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Proven Cash Flow Techniques
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Financing & Cash flow are the biggest issues facing business today
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Business Cash Flow Financing Today
Unlocking the potential of business cash flow financing can transform your company's financial landscape, providing the lifeline it needs for growth and stability.
Struggling with business financing? Discover how unlocking cash flow can be your game-changer.
Introduction to Business Financing Needs / The Necessity for External Financing
It becomes evident at numerous times in a business's life that some form of outside financing is needed. Let's look at some of the situations that your firm finds, or might find itself in and what types of Canadian-oriented working capital and cash flow financing business loan solutions are available to achieve a positive cash flow position.
Growth and Financial Challenges
Sometimes the best problem is the worst problem - by that, we mean that you are growing and growing quickly. Alternatively, many clients we meet are experiencing some sort of challenge in regular business operations - it might be a financial loss in the current or previous year. And most commonly it’s a case of financing those current assets, i.e., A/R and inventory to bring in liquidity to the company for normal ongoing operations.
Financing Solutions for Canadian Businesses
Three solutions are available to the Canadian business owner or financial manager. They include taking on more debt (not optimal or often desired), bringing in a partner for additional permanent equity and working capital, or, our favourite 'Monetization' (Back to that one later)
What are Acceptable Debt Levels?
If your company is not leveraged, or should we say over leveraged and can handle additional debt that is not necessarily a bad thing. For the majority of firms and industries in Canada a debt to equity ratio of 2 or 3:1 is generally viewed as acceptable by the people that count. (Banks and other lenders!)
The Challenge of Raising Private Equity
Raising private equity for small to medium-sized businesses is generally challenging in the Canadian business climate. We've seen numerous clients take the public financing route via a reverse takeover or utilizing a capital pool... our simple observation on that?... In general, things never seem to work out! Let's leave it at that.
Traditional and Alternative Borrowing in Canada
When studies look at how small and medium-sized borrowers really do borrow in Canada it probably isn’t shocking to our clients that a huge majority of debt comes from credit cards, the BIL Government loan, personal savings of the owner, loans from friends and family, etc.
Generally only 35% or so of businesses in Canada in the SME sector get the financing they need from traditional bank financing, due mainly to the requirements that Canadian commercial banks impose on company borrowers and their owners personally. (By the way, we love Canadian banks... it's just that sometimes there is a better way).
Monetization of Assets for Working Capital / Innovative Working Capital Solutions
We mentioned that working capital solutions for cash flow financing can come not from borrowing, but from monetization of current and fixed assets. That’s why we spend a lot of time with clients explaining the different benefits and costs associated with:
Bank lines of credit,
Non-bank lines of credit,
A/R and inventory working capital facilities
ABL (asset based lines of credit) facilities
Confidential receivable discounting
Inventory Financing
Sale Leasebacks
Mainstreaming of Alternative Financing Solutions
In addition, many previously viewed 'alternative solutions' are becoming more mainstream every day. They include:
Purchase order and contract financing
Tax credit financing
Factoring
Key Takeaways
Working Capital Management: Understanding how to optimize current assets and liabilities ensures liquidity and operational efficiency.
Asset-Based Lending: Leveraging company assets for loans offers a flexible financing solution.
Invoice Financing: Accelerating cash flow from unpaid invoices helps businesses meet immediate financial needs.
Line of Credit Options: Accessing revolving funds supports ongoing expenses to help with cash flow gaps without repeated loan applications.
Equity vs. Debt Financing: Balancing ownership dilution and financial leverage is crucial for sustainable growth.
Conclusion: Seeking Real-World Financing Solutions
So, do you have a working capital or cash flow financing business loan challenge? Invest some time in real-world Canadian solutions.
Invest in the right advice - Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you in addressing current and perhaps future financing cash flow challenges.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does business cash flow financing benefit my company?
This financing approach improves liquidity, allowing for smoother operational management and investment in growth opportunities. A cash flow loan provides businesses with financing by using their expected future cash flow as collateral. It offers a flexible way for companies to secure funds for diverse needs, including inventory purchases
What types of cash flow financing options are available?
Options for cash flow loans include lines of credit, invoice financing, and asset-based lending, each tailored to different business needs.
Is my business eligible for cash flow financing?
Eligibility for a cash flow loan varies with lenders but generally depends on your cash flow stability, credit history, and asset base. Cash Flow Lending focuses on a business's cash flow to determine loan approval and conditions, typically through term loan structures.
