We’re not shocked – You wont be either – a recent U.S. survey by CFO Magazine stated that cash flow and working capital and accessing working capital funding sources was the biggest concern of any financial manager.
Welcome to Canada ! We are pretty sure we are in the same boat as we talk to clients who seek alternatives to debt financing and liquidity for their companies.
The other key item in the study was that business in general was dissatisfied with their banking relationships – again no real surprise.
So we all agree there is a gap in working capital solutions for Canadian business. Let’s discuss why that gap exists, and, more importantly is there alternatives to taking on more debt financing while at the same increasing cash flow in your firm.
As we have written in the past we always tell clients the best program in Canada, bar none in our opinion is the government small business loan program, which is underwritten by our good friends in Ottawa. Great rates, terms and structures, what more could you ask for. Well here’s the problem, the program only covers equipment, leaseholds and real estate – that’s called debt financing. So not working capital or cash flow is ever going to come out of that program for your firm. Let’s move on then.
We can start by defining our working capital problem by simply saying it’s the day to day liquidity in your business that we are talking about – essentially the amount of funds you have in your company that could be liquid if you didn’t have them tied up in inventory, accounts receivable, and in some cases prepaid current assets. And of coruse the ‘ double whammy’ comes in when you have your obligations on the other side of the balance sheet, i.e. accounts payable and term loans.
Working capital funding sources come from two areas, debt and the monetization of those current assets. We prefer monetizing and cash flowing things like A/R and inventory as opposed to debt financing, which infers a long term commitment.
So let’s get right to the point, what are your alternatives to cash flow success. The good news is there are a good handful of alternatives – they include operating lines of credit which can come from your bank or your non bank lender. Clients are increasing more interested in hearing about non bank lenders because these firms can more readily approve financing for your inventory and receivables. The ‘ buzz word’ around this industry is asset based lending, and we advise clients to check it out, because in many cases it’s the ultimate solution to working capital success.
If you are a smaller firm you can employ accounts receivable financing, otherwise known as invoice discounting. If done properly ( and many times it is not ) it can turn your firm into literally an ATM cash flow machine, as you generate instant cash flow for all your sales . This type of facility comes at a cost and we find there are many misconceptions about the cost of this type of financing, and as importantly, how it works.
So lets summarize – you aren’t going to get working capital from our friends in Ottawa – if you qualify for bank financing employ it! Many of our clients don’t, so consider great alternatives for working capital funding sources such as asset based lines of credit, receivable financing, or in some cases even securitization.
So if your firm has a thirst for liquidity (!) speak to a trusted, credible and experienced Canadian business financing advisor who will work with you to solve your cash flow challenge .