Avoid Costly Mistakes In Financing Working Capital - Finance Solutions For A Canadian Business It's a mine field out there!
When we meet with clients we often find we are talking about all sorts
of unique situations - perhaps the company has expanded too quickly. In
some cases interest expenses on long term debts and leases and equipment
loans are severely eating into profits. It's of course a vicious cycle
and one difficult to get out of - with those liquidity challenges around
financing working capital leading to some serious problems.
The signs are usually quite clear - in hindsight, not when you're in
the thick of the weeds. We often think of how easy it sometimes probably
is for folks to write those 'business cases' in MBA classes about what
went wrong and why. Probably would have been a bit more difficult for
them if they were like you, in the thick of it.
So what are some
of those danger signs in cash flow financing and business working
capital loan scenarios? Those warning signs are often called '
overtrading '. Symptoms include very strong growth in sales, dwindling
profits, lack of knowledge around short term and long term financing
options, no cash flow budges, high leverage ( that's too much debt by
the way !) and slow moving or other inventory issues . Talk about a
plethora of problems!
Working capital loans are in fact available in Canada. They are limited, but available. A pure working capital loan is most commonly a term loan, for cash, with fixed repayments and terms of typically three to five years. To get this loan you need to demonstrate historical and future cash flow. Many of the problems we pointed out above in overtrading don't really often make your firm a candidate for this type of financing. Larger companies are in the same position - these loans are then called mezzanine loans or sub debt type financings. Bottom line, those same cash flow qualifications.
There are some methods of enhancing your working capital that many of
the clients we talk to don't think about. Simply negotiating better
terms with favored suppliers is a good one. Also, earlier we spoke of
Canadian business owners who knew they had a problem but weren't aware
of possible solutions.
One of those solutions is a working
capital facility that monetizes your inventory and receivables. These
facilities, a sub set of asset based lending are more expensive usually
than bank financing but boy do they solve the problem. Other
alternatives are bridge loans on existing equipment, aka the infamous '
sale lease back '.
