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Financing & Cash flow are the biggest issues facing business today
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Stop watching opportunities slip away due to cash flow constraints!
"A business that doesn't grow dies. Working capital is the lifeblood of business growth." - Peter Drucker
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Working capital financing and cash flow finance solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Working Capital Financing: Canadian Business Challenges & Solutions
Financing a business in Canada can be a daunting challenge, especially regarding working capital, debt management, and recognizing financial problems and opportunities.
Are there some 'Golden Rules' to follow? At 7 Park Avenue Financial, we believe so. Let’s explore various loans for businesses in Canada.
CASH FLOW CRUNCH? THERE IS A BETTER WAY!
As your business grows, cash flow gaps can materialize. Between late-paying clients and the ups and downs of sales, your business can often miss an opportunity to grow and increase sales. That's the importance of achieving flexible funding for today's operations with a focus on growing the business.
3 Uncommon Takes On Working Capital Finance
- Working capital financing can be used as a competitive advantage tool to negotiate better supplier terms
- It can serve as a risk management strategy during economic uncertainty
- Using it strategically during slow seasons can increase annual profitability
DID YOU KNOW?
- 82% of business failures are due to poor cash flow management
- The average approval rate for working capital financing is 65%
- Processing time has decreased by 71% in the last 5 years
- 43% of small businesses struggle with cash flow issues
- Working capital loans typically range from $5,000 to $500,000
Growth and Capital Needs
In some cases, your firm might be growing too fast, and just when you are ready to expand or take on larger orders, your operating and business capital needs replenishing without the necessary funding.
Working capital funding can be accessed within 48 hours, allowing businesses to cover short-term costs and maintain operations.
Every company, small and large, eventually needs more access to capital.
A financing error can impair financials and even cause business downfall for small and medium firms. Expansion financing often involves securing funds for business assets such as commercial land, buildings, and equipment.
Definition and Importance of Working Capital
Working capital is a crucial financial metric measuring a company’s liquidity and ability to meet short-term obligations.
Essentially, it is the difference between a company’s assets and liabilities. This metric is vital for day-to-day operations, enabling businesses to pay employees, suppliers, and creditors on time.
Positive working capital indicates that a company can withstand financial challenges and invest in growth opportunities. Maintaining adequate working capital is essential for sustaining operations and ensuring the company’s financial health.
Working Capital Management
Firms with poor working capital are typically poorly managed and unable to meet cash flow needs, which negatively impacts the company's financial health.
However, a constant reliance on new working capital often demonstrates that a company is investing all its cash to grow the business and increase return on investment. Expert advice and making the right choices are crucial, as the wrong debt must match your cash inflows.
Economic uncertainties, including pandemics, make it challenging to find business capital. The financing you need depends on how you operate within your industry.
Strategies for Increasing Working Capital
Increasing working capital is essential for improving a company’s financial stability and operational efficiency. Here are several strategies to consider:
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Optimize Accounts Receivable: Implement efficient invoicing and collection processes to reduce the time needed to receive customer payments. This can significantly improve cash flow and ensure funds are available.
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Improve Inventory Management: Adopting just-in-time inventory management can help reduce inventory levels and free up cash. This approach minimizes the amount of capital tied up in unsold goods, enhancing liquidity.
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Reduce Accounts Payable: Negotiating with suppliers to extend payment terms or taking advantage of early payment discounts can help manage cash outflows more effectively. This strategy can improve net working capital by delaying cash payments without incurring penalties.
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Increase Sales: Implementing targeted sales strategies can boost revenue and improve cash flow. Higher sales volumes can lead to increased working capital, providing more resources for growth and investment.
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Reduce Operating Expenses: Cost-cutting measures can reduce operating expenses and improve profitability. Lower costs mean more cash is available to meet short-term obligations and invest in business growth.
Understanding the Operating Cycle
Finance experts refer to the ‘operating cycle,’ which is the time it takes for a dollar to flow through your company from order to collection via receivables.
Maintaining positive working capital throughout this process dictates the type and amount of financing needed, which is heavily influenced by the company's current assets.
These assets are crucial for meeting short-term obligations and can be quickly converted into cash, ensuring liquidity.
The amount of working capital a small business needs depends on its operating cycle and growth goals. Large businesses can manage with negative working capital due to their ability to raise funds quickly, but small companies should maintain positive figures.
Impact of Seasonality on Cash Flow
Seasonality can significantly affect cash flow needs.
All financing solutions consist of debt, equity, or a combination. The best solution depends on your specific circumstances and requirements. One golden rule is to appropriately match short-term and long-term debt, each with benefits and potential disadvantages.
Working Capital Loans
Working capital loans can be either a term loan to inject permanent working capital or a short-term loan, typically 12 months in duration, to cover short-term needs like working capital costs, such as payables, receivables financing, and wages.
Using shorter-term facilities for long-term needs like fixed assets or real estate is improper.
