Working Capital Business Financing Sources

Working Capital business financing is never a question of why – it’s just simply a matter of when! Working capital and cash flow are of course the heart of every business. The challenges of obtaining that financing become a question of time.

Perhaps you need cash for for your regular ongoing business cycle – that’s the simple one – you buy inventory, your produce things, you sell, bill and collect. In a perfect world your suppliers give you unlimited time to pay, and unlimited credit limits. And of course your customers pay you in exactly 30 days. Guess what? It’s not a perfect world!

If you are a traditionally financed firm you have access to bank capital for revolving credit lines based on your business needs. But for a growing number of Canadian firms that access to traditional bank capital is not available. Those scenarios require a special expertise in identifying sources of business financing that work for you. The solutions actually are quite numerous – its becomes a questions of which solution works for your firm, what are the costs involved, and does the solution fit within your business model.

The business financing we are talking about can take many different forms – it might include an asset based line of credit, inventory financing or purchase order financing, a sale leaseback on unencumbered assets,, working capital term loans, or accounts receivable financing, otherwise known as factoring.

One of the most important things you can do for business financing is to ensure that the type of financing you source matches your needs. What we mean by that is that you should match short term needs with short term financing. Factoring might be a good example. If your receivables aren’t financed, and you need cash to meet inventory and supplier commitments that type of financing is immediate and addresses your needs. Why would you enter into a five year term loan at fixed payments for a short term capital need or requirement?

The best way to think of short term financing is to focus on the current assets part of your balance sheet – those items include inventory and accounts receivable typically. Those assets can quickly be monetized into a working capital facility that comes in a variety methods. The reality is that your inventory and accounts receivable grow lock step to your sales and your ability to finance them on an ongoing basis will give you access to, in essence, unlimited working capital.

There are some solid technical rules of them around how you can generate positive pricing for operating facilities. By calculating and analyzing some basic financial ratios (we call them relationships) in your financial statements you can get a strong sense of whats available in working capital business financing and what pricing might be involved. Those ratios are your current ratio, your inventory turns, your receivables turns or days sales outstanding, a, and your overall debt to worth ratio. Depending on where those final ratio calculations come in will ultimately allow your working capital financier to put your firm in a low risk, medium risk, or high risk band of pricing?

In Canada working capital rates range from 8-9% per annum to 1-2% per month, depending on what assets are financed and how they are financed.

So whats our bottom line in working capital business financing? It is simply there are alternatives available and you as a business owner of financial manager can assess those alternatives in terms of short term needs or long term needs. Pricing and solutions vary, and your ability to convey the positive aspects of your business to the working capital lender will ultimately lead to a final pricing and solution. Speak to a credible, experienced and trusted working capital business financing advisor to determine what solutions are the best for your firm.

What If Accounts Receivable Finance Was the Perfect Answer to Your Cash Flow Financing?

A tale of two worlds – one in which you have unlimited cash flow or one in which you had day to day cash flow challenges that hamper your ability to grow and manage your business. A cash flow financing solution could well be the solution to all your problems.

Canadian business owners and financial managers face, on a daily basis real world cash flow challenges. Lets look at an example at why accounts receivable finance can be your holy grail of working capital financing. Cash flow financing goes by a number of different names in Canada that is part of the confusion we are always trying to wade through on our client’s behalf – various terms apply to this type of business financing. They include: factoring, invoice, discounting, A/R financing, etc. Depending on how you transaction is structured and who you are dealing with is really the key issue, not what the financing is called.

Clients always want to know if they are a candidate for this type of business financing. There are some perfect candidates, so let’s look at a profile or two in order that you can determine if you fit. Generally you will have accounts receivable that pay fairly regularly but are on occasion slow – your overall bad debt experience has probably been quite satisfactory. Your invoice and stated terms for your customers is 30 days, but guess what, most of them seem to be paying in 60 and 90 days – that definitely seems to be the trend of clients we talk to.

Does size count – In cash flow financing it really doesn’t – speaking in general terms if you have at least $ 50,000 of invoices a month you are a candidate for accounts receivable finance. The reality is that corporations with many millions of dollars in receivables actually utilize this form of financing also.

We hasten to say that in most instances the size of your facility will affect your overall pricing. In our experience you can potentially reduce the cost of your accounts receivable finance facility by close to 1% per month if you have a large facility. However, we spend many hours and many meetings educating Canadian business on factoring pricing, which is grossly mis understood by most clients who look into this type of business financing.

So the bottom line is that you should not let your company size, or any other challenges you might be facing – (temporary financial losses, restructuring, etc) affect you ability to successfully achieve an accounts receivable finance strategy.

Many times the decision to consider cash flow financing of your receivables comes from directly related issues to collections – in some cases the slow pay nature of your client may be affecting your ability to purchase inventory or meet payroll – those are some typical factors that drive customers toward factoring.

When you finance (in effect you are selling) your receivables under this type of facility you immediately receive an 80% advance on your invoice- that allows you to meet obligations and expand your business.

Most business owners know that if they had access to working capital they could readily grow their business – yet the traditional sources of business financing in Canada, i.e. chartered banks have made it challenging for firms to finance receivables in a manner that makes sense for the business owner. In some cases, as we noted, your business has or had challenges that prohibit you from temporarily sourcing cash flow financing.

Speak to a trusted, credible and experienced business advisor in this area – determine if accounts receivable finance is right for your firm, and focus on getting into a facility that meets your needs re day to day workings and cost.