Working capital financing – there is problem not a day when the business owners and financial managers of small and medium sized firms in Canada don’t think or worry about working capital challenges. What are the issues and are their traditional or new innovative financing strategies available?
The irony of the business owners concern is, many times, that business is great. We hate getting technical with clients, but finance has a term called ‘sustainable growth ‘- very simply put it’s the growth rate your firm can achieve without increasing leverage, or the amount of debt to equity in your firm. It’s calculated as follows:
ROE X (1-dividends paid out)
ROE is of course return on equity, the amount of net income at the end of the year as a percentage of your firm’s net worth.
Perhaps we have surprised some Innovative Finance for Personal Loans owners by telling them the exact day that they will have to stop growing based on their inability or desire to borrow!
Anyway, our point is not that, it’s simply that at a certain point you cannot grow your business any more without debt.
We can suggest a solution that’s even better than borrowing, which is self financing for an asset based working capital facility. This type of facility adds no additional debt to your firm but gives you maximum liquidity for receivables, inventory, and even equipment you already own.
So, we promise, no more technical financial discussion lets discuss the financing you need and the challenges you have. As we stated it is ironic that many times the stress of managing working capital is related to success – you have new orders, contracts, the need to build up inventory, or perhaps you have granted special payment terms to new or existing customers.
At the same time your firm has its own obligations to suppliers and term creditors such as the bank or equipment lenders, etc.
We can say that the problem is very obvious when you have suppliers that want to get paid either up front or in 30 days, but you have inventory build up needs and your customers are paying you in closer to 60 days, despite your terms of 30 days.
The traditional solutions are always too obvious, Canadian chartered banks for term loans or operating facilities, or even consideration to giving up some equity in your ownership.
Those are solutions that are either desirable by many of our clients, or, frankly in most cases, they aren’t possible because of your firms overall financial condition or lack of additional collateral, etc.
Therefore those non traditional, but getting less non traditional solutions look more and more attractive every day. By sacrificing one of two points of gross margin true working capital asset based lending facilities can provide you with all the cash flow you need when it comes to financing inventory at aggressive loan to value, 90% of receivables, and, as we said in some cases equipment and even purchase orders.
So what is the final effect of a true working capital facility – it’s financially much better than taking on term debt or selling equity ownership, etc. We have just shown you that by maximizing a true working capital facility you have increased sales, increased profits, and have not taken on additional debt or given away any portion of your equity stake.