Calculating Working Capital Costs
Working capital is calculated by subtracting current liabilities from current assets on your balance sheet.
A shortfall indicates the need for short-term liquidity financing. Fortunately, creative and alternative financing options are available for SME commercial finance in Canada.
SME Financing Landscape
The SME segment is a significant part of the Canadian economic landscape. Numerous traditional and alternative lenders offer the financing options needed to run your business. The same fundamental criteria apply, such as years in business, annual revenues, and proper financial statements.
Importance of Personal Financial Management
For smaller businesses, lenders view personal financial affairs as a reflection of business financial management. Therefore, decent credit scores are essential.
Repayment of Working Capital Loans
When selecting a financing facility, you and your lender should be aware of your repayment ability. Short-term working capital loans are popular, and many lenders use online portals and algorithms to determine loan amounts and repayment timing.
These loans may require weekly or monthly repayments based on annual sales and business duration.
Interest Rates and Financing Costs
Interest rates for working capital loans are high in Canada, with the maximum chargeable rate often being the lender's prime lending rate plus 5%.
However, the appeal lies in the speed and flexibility of approval. Options like equipment leasing and commercial mortgages are available for long-term investments like equipment or real estate. Merchant advances provide short-term working capital loans payable on installment and based on sales history.
Government of Canada Small Business Loan Program
This program, known as the Canada Small Business Financing Program, provides up to $1,000,000 of financing with a government guarantee, offering attractive interest rates, repayment flexibility, and minimal personal guarantees.
Leasehold improvements, equipment, real property, intangible assets, and working capital are among the eligible purchases under the program.
It’s ideal for leasehold improvements, new and used equipment, and building acquisition or modernization. Additionally, the borrower may finance a registration fee, which can be a percentage of the loan amount.
Canadian Banks and Financial Institutions Financing
Canadian banks offer unlimited funding and flexibility for firms that qualify, with the appeal of low-cost revolving lines of credit.
However, financial institutions determine interest rates and provide financing terms based on stringent qualification criteria, focusing on established businesses, balance sheet quality, and personal covenants.
Factoring and Purchase Order Financing
Factoring financing, the fastest-growing working capital financing, involves monetizing receivables for immediate cash.
Financial institutions are responsible for approving and delivering loans, such as Confidential Receivable Financing, which allows billing and collecting without third-party intrusion.
Purchase order financing enables fulfillment of larger orders by paying suppliers directly, supporting growth without additional equity.
Alternative Lending in Canada
Alternative lending solutions are rising in Canada. Lenders often consider intangible assets, such as leasehold improvements and working capital costs, when providing financing options.
Staying attuned to economic conditions, industry trends, and politics is crucial for effective financial management. External financial solutions, such as lines of credit, bank debt, receivable finance, inventory finance, and equipment leasing, play a significant role.
Tax Credits and SR&ED Loans
Monetizing refundable tax credits under the SR&ED program accelerates refunds for R&D investments. Generating cash internally through asset monetization helps achieve financial goals without increasing debt and taking on secured working capital loans.
Importance of Professional Advice
Discussing taxation impacts with your accountant is vital, as debt and tax have both positive and negative aspects. Mature and efficiently operating firms can access traditional financing, while alternative finance provides flexibility, albeit sometimes at higher costs.
Proactive Financial Management
Proactively accessing debt solutions and working capital, considering equity dilution when necessary, and understanding the impacts of external forces are key to financial viability.
Lenders may also offer an unsecured personal guarantee for a loan, which can be up to the initial amount of the loan.
Tips for Effective Working Capital Management
Effective working capital management is critical for maintaining a company’s financial health. Here are some tips to ensure efficient management:
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Monitor Cash Flow: Regularly monitor cash flow to identify areas for improvement. Understanding cash inflows and outflows helps in making informed financial decisions.
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Maintain Sufficient Working Capital: Ensure the company has adequate working capital to meet its short-term obligations. This involves balancing current assets and liabilities to avoid liquidity issues.
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Optimize Accounts Receivable and Payable: Implement efficient invoicing and collection processes and negotiate with suppliers to extend payment terms. This helps in managing cash flow more effectively.
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Improve Inventory Management: Adopting just-in-time inventory management can reduce inventory levels and free up cash. This approach ensures that capital is not unnecessarily tied up in unsold goods.
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Review Financial Statements: Regularly review financial statements to identify areas for improvement. This helps ensure that the company maintains sufficient working capital and can meet its financial obligations.
By following these tips, businesses can maintain a healthy working capital ratio, ensuring financial stability and the ability to seize growth opportunities.
Key Takeaways
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Government funding programs substantially support eligible businesses, providing non-repayable grants and loans - The SBL loans are federally guaranteed to the participating financial institution.
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Bank loans remain a primary source of financing, with various options tailored to different business needs and sizes.
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Venture capital investments can provide significant funding for high-growth potential startups, particularly in technology sectors.
