YOUR COMPANY IS LOOKING FOR BUSINESS CASH FLOW AND WORKING CAPITAL!
Leveraging Working Capital Financing for Business Success
You've arrived at the right address! Welcome to 7 Park Avenue Financial
Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs
EMAIL - sprokop@7parkavenuefinancial.com
"Mastering the art of working capital financing is essential for businesses to thrive in today’s competitive landscape."
"Unlock your business's full potential – discover how smart working capital financing can transform your financial challenges into opportunities for growth!"
Innovative Approaches to Financing Your Business's Working Capital
INTRODUCTION
Business cash flow. It's the reason that thousands of Canadian businesses, every day, must feel like they have a combined feeling of 'going broke' while seeing their sales rise at the same time.
Working capital financing is a critical aspect of the growth and sustainability of any business, acting as the lifeline for daily operations and long-term goals.
Whether you're a startup or an established enterprise, understanding these financing methods is crucial for managing cash flow, covering operational costs, and capitalizing on growth opportunities.
From traditional bank loans to innovative fintech solutions, we explore each option's unique benefits and considerations, equipping you with the knowledge to make informed decisions for your business's financial health
The working capital formula is not hard for business owners to understand. By the way, sometimes it is also called the ' net working capital ' formula and is simply the balance of current assets minus current liabilities on the balance sheet.
That amount might sometimes be a negative balance depending on asset turnover in the balance sheet accounts or if the company has had a larger outlay of cash for a business reason, reflecting a larger balance in current liabilities.
At 7 Park Avenue FInancial we have observed over time that clients think that working capital is the same as cash flow - Definitely NOT the case!
We have outlined our working capital formula, while the operating cash flow is the true cash coming in and out of the company based on changes on balance sheet accounts.
QUICK EXAMPLE
A company carrying more receivables than last month would have a decrease in the total cash flow - if they have more payables than last month there is an increase in operating cash because those payables haven't been paid.
Clients will ask us also how much working capital is needed - and the answer depends on your industry and your cash conversion cycle - namely the amount of time it takes for a dollar to flow through your business to final customer payment from accounts receivable for products and services you deliver.
SALES DO NOT EQUAL PROFIT
It's very wrong of course to assume that profits out of those sales assume positive working capital equals profits. That is not the case.
PROFITS EQUAL CASH - IN THE LONG RUN! HOW LONG IS YOUR RUN?
Yes, over the long run those profits will become cash, but what about the gap? That’s that lag in between that is giving our business owners that ' broke ' feeling!
CASH FLOW IS YOUR COMPANY LUBRICANT
Business cash flow is the 'lubricant' that keeps your company running. You get that working capital from two sources, internally, i.e. how you run your company and manage your current assets, and externally, via commercial lending facilities. We suppose that you could also sell assets to generate cash, but that’s not really why businesses go into business, right?!
WATCH THOSE BALANCE SHEET CHANGES!
Your company balance sheet changes every day, At the same time though its important to regularly take a look at that balance sheet as a measurement of your ability to run your company. Simply speaking it’s a way of both you as owner or manager, or any of your lenders, for example, to determine if you're solvent and able to meet your commitments.
BORROWING PROPERLY
Borrowing properly and putting cash flow to good use is of course your goal for a successful business operation it’s about borrowing the right way, from the right parties, in a manner that ensures you are not in a liquidity trap that so many business owners and financial managers find themselves in.
One key way you can borrow successfully is to match short term debt with the right assets. A great example of this is a business line of credit or receivable finance and inventory finance facility. In this manner, you're taking current assets and ensuring they are supported with a solid short term debt solution. When it comes to financing long term assets you should not be doing that by collateralizing your current assets. It's all about matching!
AN EXAMPLE OF THINGS GOING WRONG
Let's use a quick example of where things can go wrong... it comes back to that ' business is great' but why do we feel like we're going under' feeling? Let's say a company has a significant receivable base and puts in a business line of credit facility. A need perhaps develops for some new assets to support the growth of the business so part of the line of credit funds is used to finance equipment assets.
Where things go awry is when sales go down or flat, funds are used to reduce payables or temporary operating losses, and the company finds itself 'over advanced'. This is right about the time when creditors get worried, both suppliers and lenders. The bottom line, it’s a perfect storm of cash flow ugliness from a business loan perspective.
AVOIDING THE BROKE FEELING!
To avoid that ' broke feeling' it’s a question of matching debt properly and using cash flow via solutions such as leasing or term loans for asset acquisition. Accounts receivable financing is probably the quickest and most popular addition to working capital solutions these days. It is also called 'factoring' as most people know already.
Numerous short and long-term solutions are available to Canadian business owners when it comes to business cash flow solutions. It is worth spending time to understand your balance sheet and how to spot changes in working capital that need to be addressed in your business operations.
