Power Your Growth with Working Capital Solutions
Stan Prokop
Canadian Business Financing | Cash Flow Financing | Asset Based Lending | Equipment Finance | Lender Financing | Purchase Order Financing | Acquisition Financing | SAAS Financing | Acquisition Financing
Working Capital Business Financing For Your Business!
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When business owners and financial managers seek financing in today’s challenging commercial financing environment, they often consider alternative business financing solutions other than traditional Canadian chartered bank solutions.
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Business credit cards can be an effective alternative financing tool. They provide fast funding to cover short-term expenses and can potentially improve a company's credit score.
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CASH FLOW CRUNCH -? TRANSFORM YOUR FINANCIAL FUTURE
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?Running a business with tight cash flow creates constant stress and missed opportunities. Late-paying customers, unexpected expenses, and seasonal fluctuations can strain your working capital, threatening your ability to meet payroll, purchase inventory, or pursue growth opportunities.
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Fortunately, modern working capital business financing solutions offer flexible funding options that align with your business cycles and revenue patterns.
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2 Uncommon Takes on Working Capital
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HAVE YOU INVESTIGATED ALTERNATIVE FINANCING SOLUTIONS
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So why are these companies looking for alternative solutions? A fairly strong, consistent profile emerges among Canadian firms seeking alternative working capital solutions.
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One such method is invoice financing, which allows businesses to borrow against their outstanding customer invoices, providing immediate cash flow.
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FINANCING GROWTH IS CHALLENGING
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Despite the difficult 2008 and 2009 financial-economic challenges, many companies are encountering opportunities to grow - and let’s not talk about Pandemics/Covid!
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Yet as those growth opportunities emerge, they find themselves challenged by traditional debt-to-equity ratios and lower tangible net worths than are required by conventional financial institutions such as Canadian banks.
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Interest rates vary based on factors like loan type, security status, and the borrower's credit score. For example, working capital loans often have higher interest rates than home equity loans.
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Secured loans typically offer lower interest rates, ranging from 3% to 7%, while unsecured loans can range from 10% to 20%, depending on the borrower's creditworthiness.
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WHEN THE BANK SAYS NO ...
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We quickly add that Canadian businesses that enjoy profit, have a clean balance sheet, and adequate capital ratios are candidates for Canadian banks.
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However, not all firms find themselves in this situation! Instead, firms are challenged by bank lines that have been capped or constrained, debt covenants that restrict, and higher cash flow needs due to higher investments in accounts receivable and inventory required to fulfill those great new contracts and purchase orders.
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A line of credit is a flexible and accessible financing option that helps manage cash flow shortages and provides immediate access to funds.
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UNDERSTANDING YOUR CASH FLOW CYCLE AND BUSINESS NEEDS IS THE KEY TO SUCCESS
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So what’s the alternative? A triple-threat solution is available to many firms that may not even know this type of financing is available.
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We will call it the ‘holy grail ‘of working capital financing because it covers purchase orders, inventory, and accounts receivable. Business owners clearly recognize these as key elements of their operating cycle.
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That is, they get an order, purchase or manufacture a product, and convert the sale into an account receivable. That’s the good news; the bad news is that that process probably takes 90 days, even more sometimes. Cash flow is needed in the interim!
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Net working capital, the difference between current assets and liabilities, helps assess a company's liquidity and short-term financial health.
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THE IMPORTANCE OF WORKING CAPITAL AND FINANCING THE BALANCE SHEET
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Why are working capital and cash flow so important to your business? One reason is simple and should be obvious – if you manage and understand the whole process, you will have a solid ability to predict how much cash you need in the future –
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All you need to do is invest some time in understanding your balance sheet and the relationship between current assets and current liabilities to measure issues around cash flows in your firm.
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Positive working capital, defined as having sufficient liquid assets to meet short-term obligations, is crucial for operational stability and business growth.
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Your financial statements will always point to the amount of cash you require - even managing accounts payable properly will majorly affect cash flow.
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CALCULATING WORKING CAPITAL
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Calculating working capital is fundamental to assessing your business’s financial health and liquidity. The most straightforward method to determine your working capital is by using the formula:
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Working Capital = Current Assets - Current Liabilities
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This calculation considers your company’s current assets, such as cash, accounts receivable, and inventory, and subtracts its current liabilities, including accounts payable, wages, and interest owed.
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This simple yet effective formula gives you a snapshot of your business’s short-term financial standing.
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This formula provides a broader perspective by comparing your working capital to your total assets, offering more profound insights into your company’s financial efficiency.
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It’s important to remember that working capital can fluctuate due to various factors, such as changes in sales, inventory levels, and accounts receivable.
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Regularly reviewing and updating your working capital calculations ensures you understand your financial position accurately, helping you make informed decisions.
