Avoiding Blunders in Working Capital Financing and Cash Flow Financing

Mistakes. As Business owners we all make them. Let’s talking about wrong choices in working capital financing and how the right types of cash flow financing can turn adversity into opportunity for growth and profits.

All Canadian businesses need working capital, permanently, and in many cases, on a ‘ bulge’ basis from time to time. In essence you are financing your operating cycle, and most business owners intuitively know their industry has a unique cycle – that being simply the time it takes for a dollar to flow through inventory, A/R, and back to cash.

Larger or established? You probably have a better chance of seeking what people refer to as ‘ traditional’ forms of financing. Quite frankly we’re not sure anymore what traditional means, as the lines are getting blurred between what some consider as non traditional working capital financing.

Maybe we’re different, but we seem to meet more and more clients that are unable to access capital for growth and development. They seek to enhance working capital in a variety of methods. Those include receivable financing, aka ‘ factoring’, asset based lines of credit, financing for purchase orders ( yes, you can finance a purchase order!), and even monetizing hard assets into revolving facilities such as a short term bridge loan on equipment, with proceeds used for working capital and cash flow.

The bottom line is your need to focus on liquidity, so if you have positive working capital as calculated by the text books ( current assets – current liabilities ) you must therefore monetize those assets into the ‘ cash is king ‘ model.

The harsh reality is that as you textbook calculation of working capital goes up your actual cash flow is negative, given that your investments are simply tied up in inventory and receivables which seem to be collected more slowly every year in our opinion and those of our clients.

Naturally if you are able to be paid in cash at time of sale, of if inventories turn very quickly, and billed customers pay promptly,, well suffice to say the cash flow financing pressures are eased quite a bit – but reality of business usually does not give us that luxury.

We are often amazed at how many clients we meet who are looking for proverbial ‘ working capital ‘ but are in a position of not being able to define the type of financing they think they need

The ultimate cash flow support tool is the Chartered bank operating line of credit. But many business owners who do not qualify for these facilities are moving to either a receivable financing facility or an asset based line of credit. These come at a higher cost, but provide liquidity often 100% greater than might have been achieved previously, had they been bankable.

So whats our take away tip here – simply that you must look beyond the rate and focus on what collateral you are providing to get the liquidity you need.

Ultimately you need to understand your particular need and choose a financing solution that provides you with the cash flow financing to meet your business needs, as well as grow your business. You have options, which many Canadian business owners and financial managers don’t realize. Be they traditional or alternative, one or several of them will work for your firm. Speak to a trusted, credible and experienced Canadian business financing advisor who will put you on a clear path to the solution for working capital financing.

Your Competitors Use SRED Financing to Cash Flow CRA SRED (SR and Ed) Tax Credit Claims

Your business success hasn’t been based on doing what your competition does, but if they are utilizing SRED financing to grow their business doesn’t it make sense to investigate why cra SRED claims, when financed, might put you a step ahead of the competition?

We think so, and if the Scientific Research and Experiment Development Program, (aka ” SR& ed ) pours billions of dollars into Canadian company coffers every year why wouldn’t you want to accelerate the access to cash for those claims and maintain your own competitive posture in your industry.

The financing of you SRED claim, via what we could call a SRED bridge loan is a recognized and solid manner in which to recover working capital faster. The very essence of having a SRED claim filed of course means you will recover your funds, but doesn’t it make sense to recover them sooner, putting cash flow and working capital back to work for your company.

In business it’s all about timing, and in case you haven’t noticed things aren’t exactly moving slower in Canadian business today. So is it an advantage to get immediate cash for your SRED claim instead of waiting several months, in some cases up to 9 or 12 months for your funds? You probably don’t need exactly cash flow these days – therefore we strongly recommend waiting for your cheque from the feds, it’s ‘ in the mail ‘ so to speak. However, if you’re among the many clients that we meet that could actually use additional cash flow today, then you should be considering financing your claim.

What are the mechanics of having your claim financed, ask client such as yourselves? To say that SR&ED financing is a niche industry requiring knowledge and expertise is a bit of an understatement. That is why we strongly suggest you work with a trusted, credible and experience d business financing advisor who will walk you through a very basic process.

