Working Capital Financing Business Cash Flow Solutions | 7 Park Avenue Financial

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Boosting Your Cash Flow: 6 Essential Strategies for Businesses

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Your Path to Financial Stability: Working Capital Solutions

Introduction -  Working Capital Financing as a Business Cash Flow Solution 

Business cash flow! In times of economic or industry turmoil, most business owners and their financial managers would probably be happy with 1 solid working capital financing solution for cash flow business needs and the ability to maintain sufficient working capital.

We'll beat that and give you 6 ways to improve your business finances via sufficient cash flow going forward while eliminating financial challenges and enhancing profits on the income statement!

.All of these solutions are accessible immediately to generate cash if you have the right help to calculate cash flow needs. How is that for alternative solutions to your working capital and cash flow needs? Let's get started on how to boost cash flow!

The Challenge of Working Capital Financing

The funding of working capital continues to be a large challenge for Canadian businesses of all sizes - The business owner/financial manager wants to be able to comfortably run the company on a daily basis, as well as grow the company.

Managing Cash Flow

That requires funding of potentially different types, and along the way, those suppliers and employees want to be paid on time also! That's called running a business and requires a good cash flow forecast

Leveraging Receivables for Working Capital

The most liquid asset any business always has, (next to cash) is your receivables. Working capital financing is best generated by the collection or financing of your receivables. This can be done by:

Asset Turnover! Faster collections

Many companies should consider offering a discount for prompt payment - a typical offer might be 1-2% for payment on delivery or within 10 days for example.

Financing  your receivables as you generate sales revenues

This type of financing is called receivable discounting or factoring and is becoming increasingly popular every day. If your company qualifies for bank credit, i.e. traditional bank financing, then setting up a business line of credit is optimal. When this type of facility revolves up and down based on your selling products and services and getting paid the facility is operating well.

Unlocking Capital in Existing Assets

You've spent your valuable business capital - would you like to get it back? Clients of 7 Park Avenue Financial always ask what we mean by that. Any equipment you have already paid for can often be refinanced, the technical term is - Sale-Leaseback.

That strategy, or a short term bridge loan with the equipment as security is exactly what our clients need to bridge the cash flow gap and finance the balance sheet properly.

The Power of Combined Liquidity

We spoke above about receivable financing - one of the best facilities for Canadian business is a combo working capital facility that finances, or 'margins' both your A/R and your inventory. Since many firms previously couldn't finance their inventory either elsewhere, or via banks, the combined liquidity of borrowing against your A/R and inventory is a true power punch to achieve net working capital positions to increase cash and cash equivalents!

Typical this type of financing is known as an: Asset-Based Business Line of Credit

This makes the most sense when the facility is at least in the 250k range, and business owners/managers will be pleased to know there is virtually no upper limit in this type of business credit for their busines model.

The facility will grow as your sales and assets grow and companies pay interest on only funds drawn down. 

Unlike bank lines of credit, these are more flexible when it comes to growth business owners will probably recognize that most bank lines from financial institutions such as Canadian banks are reviewed annually and place a heavy financial analysis emphasis on issues such as personal guarantees, covenants, financial ratios, and outside collateral. In some cases, intangible assets may be included in the facility to help with adequate working capital.

Those issues are NOT the underpinnings of asset-based business lines of credit as your company focuses on how to improve cash flow.

Purchase Order Financing for Cash Flow

Many clients are totally unaware that Purchase Order Financing is available in Canada.

This is a strong potential cash flow saver, and generator since your suppliers are paid for the product when you order it, once you have received the PO and entered into a PO finance facility agreement.

The Purchase Order financier takes the inventory and receivables as security, but in effect finances your wholesale. While it is an expensive form of financing - typically 2-3% per month - for companies that have good gross margins and could otherwise not facilitate the sale of large new orders and contracts it is a most welcome solution for large contracts, orders, etc.