It evaluates a company's revenue, current cash flow, and financial forecasts for eligibility, sometimes requiring personal guarantees. This approach, emphasizing cash flow over tangible assets, offers flexibility and accessibility but often comes with higher interest rates.
How quickly can I access funds through cash flow financing?
Some options like invoice financing can provide funds within a few days, while others may take longer to process.
Can cash flow financing improve my business credit?
Yes, responsibly managing financing and timely repayments can enhance your business credit profile when accessing business loans in Canada.
What is the difference between secured and unsecured financing?
Secured financing requires collateral, offering lower rates, while unsecured does not, typically resulting in higher rates.
How do interest rates for cash flow financing compare to traditional loans?
Interest rates may be higher due to the increased flexibility and lower collateral requirements. Cash flow finance works best when financing costs are matched properly to cash flow sources.
What are the risks of cash flow financing?
Risks include the potential for increased debt and reliance on financing for operational expenses. Cash flow finance works best when there is a solid critical assessment of future cash flows as a function of successful cash flow finance. In many cases, cash flow loans are structured as unsecured loans collateralized only by future cash inflows.
What documents are needed to apply for business cash flow financing?
Applicants should prepare financial statements, and tax returns, and possibly provide a business plan or cash flow forecasts.
How does asset-based lending work?
Asset based lending works because it allows a business to borrow against the value of its assets on the balance sheet, such as inventory or receivables, to provide working capital. The company's cash flow is secondary to sales and asset values.
Can new businesses qualify for cash flow financing?
Yes, though options may be limited, new businesses can qualify, especially with invoice financing or asset-based options. Some businesses use merchant cash advances as cash flow loans, which are secured via future cash flow but are expensive from an interest rate point of view - These loans are structured as monthly payments geared to incoming cash flows. In some cases, the government small business loan or a BDC working capital loan are solid solutions for new and early-stage companies.
What is good working capital management?
Good working capital management involves efficiently overseeing a company's short-term assets and liabilities to ensure it has sufficient liquidity to meet its short-term obligations for debt repayment and operate effectively. This includes managing inventory, accounts receivable, and accounts payable to optimize cash flow, reduce carrying costs, and improve profitability and liquidity - Understanding the business cash flow statement is key to good financial management.
What is Asset-Based Lending?
Asset-Based Lending (ABL) is a type of financing where loans are provided to businesses based on the value of their assets versus typical cash flow lending via banks. These assets, such as inventory, accounts receivable, equipment, and physical assets such as real estate, serve as collateral for the loan. ABL allows companies to leverage their assets to obtain funding, which can be used for various purposes, including working capital, expansion, and refinancing.
How does invoice financing work?
Invoice financing is a financial transaction where a business sells its accounts receivable (invoices) to a third party (a factor or financing company) at a discount. This provides the business with immediate cash flow, enabling it to fund operations, meet payroll, and invest in growth opportunities without waiting for customers to pay their invoices.
The financing company then collects the payments directly from the customers based on the invoice terms. Invoice factoring can be an ideal solution for rapidly growing companies, startups, or businesses that have exhausted other financing options like short-term loans or cash flow lenders.
Unlike traditional financing, invoice factoring prioritizes customer creditworthiness over personal or business credit history, making it easier to qualify for. It offers flexibility and accessibility, especially for businesses seeking quick funding without strict requirements on time in business, cash flow projections, etc.
What is the line of credit option for a business?
Businesses have access to various line of credit options, including secured and unsecured lines of credit.
A secured line of credit requires collateral, such as real estate or inventory, while an unsecured line does not. Other options include revolving lines of credit, which allow businesses to borrow, repay, and borrow again up to a certain limit, and business credit cards, which offer flexibility and might include rewards. These lines of credit provide businesses with a flexible source of funding that can be used for operational needs, capital investment, or to manage cash flow fluctuations.
What are the differences between equity financing and debt financing?
The main difference between equity financing and debt financing lies in ownership and repayment obligations.
Equity financing involves raising capital by selling shares of the company, resulting in new investors who become co-owners and share in the profits and losses. This method does not require repayment but dilutes the original owners' control and profit share. Debt financing, on the other hand, involves borrowing money that must be repaid over time with interest. It does not dilute ownership, but companies are obligated to make regular payments regardless of their financial situation, which can affect liquidity and cash flow.
