YOUR COMPANY IS LOOKING FOR DEBT FINANCING
AND BUSINESS LIQUIDITY & DEBT FUNDING SOLUTIONS IN CANADA!
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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EMAIL - sprokop@7parkavenuefinancial.com
Debt financing for your Canadian business. Should you... and when? That’s the key question the Canadian business owner and financial manager take a look at when assessing business liquidity.
No one is going to argue that the focus should not be on profits, but the reality is that if you have too much business debt, or aren’t properly monetizing current assets you're going to be in a situation where the last of your concerns are going to be profits, you'll, in fact, be fighting for business survival.
BUSINESS LENDERS WANT TO BE REPAID!
Notwithstanding the type of debt your company needs it’s in fact the level of that debt that is going to be the key focus of any financing partner you're looking at. That partner’s focus is very clear: getting repaid!
WHAT IS THE RIGHT AMOUNT OF DEBT
So are there in fact some ways you as a business owner or manager can determine what the right amount of debt is? Ultimately it's a case of ensuring that business liquidity is there to properly augment future business success.
THERE IS NO MAGIC FORMULA FOR DEBT
We point out to clients that there is no magic formula for the right amount of debt; there are some industry standards though and that relates to the fact that different industries and business models require different amounts, and types, of debt financing.
THOSE RATIOS AND COVENANTS
The average business owner thinks of 'the bank' when it comes to measuring debt. They are of course the masters of ratios (we have always preferred to call them relationships) and the covenants that come with those ratios. We're also not necessarily in agreement if some of those ratios and calculations accurately reflect what's going on in the use of a solvency ratio formula.
Case in point? Liquidity ratios, such as the proverbial ' current ratio ' which many bankers and lenders focus on as a key measurement of debt and business liquidity. By going to your balance sheet and taking current assets and dividing them by current liabilities we're told that a 2:1 ratio is generally desirable and that higher is better. But our point? It's simply this in fact might be a poor measurement if receivables and inventories are growing... BUT NOT TURNING!
So the answer to ' what is a good liquidity ratio ' is your ability to measure asset turnover consistent with your payment terms and the cash cycle within your particular industry.
We do note that using the proper tools and analysis does make liquidity ratio analysis valuable if, as we noted, you can properly interpret the numbers! It's all about performance measurement finance and understanding your balance sheet .
Debt financing in Canada brings interest repayments. That's where interest coverage comes in - you want to be in a position to generate enough positive cash flow, at a minimum, to repay that debt. The quick formula if net income plus deprecation divided by interest expense. Here to the bankers tell us that 1:25 to 1 is the desired ratio that reflects positive business liquidity.
The total debt you carry in relation to your equity in the company is a very valid discussion point when it comes to your ability to achieve the amount of debt financing you need. And how you use that borrowed money, via leverage, is also key.
So what's our take away today when it comes to accessing the right amount of debt via business liquidity solutions Simply that you do need to understand how debt financing is score carded, by your lenders and yourself as an owner.
CONCLUSION
Using debt properly won’t put you in a cash crunch and will allow you to grow your business. Know those key financial ratios, and the importance of those financing ratios/relationships. Taking on debt forces the business owner to understand the cost of financing/interest rate considerations as well as ensuring the traditional risk involved in taking on debt. Startup companies have an even larger challenge given the absence of a track record.
Debt should not always be considered negative given that current interest rates are very low, and projected to be so for a long period of time - even the largest well-heeled large and public corporations assume debt loads all the time. Canadian chartered banks and commercial lenders have the ability to offer unlimited debt financing for firms that qualify.
Accountants will of course note to management the overall attractiveness of ' good debt' given the tax deductibility of interest as well as our previously noted low rate environment. Debt is also finite, and when repaid owner equity again prevails!
Management must always consider the ramifications of lender covenants and collateral in the event the company cannot repay debt, as well as the effect on the business credit profile/reputation, as well as collateral and personal guarantees attached to usual terms and covenants in debt finance.
Alternatives to funding by debt include additional owner equity, or cash flow based/mezzanine solutions if the company can prove strong cash flow. Funding should be matched to the needs of the company as well as a solid understanding of how the company generates cash flow in their operating cycle.
Speak to a trusted, credible and experienced Canadian business financing advisor on sourcing debt financing that makes sense for your business liquidity needs. That might include bank debt, cash flow loans, equipment financing, subordinated debt, or merger and acquisition financing. It's score carding and measuring that’s the trick when it comes to debt finance.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2020