SRED financing will, 9 times out of ten, get you approximately 70% of your total SR&ED filing as a cash flow bridge loan. Why 70%. It is simply because the remaining 30%, which of course still belongs to you, is held back as a buffer to cover both any adjustments the good folks in Ottawa might make to your claim, and it also helps to cover off the actual financing charges. However, it’s easy to see that if you have a claim, for example, of 300k that an immediate cash flow loan of 70% of that amount generates some real cash back into your firm. Which of course, per the program, is in effect a non repayable grant.

Could the benefits therefore be any clearer – The Canadian government is reimbursing you with your R&D funds and you are accelerating that reimbursement straight back into working capital. Use the funds for whatever general corporate purpose – pay payables, buy new equipment, re invest in more R&D, it’s your call!

The mechanics of SRED finance are simple – have a claim prepared by a credible consultant or accounting firm. Complete a simple business financing application, go through standard due diligence as you would any type of financing, and execute a financing document which in effect collateralizes the SRED for your SR&Ed loan. The entire process can be completed with a couple of weeks with the right amount of commitment on your part.

If your SRED claim was prepared by a consultant who did it on contingency you can even pay them out of the financing – at that point everyone is happy!

Your competition probably finances their CRA SRED claim – why not increase your own cash flow and maximize your refund for the best uses your company can utilize. That’s a competitive financing strategy that works!

How Receivable Financing and Factoring Turns Cash Flow for Business Challenges Into Opportunity

The chance for business owners to turn adversity into opportunity comes around rarely. The ability of your company to turn cash flow for business challenges into a major win in working capital and cash flow might just come from one of Canada’s newer forms of business financing, called ‘ receivable financing ‘.. more commonly known as factoring.

For small and medium business it seems to always come down to two basics – getting the order, and then getting paid. The old ‘ cliché’ of ‘ the order is not complete until it’s paid for ‘… as trite as that sounds, seems to hold true even today.

Many clients we meet with are in the enviable position of getting larger orders and contracts than they might have imagined based on their innovative products and services. But with that success, as we noted, comes the challenges of cash flow financing. During the past few years with all the economic turmoil it seems Canadian business financing options seem either limited or have disappeared – that’s certainly how many clients feel. The impact of accounts receivable growth is a huge challenge, not to mention inventory also of course.

So we have waxed eloquent on the problem- That’s easy to do. let’s talk about the solution. Receivable financing, also known as factoring addresses the issues of your customers paying you in 30.60, or dare we say it, 90 days. You can carry those receivables, or…. utilized factoring as a method to turn your sales into immediate cash.

Let’s cover off some of the basic requirements around how this innovative method of business financing works. When you sold the product or service you hopefully had enough gross margins in your cost of sales to make the sale profitable. If you are able to sustain another 1- 3% of gross margin erosion you can use receivable financing to turn sales into same day cash, which is what this financing is about.

Let’s reveal and recap in a manner you can understand how this financing works. Your purchase orders or contracts must be ‘ clean ‘ from a viewpoint of being able to demonstrate you can recognize revenue on your shipment. We should interject at this point that the banks will finance your receivables also, but that comes with much stricter criteria and limits on the amount you can finance.

That is why factoring has risen in popularity, it provides unlimited… yes… unlimited same day cash flow for your sales. Your challenge is to work with a trusted, experienced and credible business financing advisor who can steer you to the right partner with the type of facility that works for you. Although traditional factoring along the lines of the U.S. model requires your customer to be notified we are in fact a fan of this type of facility that allows you to bill and collect your own receivables, for all the obvious reasons.

It’s important for clients to understand at its most basic how factoring works. You are advanced, on the same day as you invoice approx 90% of funds for your invoice. The remaining 10% is a holdback which creates a reserve and also covers the financing charges. When you customer pays you or the factor you receive the remaining 10% of your invoice amount, less the financing charge.

In Canada cost of factoring ranges from 1-3% a month. It turns adversity into opportunity because you grow sales with larger gross and net margins, and if you utilize the financing properly you are actually in a position to reduce much, in some cases all of your financing costs by taking discounts with your own suppliers or buying smarter and in larger quantities. Reversing the cash flow for business problem – That’s a win win in the language of business.