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.