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METHODS AND FORMULAS FOR ACCURATE CALCULATIONS
WORKING CAPITAL EFFICIENCY
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Achieving working capital efficiency means effectively managing your resources to ensure you have enough liquidity to meet short-term obligations. Here are some strategies to enhance your working capital efficiency:
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By implementing these strategies, your business can improve its working capital efficiency, reduce costs, and enhance overall liquidity, positioning you for sustained growth and stability.
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STRATEGIES TO IMPROVE EFFICIENCY
RECEIVABLE FINANCING - FINANCING SALES!
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Customers are turning to factor or accounts receivable financing as the most immediate and obvious solution to their problem.
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By partnering with the right firm, they convert their receivables to cash the day they can invoice and recognize revenue—the lower Days Sales Outstanding achieved by factoring turns credit sales into cash.
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This is short-term financing versus a more long-term permanent solution for your company's day-to-day operating activities.
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Understanding working capital loans is crucial for businesses in Canada, as they are a common source of quick funding.
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These loans come with various features, including typical amounts, repayment terms, and conditions for qualifying for secured or unsecured options. Additionally, credit scores significantly impact loan availability and interest rates.
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This working capital allows the Canadian business owner to strengthen supplier relationships, which is critical in an unfavourable economy.
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In some cases, your firm might be able to (for the first time ever, perhaps?!) To take prompt payment discounts. It might not be evident to some owners that the ability to take prompt pay discounts can offset a very substantial part of the higher cost of factoring.
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IS PURCHASE ORDER FINANCING RIGHT FOR YOUR FIRM
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We have discussed a combination of alternative financing solutions that are interdependent on each other. Canadian business owners may not be aware that purchase orders can also be financed.
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With good purchase orders from solid customers, financing can be obtained on the strength of the purchase order itself. This relatively unknown financing concept in Canada is gaining some popularity.
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Lump sum loans refer to a single amount of money borrowed that is repaid over time through regular installments. Unlike flexible borrowing options like lines of credit, lump sum loans provide a fixed amount that must be paid according to a schedule.
领英推荐
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We spoke of receivable financing, a.k.a. factoring, purchase order financing, and inventory, the final piece of our puzzle.
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INVENTORY LOANS AND WORKING CAPITAL LOANS
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Solid, financially stable businesses with bank credit lines can obtain inventory financing or margining.
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Many smaller and more ‘frail’ firms cannot and aren’t aware of the growing number of inventory financing options. On balance, we can say that a reasonable commodity-type inventory (i.e. saleable) can, in fact, be financed for anywhere from 40 cents to 80 cents on the dollar.
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Negative working capital indicates a shortfall in current assets compared to liabilities, which can lead to potential difficulties in meeting short-term obligations.
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DID YOU KNOW?
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KEY TAKEAWAYS
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HOW TO GET A WORKING CAPITAL LOAN
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Securing a working capital loan can be straightforward if you understand the necessary steps and requirements. Here’s a step-by-step guide to help you navigate the process:
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Typical requirements for securing a working capital loan include:
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By following these steps and meeting the requirements, you can increase your chances of securing a working capital loan, providing the financial support needed for your business growth and stability.
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CONCLUSION
In summary, Canadian businesses that do not qualify for full-fledged bank operating lines can choose one or all three of three different alternative working capital solutions: factoring, purchase order financing, and inventory financing.
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Call? 7 Park Avenue Financial, a trusted, credible and experienced business financing advisor with experience in these alternative facilities. Your firm will have an arrangement that takes your financial success to the next level.
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The inflows and outflows of business capital in your business and how you manage them is key to business success in the growth of your products and services.
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FAQ
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How does working capital financing improve business flexibility?
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What advantages does modern working capital financing offer?
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How can working capital financing accelerate growth?
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What makes working capital financing better than traditional loans?
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How does working capital financing protect business stability?
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What exactly is working capital financing? Working capital financing provides businesses with funds to cover day-to-day operations, inventory purchases, and short-term growth opportunities through various lending solutions designed for operational flexibility.
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How does repayment typically work?
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Can I get working capital financing with bad credit? Alternative lenders focus on:
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What's the difference between working capital loans and lines of credit?
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How do I choose the right working capital solution? Consider these factors:
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What role does working capital play in business success?
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How do lenders evaluate working capital needs?
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What makes an ideal working capital financing candidate?
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What are the typical qualification requirements for working capital financing? Most Canadian lenders require 6+ months in business, minimum monthly revenue of $10,000, and a personal credit score above 600 re: the business owner's personal credit. Alternative lenders may have more flexible criteria focusing on business performance rather than credit scores.
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How quickly can I access working capital financing? Modern financing solutions often provide funding within 24-72 hours after approval. Traditional bank loans may take 2-4 weeks. Online lenders typically offer the fastest processing times.
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What documentation is typically required? Basic requirements include:
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What are the typical costs and terms? Costs vary by financing type:
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How much working capital can my business qualify for? Typical approval amounts range from 80-150% of average monthly revenue. Factors affecting approval include:
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' Canadian Business Financing With The Intelligent Use Of Experience '
?STAN PROKOP 7 Park Avenue Financial/Copyright/2024
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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil