Working Capital Financing Factoring | 7 Park Avenue Financial

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YOUR COMPANY IS LOOKING FOR WORKING CAPITAL SOLUTIONS

IS  FACTORING SERVICES ONE OF THEM?

A Term Loan Or Accounts Receivable Factoring?

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses 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

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

When business owners and financial managers think of ‘cash flow ‘two terms are almost synonymous, factoring, and working capital. Is there a difference?

 

Yes, a major difference. It kind of comes down to a ‘plus’ or ‘minus’ situation – a term that’s universal in any language.

 

Working capital financing is the business solution to fund your company's day-to-day operations around short-term obligations around current liabilities such as accounts payable. This type of financing should NOT be used for the purchase of long-term assets - Those assets should be financed via long-term financing solutions around equipment leases, loans, etc,

 

Given that the majority of businesses in Canada never have 100% consistent cash flow a working capital finance solution is almost always needed by a business, and that can come in many forms.

 

It's important to understand :

 

Why your business needs working capital

 

How can working capital be financed - what strategies are best for your firm via analyzing the working capital financing formula?

 

 

 

WHAT ARE THE TYPES OF WORKING CAPITAL FINANCING

 

The major types of financing working capital include shorter-term working capital loans, also called Merchant Cash Advances, Business lines of credit, and accounts receivable financing.

Each of these methods of financing comes with various pros and cons and some are more difficult to get approved for based on your business credit profile.

 

 

 

WORKING CAPITAL TERM LOANS 

 

We believe that when Canadian businesses think in terms of working capital financing that is often in the context of permanent working capital. This can be in a couple of forms, a term loan, a mezzanine loan, or subordinate debt.

 

These are the key terms of ‘high finance’ for working capital loans! With loans such as these businesses typically use the working capital derived from the loan to invest in sales and marketing, implement new products and strategies, and purchase inventory and materials for further corporate growth. 

 

  

 ADVANTAGES AND BENEFITS OF A  A WORKING CAPITAL TERM LOAN   

 

There are many advantages to working capital term loan solutions - the main one being the ability to cover the short-term gaps that come with those inconsistent cash flows in any business - for companies that have been self-financing via accounts payable cash flow management the ability to source financing that meets their every day needs is critical.

 

The security, or collateral required for cash flow loans is .. you guessed it - Cash flow! That means businesses that are not asset-intensive do not need business or external collateral is given the cash flows of the company support repayment -

 

Business owners are focused on solutions that provided immediate financing for their needs, around solutions that are flexible when it comes to repayment. Interest rates on working capital loans will always be commensurate with the size of the facility and the overall business credit profile around issues such as the balance sheet, profits, etc.

 

It's important to understand asset turnover and overall working capital turnover to be able to measure how your company can meet obligations to short-term creditors. Focus on key balance sheet measurements such as accounts receivable turnover, inventory turns, and days payable outstanding.

 

There are numerous advantages to a working capital term loan. Repayment of the loan is typically in the 5 -7 year range. As such that clearly frees up cash flow. Let’s do a quick example – If a Canadian business borrowed $ 150,000.00 and was successful in getting a term loan in place the monthly payments over a 5 year period would be approximately $ 3000.00 per month. (We used an interest rate of 8% just as an example).

 

PAYMENT FLEXIBILITY

 

Depending on the flexibility of the lender payments can be structured, or even potentially deferred, based on the nature of the customer’s needs and overall financial situation.

 

THE ' PERMANENT WORKING CAPITAL SOLUTION

 

Naturally, any financing scenario as positioned above is long-term permanent working capital, which is generally viewed positively by business owners and their lenders. It is in effect a form of ‘patient working capital ‘.

 

MEZZANINE FINANCING  IS QUASI-EQUITY

 

Long-term working capital loans in effect ‘complement ‘your existing secured creditor relationships. For the purposes of this article we won’t dwell too much on the aforementioned subordinated debt and mezzanine debt – we will simply say they are unsecured ‘ cash flow ‘ loans, long-term in nature, with rates substantially higher than chartered bank rates due to the general unsecured nature of the loans.

 

The lender is simply taking a position that your firm will be able, based on historical and present financials, to repay the loan out of cash flows.

 

We’ve discussed the ‘permanent ‘ working capital loan and have seen its characteristics, i.e. term loans, longer repayment schedules, fixed rates, terms and structures. Now let's look at totally immediate working capital/ cash flow, which many customers in Canada are achieving by a factoring or working capital cash flow facility.

 

INVOICE FACTORING VERSUS CASH FLOW TERM LOANS

 

 

The factoring solution is immediate. Transactions and facilities from a factoring company can usually be approved in a much shorter timeframe. Every customer is different of course, and in many different industries, but based on a review of your financials and your tax returns customers receive immediate significant advances (typically 90%) of their accounts receivable invoices.

 

Since the heart of any business cash inflow comes from collected accounts receivables businesses that ‘struggle’ with the collection process often face cash flow shortages due to slow-paying customers. Conversely, as receivables and inventory build-up for good reasons (good reasons = more sales), the company's investment in receivables outstanding invoices and inventory grows.

 

Factoring, or receivable discounting as it is also known, is based on the overall size, quality, and collection experience related to your billings. Traditional working capital loan requirements do not really pertain to this method of financing. It is very safe to say that current invoices are more easily factored (sold) than 65-day unpaid invoices from slower-paying customers.

 

The factoring company assumes the role of your collection department when you are looking at a traditional factoring company solution, some business owners actually welcome this as they have in fact utilized the very popular concept of ‘outsourcing‘ regarding their collections.

  

 

  

WHAT IS THE BEST FACTORING / AR FINANCING  SOLUTION?

    

 

At 7 Park Avenue Financial, our most recommended form of a/r financing is Confidential Receivable FInancing, allowing your firm to bill and collect its own accounts receivable, while at the same time achieving all the cash flow benefits of traditional AR Finance. Small business benefits from receivable factoring because it's fast and flexible funding accessible to all. Non-recourse factoring solutions are also available, allowing your firm to transfer risk to the factor finance company.

 

  

ANALYZING THE PROS AND CONS   

 

So is factoring all goodness. Certainly not, what type of financing is? In factoring, there is a much higher cost to finance your A/R portfolio. In Canada, there are tens and hundreds of nuances and administrative procedures around the factoring process that many business owners struggle with.   Factoring should be used for growth, not survival, and other strategies can be explored at a lesser cost and less intrusiveness to your business.

 

  

BUSINESS LINES OF CREDIT   

 

Business lines of credit are business loan facilities that allow businesses to draw down and repay funds as needed, typically within set credit limits. Credit lines can be from traditional financing institutions such as banks, or from alternative lenders who offer asset-based lines of credit.

 

These facilities are long-term in nature and provide maximum flexibility to the business, as the facility revolves around the company selling its products and services and collecting accounts receivable. In many cases, the credit line facility helps the seasonality of a particular business or industry - as the company can draw down funds when needed.  Bank credit facilities offer very competitive interest rates, and while asset-based credit lines are more expensive they offer more financing and provide cash flow to businesses that might not be able to meet bank credit requirements.

 

 

CONCLUSION - SOLVING THE CASH FLOW CONUNDRUM

 

When your business faces a cash flow crunch the ability to have access to extra cash helps the business during challenging times - Working capital financing solutions help fill the cash flow gap!

Some companies prefer the long-term approach to a permanent fix in their business capital structure - that might typically involve more equity in the company or taking on long-term debt.

Other firms focus on immediate short-term financing options that speed up the business cash flow cycle and maximize the financing of short-term assets in the business.  While a long-term strategy might be most beneficial many firms are either reluctant or simply cannot attract additional equity in the business.

 

In summary, business owners considering the ‘ working capital/cash flow ‘  conundrum can consider long term working capital loans or short term accounts receivable financing strategies for growth.

 

There are a number of options around both of those financing, and in fact, other options (example: a sale/leaseback of your assets or a real operating margined facility with a Canadian chartered bank) should also be potentially explored.

 

Review all options, and speak to 7 Park Avenue Financial,  with trusted, credible, and experienced business financing advisors to find your optimal working capital solution.

 

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