Back By Popular Demand ! Canadian Working Capital Cash Flow Financing And Loan Alternatives

Updated: June 08, 2011

‘Make better use of your cash ‘said the article, and encouraged you to maximize supplier credit, and at the same time work the other end of the spectrum, which is your own receivables policy.

A constant comment we hear from clients is that they not only don't know ' the fix ' to a working capital and cash flow problem, they often actually don't understand what the problem is or how to measure it. Let's look at some of those measurement tools, and more importantly, ' the fixes'!

As business owners ourselves we can relate to the fact that every time a business feels some sort of cash shortage you might feel your business is ' in trouble '.

Businesses finance working capital through the current asset accounts, namely receivables and inventory. In Canada those assets are financed either through a bank line of credit, or various types of working capital facilities that are more alternative in nature. They include asset based lines of credit, receivables financing facilities, and purchase order financing.

The latter three solutions tend to be more expensive for Canadian business, but in our experience provide you with much more cash flow and working capital. Important also to remember this type of solution is not a loan alternative, you are simply monetizing or cash flowing your assets, and that's a good thing.

We spoke of ways to measure the strain you have on working capital. Business owners need to realize that only efficiently moving receivables and inventory can be financed. If you are financing through a bank then not only is your margining limited but you more often than not have a borrowing limit. That can really impact growth ability.

It's also important for Canadian businesses to understand that access to more working capital shouldn't make them lose their focus on losses and unprofitability.

Let's look at a quick example - let's say a business has an operating line of credit of 1.2 Million as an example. The firm borrows to the maximum but then sales drop off significantly. Your bank reduces the credit line because your borrowing and margining power just is not there due to those slow sales. This then puts tremendous pressures on those supplier payables resulting in both loss of credibility with suppliers and operating losses due to those lower sales. It's a vicious circle.

The bottom line is of course that lack of working capital and cash flow financing can kill your business - short term losses aren't great, but they are manageable. But insolvency due to real cash flow challenges is very real and deadly

And back to our article that we mentioned on growth. Small and medium sized business in Canada has the ability to access traditional credit, as well as numerous other ' growth' working capital alternatives. A loan or debt is typically not the answer to growth.

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