Other alternative methods of cash flow financing including monetizing (that's financing) your government tax credits, or even financing your purchase orders or contracts
Break The Shackles Of Canadian Working Capital Financing Challenges - Proven Methods To Finance A
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.