The Rise of Working Capital Loans

Canadian business owners are somewhat bombarded by potential short-term loans for cash inflows that appear via online firms as well as some 'bricks and mortar' companies. They attempt to solve the challenge around  short term financial obligations and satisfying repayment short term debt

Where did this type of loan come from? The answer is 'from the United States'. It originated via a "new" type of credit for borrowing money borrowing in 1995, which has morphed into what is now known as a working capital loan for small business cash management, aka a 'Merchant Advance'.

These loans were mostly for small businesses that could not get bank credit or had no personal ability to borrow money for purchasing assets, supplies, etc.

The loans were based on advances against future sales and were originally focused on the credit card sales of the business. The industry grew and now services small and medium-sized companies, including having become very popular in Canada.

A typical loan is paid back in 1 year in fixed installments, and the most common requirement is for loans to be approximately 10-15% of your firm's annual sales. This was a novel way of lending and has become popular with many businesses.

 The Psychological Aspect of Working Capital Financing

While most discussions focus on the financial and logistical aspects of working capital financing, an uncommon take delves into the psychological impact on business owners. It explores how the availability of working capital can alleviate stress, boost confidence, and enable strategic decision-making. This perspective highlights the emotional well-being of business owners as a critical component of successful working capital management to meet financial obligations capitalize on cash flow statement analysis and understand the company's financial statements.

Key Takeaways 

1. Working capital financing refers to how much cash a business needs to operate effectively in the short term. Understanding how to obtain and manage working capital and manage current assets is crucial for cash flow management.

2. Receivables Financing: This concept includes both faster collections and financing/selling your receivables. It emphasizes the importance of effectively managing accounts receivable to improve and increase cash flow.

3. Asset-Based Business Line of Credit: This financing option combines accounts receivable and inventory financing. It's a powerful tool for businesses to access working capital based on their assets.

4. Purchase Order Financing: This financing method allows businesses to secure funds based on purchase orders, enabling them to fulfill large orders and contracts.

5. Working Capital Loans/Merchant Advances: This concept highlights short-term loans based on future sales to assist in a company's working capital. It's a useful option for businesses looking to bridge cash flow gaps and obtain operating cash flow for financial health

 Conclusion -  Exploring Your Canadian Business Financing Options 

Ensure you are aware of your Canadian business financing options.

Working capital and cash flow are available if you have assets and orders. We have demonstrated that clearly to you via 6 separate solutions to withstand financial challenges

Call 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success to determine what works for your firm and your company's ability to achieve your business growth needs around cash flow and working capital needs.

 FAQ 

What is working capital financing?


Working capital financing involves obtaining funds to manage daily business operations and improve positive cash flow. Understanding the working capital ratio around current assets and current liabilities is critical.


How does receivables financing work?


Receivables financing includes faster collections and selling receivables to access immediate cash based on outstanding invoices/accounts receivables, which reverses potential negative cash flow due to customer payment timing - Companies can reduce credit risk if they choose by acquiring non recourse factoring solutions



What's the advantage of asset-based business lines of credit?


These credit lines leverage your accounts receivable and inventory, providing flexible financing options via short term debt  based on your assets to improve the company's financial health and money flows



How does purchase order financing benefit my business?


Purchase order financing enables you to fulfill large orders and contracts by providing funds based on funding purchase orders which can strengthen sales and overall financial performance



What are working capital loans or merchant advances?


These short-term loans are based on future sales and can help bridge cash flow gaps for businesses experiencing negative working capital and striving to get enough money to run the business.



Are there restrictions on how I can use working capital funds?


Generally, working capital funds can be used for various operational needs, such as paying accounts payable and other immediate liabilities such as suppliers, covering payroll, or investing in inventory.



What's the difference between factoring and receivable discounting?


Factoring involves financing accounts receivable - a key part of your company's current assets  via selling your receivables to a third party, while receivable discounting allows you to access cash flows by using your invoices as collateral to generate positive working capital


Are there limits to the amount I can borrow with asset-based credit lines?


These credit lines often scale with your business's sales, net income, and asset growth, providing flexibility without strict upper limits.


How quickly can I get approved for a working capital loan?


Approval times vary depending on the lender and your financial situation. Some options offer quick approvals, while others may take more time to achieve a positive net cash position for the business cash flow working capital financing they need.



 

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