We’re the first to admit that any Canadian business, from start up to established company often has the feeling they are somewhat shackled in working capital financing options. So how do you finance a business from a cash flow perspective and how one measure does and evaluate the options. Let’s dig in, as usual!
A good start is to simple differentiate between short term cash needs (that’s working capital by the way ) and long term debt and financing solutions . That short term cash flow we’re talking about is the cash flow you use on a day to day basis to finance a business – those mundane things like payroll, purchasing inventory, covering your fixed costs, etc!
As that cash flow deteriorates or goes down you not only don’t meet those short term obligations but you run the risk of failing to meet long term debt such as leases, loans, etc.
There are essentially three reasons your firm ends up needing working capital financing – they are of course if you are a start up , secondly if you are growing rapidly, and thirdly if your firms basic situation is such that your current operations cant finance day to day activities . This typically arises out of your growth and management of receivables and inventory.
When smaller businesses in Canada borrow for working capital purposes a significant amount of emphasis is placed on the owner’s personal credit .As your company grows the focus turns and it’s now up to you to properly position your businesses financial situation – that means proper presentation of your balance sheet, income statement and projected cash flow.
The good news about working capital financing is that it is not debt in the true sense of the word – it’s simply the monetization of your current assets, typically receivables and inventory. The challenge though it to ensure you don’t over borrow on those assets , that you manage them properly, so that your borrowing doesn’t become what one writer recently described as an ‘ addiction ‘.
Quite frankly we agree, and the reality is that the best line of credit is one that goes up and down all the time, and doesn’t stay maxed out at the top of the facility. If in fact you are always at the top of your working capital financing facility you might well be close to some sort of financial challenge or catastrophe.
Of course there are times when it makes perfect sense to borrow and incur debt outside the working capital needs – a good example might be the need for more equipment. Paying for a long term asset out of current operating capital is not recommended. If the equipment generates profits and has a longer term useful life you have made the correct financing decision.
In Canada working capital options range from traditional to alternative. A bank working capital facility will margin 75% of receivables and potentially, but certainly not always, a portion of your receivables. Larger firms have access to non bank asset based lines of credit that provide a very healthy margin of cash flow by utilizing 90% of your receivables and anywhere from 30-70% of your inventory. A subset of asset based lending is accounts receivable financing, which monetize your invoices… on a daily basis. While more costly your firm has just turned itself into an ATM machine for constant cash flow as you grow your business.
Other alternative methods of cash flow financing including monetizing (that’s financing) your government tax credits, or even financing your purchase orders or contracts.
Still feel shackled? Canadian business owners and financial managers shouldn’t feel prisoners due to lack of working capital financing. Don’t over borrow; ensure you know what facilities are available. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in identifying immediate solutions… unleashing those shackles!