EMAIL - sprokop@7parkavenuefinancial.com
WORKING CAPITAL FINANCING GUIDE & BUSINESS FUNDING OPTION
Working capital financing challenges require the 'real thing' in business funding for Canadian small businesses.
Is it even possible to imagine your company having enough steady cash flow all the time in your current business model? That would certainly alleviate the daily challenges that seemingly consume a large amount of the time when it comes to owners/management as your business grows. Let's dig in.
BUSINESS FINANCING SOLUTIONS
Part of your success in attaining the right amount of working capital is understanding what it is and what it is not. The most applicable way we encourage clients to understand the term is simply the funding needed to manage your daily business operations via a line of credit or another type of facility.
So in general it is 'short term in nature, although small business owners can readily be excused for wondering why it is 'short term' if they are thinking about it all the time!
FINANCING TAILORED TO YOUR BUSINESS NEEDS
Understanding and recognizing the problem is half the challenge. That allows you to focus on real-world solutions, which by the way are available! Classic cash flow often simply revolves around understanding how you can finance inventories and A/R trade finance - often under a revolving credit facility via a bank or non-bank solution to fund the company's balance sheet.
merchant cash
merchant cas
The concept of a 'cycle' is very important in understanding the cash flow conundrum and the solutions around that conundrum. The bottom line is that the working capital ties up in your current assets changes - daily!
Cash becomes inventory which becomes a receivable which becomes cash again... what a concept! You will be in a better position to understand the working capital needs, and how to address them if you understand the length of your working capital cycle - simply put: How long does inventory remain on the floor and then converted into saleable inventory, and how long does it take for a receivable to be collected.
Delaying payables is the opposite way to work your way to fairly perfect working capital. Naturally, that is not practical or recommended, but our point is simply that your working capital financing investment in your current assets is offset by the timing of your payables, which assists in your cash flow cycle.
SPECIALIZED FINANCING SOLUTIONS
So we've focused on the problem of small businesses, what about solutions? It comes down to 3 basics:
Permanent working capital
Outside commercial financing or bank financing if available
Internal cash flow management - i.e. payables management & asset turnover focus
What types of working capital loans are best for your firm? Focus on understanding the turnover of your receivables and inventory - very quick rudimentary calculations can determine that. Also, develop a realistic cash flow forecast, because you now know what the needs are based on the knowledge we have obtained around understanding our turnover and requirements.
THE QUICK FIX TO ACCESS WORKING CAPITAL?
One useful tool? Clients we meet are often searching for a 'quick fix' number in their search for small business loans that work for their business - One calculation you can use in a general matter is that your firm requires working capital in the amount of 25% of your sales. That is of course a very general guideline.
To finalize working capital financing and business funding for your company your options are a long-term fixed working capital cash loan, in some cases, this is called mezzanine or sub-debt financing. At the same time, you may be in a position to secure bank financing of receivables and inventory, which has become more of a challenge than ever in the current economic and business environment.
Your firm is probably a candidate for a working capital factoring facility, which monetizes your receivables the same day you issue them - this is one form of generating all the working capital financing you need for business funding via a variety of lending institutions and of course you only pay interest on what your firm has drawn - whether its domestics sales or international trade. These are provided by a lending institution such as a commercial non-bank financing company.
CONCLUSION - BASICS FOR FINANCING YOUR BUSINESS
The bottom line: Understand what working capital financing is, calculate how much you need and when and why, and then implement the right solution that matches your business's overall needs and credit quality. Speak to 7 Park Avenue Financial, a trusted, credible, and experienced business financing advisor in this area of Canadian business financing to help fund your business growth.
FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION / PEOPLE ALSO ASK
What is a working capital loan?
Working capital business finance solutions are used to fund day-to-day operations of a business, including such areas as payrolls, marketing, research and development, inventory purchases, etc.
Business lenders focus on trends in monthly sales revenues and cash flow forecasts as well as, in some cases, the personal credit history of owners. Lenders will often focus on the working capital ratio of a business, which is the relationship of current assets to current liabilities.
Solutions can come in the form of revolving credit facilities, merchant cash advances, or a working capital line of credit via a receivables factoring solution. Short-term financing solutions differ from term loans which are longer in duration.