Short-term liquidity comes from:
A/R Financing
Inventory Loans
Access to Canadian bank credit
Non bank asset based lines of credit - Operating capital loans
Export Working Capital Financing
SR&ED Tax credit financing
Equipment / fixed asset financing
Purchase Order Financing
Cash flow loans
Royalty finance solutions
Sale-Leaseback Finance
KEY TAKEAWAYS
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Understanding the primary categories of working capital financing - short-term loans, lines of credit, and invoice financing - covers a broad spectrum of options available to businesses. Each type serves different needs: short-term loans for quick, lump-sum capital; lines of credit for flexible, ongoing access to funds; and invoice financing for advancing cash based on receivables.
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Determining Needs: Assessing your business's specific financial requirements is crucial. This involves analyzing cash flow cycles, identifying gaps, and understanding how different financing options can bridge these gaps effectively.
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Cost Implications: Grasping the cost structures of various financing options, including interest rates, fees, and repayment terms, is key. This knowledge enables businesses to compare and choose the most cost-effective solution when focusing on a more conservative approach to financing working capital.
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Eligibility Criteria: Familiarity with common eligibility requirements for different financing types, such as credit score, financial history, and collateral, helps businesses prepare and qualify for the most suitable options such as BDC loans or government loans.
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Impact on Business: Recognizing how each financing type affects your business's financial health and operational flexibility is vital. This awareness allows for strategic decisions that align with both immediate needs and long-term goals.
CONCLUSION
Companies with good working capital management that can turnover receivables and inventories consistent with standards in their industry will always be able to attract business cash flow financing solutions to finance operating activities.
Focus on solutions that will bring little or no long-term debt to the balance sheet.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in being successful... not ‘going broke’! Let us put a working capital financing solution in place that meets your business needs around the types of working capital financing that works best for your business.
FAQ:FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is working capital?
Working capital financing helps businesses increase liquidity and finance investments in short-term assets like accounts receivable and inventory. This funding allows companies to invest in new projects and expand while covering daily operational costs like rent, payroll, and overhead.
This type of financing is especially useful for businesses facing temporary cash flow issues, often seen in seasonal businesses with fluctuating yearly cash flows. For example, an online store selling sports equipment might use working capital financing to buy inventory before the busy summer season, compensating for lower winter sales.
Fast-growing businesses or those aiming to expand also frequently use working capital financing. Growth phases often involve spending more than earnings, and this financing can support activities like advertising, product development, or entering new markets, without the constraint of limited working capital.
What are the primary types of working capital financing available?
Businesses can access several types of working capital financing, including short-term loans, lines of credit such as a revolving credit facility - (You pay interest on only funds drawn down at any given time) - and invoice financing. Each option caters to different needs and offers unique advantages.
How does working capital financing benefit a small business?
Working capital financing helps small businesses manage cash flow gaps, handle unexpected expenses, and invest in growth opportunities without depleting operational funds.
Can startups access working capital financing?
Yes, startups can access working capital financing, though the options may vary based on their credit history and financial stability. Invoice financing and lines of credit are commonly used by startups. Business credit cards and Merchant cash advances are popular solutions for earlier-stage businesses that can't access traditional financing - A BDC loan is a more permanent working capital solution as well as funding from other working capital lenders.
What factors should I consider when choosing a working capital financing option?
Consider factors like the amount needed, repayment terms, interest rates, and how quickly you need the funds. Also, assess how the financing will impact your cash flow and business operations.
Is collateral required for working capital financing?
It depends on the type of financing. Some options, like unsecured lines of credit, may not require collateral, while others, like secured loans, will.
What's the difference between working capital financing and long-term financing?
Working capital finance solutions are designed for short-term needs, usually less than a year, to cover operational expenses. Long-term financing is used for larger investments, like expansion or acquiring assets.
How does my business's credit score affect working capital financing options?
A higher business credit score and owner personal credit score generally gives access to better financing terms and lower interest rates, while a lower score may limit options and increase costs.
Can I use working capital financing to pay off other debts?
It's possible, but not always advisable. Working capital loans are intended for operational expenses, and using them for debt consolidation might not be the most cost-effective solution.
Do seasonal businesses have different working capital financing needs?
Yes, seasonal businesses often have unique cash flow patterns and require a more aggressive approach to financing working capital - That may require tailored financing solutions to manage periods of high and low sales. Understanding the net working capital formula helps business owners assess cash flow needs.
Are there any government programs for working capital financing?
Some governments offer programs or guarantees to help small businesses access working capital financing, especially in sectors like exports or during economic downturns.
How does working capital financing impact a company's liquidity?
Working capital financing improves liquidity by providing immediate funds, ensuring that a company can cover short-term obligations and maintain smooth operations.
What risks are associated with working capital financing?
Risks include potential debt accumulation, dependency on external financing, and the possibility of interest rate fluctuations affecting repayment amounts.
How can working capital financing support business growth?
Working capital loan financing solutions allow businesses to invest in growth opportunities, like inventory purchase or marketing campaigns, without disrupting their operational cash flow.