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Asset-based lending allows companies to leverage their inventory, equipment, or accounts receivable for financing.
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Tax incentives and credits are indirect financing methods, reducing overall business costs and improving cash flow.
Conclusion
It is essential to stay on top of cash flow planning and have a proper business plan that reflects actual growth and profit potential.
Depending on your focus, whether it's growing sales, entering new markets, or investing in R&D, understanding available business financing solutions is crucial.
For more information on business financing solutions in Canada, call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor.
FAQ
What types of Canadian business financing options are available?
Canadian businesses can access various financing options, including government grants, equipment financing, bank loans, venture capital, angel investments, and crowdfunding platforms to access capital on the company's balance sheet.
How can government grants benefit my Canadian business?
Government grants provide non-repayable funding for eligible businesses, supporting initiatives such as research and development, expansion, and job creation. CSBF loans from the Canada Small Business Financing program even fund the purchase of leasehold improvements for leased premises.
What advantages does venture capital offer to Canadian startups?
Venture capital provides substantial funding for high-growth potential startups, often accompanied by valuable industry expertise and networking opportunities.
How can a business line of credit support my company's cash flow?
A business line of credit offers flexible access to funds, allowing you to manage cash flow fluctuations and seize growth opportunities as they arise.
What tax credits are available for Canadian entrepreneurs?
Canadian entrepreneurs can benefit from various tax credits, including the Scientific Research and Experimental Development (SR&ED) program and regional development incentives.
How do I determine which financing option is best for my business?
Assess your business needs, growth stage, and industry to identify the most suitable financing options, considering factors such as repayment terms and eligibility requirements.
Are there specific financing programs for women entrepreneurs in Canada?
Yes, several programs cater to women entrepreneurs, including the Women Entrepreneurship Strategy (WES) Ecosystem Fund and BDC's Women in Technology Venture Fund.
What documentation is typically required when applying for business financing?
Typical requirements include business plans, financial statements, tax returns, cash flow projections, and personal credit history for the business owners.
How long does the process of securing business financing usually take?
The timeline varies depending on the financing type and financial institution, ranging from a few weeks for some bank loans to several months for complex grant applications or venture capital deals.
Can startups with limited operating history access Canadian business financing?
Yes, startups can explore options such as government startup grants, angel investors, crowdfunding, and specialized startup loan / working capital loan programs designed for new businesses.
How does Canadian business financing differ from financing in other countries?
Canadian business financing is characterized by strong government support, a stable banking system, and programs tailored to specific industries and regions.
What role do credit unions play in Canadian business financing?
Credit unions offer personalized financing solutions to secure funds for businesses, often with more flexible terms and a focus on supporting local economic development.
How can export financing programs benefit Canadian businesses looking to expand internationally?
Export financing programs from EDC for SME / Small businesses provide funding and insurance to help Canadian enterprises to mitigate risks associated with international trade and support their global expansion efforts.
How can working capital financing fuel my business growth?
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Enables quick response to market opportunities
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Provides flexibility for inventory management
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Supports seasonal cash flow needs
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Allows for equipment upgrades
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Helps maintain competitive advantage
What makes working capital financing different from traditional loans?
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Faster approval process
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More flexible terms
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Based on business performance
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Shorter commitment periods
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Revolving access to funds
How quickly can I access working capital financing?
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Online applications take minutes
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Approval possible within 24 hours
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Funds available in 2-3 business days
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Revolving credit accessible immediately
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Digital documentation speeds process
What are the qualification requirements for working capital financing?
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Minimum revenue thresholds
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Business operation history
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Credit score considerations
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Industry type evaluation
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Cash flow assessment
How can I optimize my working capital financing?
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Strategic timing of drawdowns
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Matching financing to business cycles
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Regular review of terms
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Maintaining strong financials
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Building lender relationships
How does working capital financing improve business operations?
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Smooths cash flow variations
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Enables bulk purchasing
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Supports expansion plans
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Maintains vendor relationships
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Provides competitive advantages
What distinguishes good working capital financing strategies?
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Aligns with business cycles
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Optimizes cost of capital
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Maintains financial flexibility
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Supports growth objectives
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Balances risk and reward
When is the best time to secure working capital financing?
What are some key working capital formulas and ratios?
Understanding and calculating working capital ratios is essential for assessing a company’s financial health. Here are some key ratios and formulas:
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Working Capital Ratio: This ratio is calculated by dividing current assets by current liabilities. It measures a company’s ability to cover its short-term obligations with its short-term assets.
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Current Ratio: Similar to the working capital ratio, the current ratio also divides current assets by current liabilities. It provides a snapshot of a company’s liquidity.
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Quick Ratio: This ratio, also known as the acid-test ratio, excludes inventory from current assets and then divides it by current liabilities. It provides a more stringent measure of liquidity.
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Working Capital Formula: This simple formula calculates working capital by subtracting current liabilities from current assets.
