replenish working capital.
Components of Working Capital
Working capital for your business consists of your cash on hand, your borrowing ability, and of course receivables and inventory.
Rethinking Current Ratio Calculation!!
The rudimentary way that those textbook guys and accountants calculate working capital is to divide current assets by current liabilities on your balance sheet.
At 7 Park Avenue Financial, we've never really liked this calculation because it doesn’t truly reflect the flow of funds in and out of your business. (A calculation called the operating cash flow calculation does this much better).
For instance, if your sales are flat or slowing down and your receivables and inventory are building up, your working capital current ratio calculation is higher, but the reality is that your real cash flow is getting worse. And that's a problem.
Available Working Capital Solutions / Exploring Canadian Options
Working capital solutions in Canada are available but they are somewhat more limited in nature than many Canadian business owners and financial managers think
. Business lines of credit to cover business cash flow for start-ups or small businesses rely heavily on the business owner's personal assets. Canada’s crown bank corporation offers working capital term loans, but significant emphasis is placed on owner equity and cash flow ratios.
Real-World Solutions in 2023
The real-world solutions available in Canada in 2023 for funding business cash flow are as follows:
Sale leaseback of some of your assets
Chartered bank lines of credit
Accounts receivable financing facilities
Non-bank asset-based lending facilities (they combine your A/R and inventory and equipment into one business line of credit)
Merchant cash advances short term loan / short term working capital loans
Many Canadian firms utilize various tax credits which can also be monetized into cash flow and working capital liquidity.
Key Takeaways
Working Capital Significance: Recognize the critical role of working capital in business sustainability.
SME Financial Challenges: Understand how small and medium-sized enterprises (SMEs) face unique financial hurdles.
Sophisticated Financing Solutions: Explore advanced funding options, such as unsecured cash flow loans, a merchant cash advance, factoring, and mezzanine debt.
Cash Flow Multiples: Grasp the concept of financing based on cash flow and profit multiples.
SME Limitations: Acknowledge the credit and size criteria challenges that SMEs encounter.
Operational Focus: Emphasize the importance of optimizing payables, inventory, and employee obligations in the company's financial statements
Components of Working Capital: Learn about the key elements: cash, borrowing capacity, receivables, and inventory.
Reevaluating Current Ratios: Question the accuracy of traditional current asset vs. current liability calculations.
Canadian Financing Options: Explore available solutions like business lines of credit, term loans, and tax credits.
Real-World Alternatives: Consider practical strategies such as sale-leaseback, accounts receivable financing, and asset-based lending.
Conclusion - Leveraging Cash Flow for Growth
Business Cash Flow Funding is the lifeblood of every enterprise, ensuring its survival and growth.
Are you tired of the constant struggle to secure the financing your business needs to thrive? Discover the key to overcoming business financing challenges and securing your company's future.
Call 7 Park Avenue Financial, a trusted, experienced, and credible Canadian business financing advisor on how you can avoid the whirligig of Canadian business cash flow. In today’s competitive environment, your ability to survive is based strongly on ensuring your working capital lifeblood is healthy.
FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
How can Business Cash Flow Funding benefit my Canadian business?
Business Cash Flow Funding provides essential capital for growth, working capital, and operations, ensuring your business thrives.
Are there specific strategies to improve cash flow in Canada?
Yes, strategies like optimizing payables, managing inventory, and exploring financing options can significantly enhance cash flow.
What types of financing are available for Canadian SMEs?
SMEs in Canada can access business lines of credit, term loans, and accounts receivable financing which can fund a company's accounts receivable, tailored to their needs around sales and business assets for a medium-sized or small business.
How does working capital impact business sustainability?
Working capital, including cash on hand and receivables, is vital for meeting financial obligations and seizing growth opportunities.
Can tax credits be used to enhance cash flow in Canada?
Yes, many Canadian firms utilize tax credits to bolster positive cash flow and working capital liquidity. Talk to 7 Park Avenue Financial about SR&ED tax credit financing solutions. These are unsecured loans with the only collateral being the sr&ed refund itself.
What are the typical interest rates for Business Cash Flow Funding in Canada?
Interest rates can vary but are often competitive. Rates depend on factors like creditworthiness, loan type, and market conditions as well as the business credit history/credit score of the borrower
How can businesses avoid common pitfalls when seeking cash flow funding?
Businesses can avoid pitfalls by carefully assessing their financial needs, understanding loan terms in both traditional and alternative financing solutions as well and working with trusted financial advisors such as 7 Park Avenue Financial for cash flow financing solutions
What is a business cash flow loan?
A business cash flow loan is a specific form of financing tailored to address cash flow challenges. It is a loan that provides a business with the necessary capital to bridge gaps in its cash flow.
Unlike traditional term loans that are typically used for specific purposes, such as buying equipment or expanding operations, a cash flow loan is designed to cover everyday operating expenses and stabilize a company's financial position. Business acquisitions can also be completed via cash flow loans, often in a term loan structure.
These loans are often unsecured, meaning they do not require collateral, and they are usually based on the borrower's future cash flow and revenue. Business cash flow loans are essential for businesses facing short-term cash shortages or seasonal fluctuations in revenue which pressures the company's cash flow and creates a potential need to borrow money
