Working Capital Finance Loan Advice – What Business Credit is Available for Your Firm?
It is not hard to determine why there is such a focus on working capital finance in Canadian business - it's simply because your ability to both manage, and access cash flow alternatives become the ultimate measure of short term financial health. We say short term because your overall capital structure and debt / equity relationship are of course the other piece of the business finance puzzle. Today we're focusing on short term health!
You know you are in good shape from a business cash flow perspective when you are in a position to meet your short term obligations - typically those are payables and any loan payments becoming due on a monthly basis within the year. If your cash on hand, receivables and inventory turnover are unable to meet those obligations consistently ... well ... its clear you need a working capital solution.
The reality of course is that cash flow fluctuates, and there are times when you have what is known to bankers as a bulge requirement - it is those times you need that access to working capital we spoke of.
So how do you determine what type of business credit financing you need, and, as importantly, how much. Sophisticated larger firms use the capital budgeting process to determine asset needs and why type of investment is required. It's essentially the mix in the financing of your company - i.e. owner equity, debt, and financing of current assets, which is our focus - 'working capital'!
The good news about working capital finance is that if it is done properly it doesn't incur debt, or reduce your owner equity - it just increases cash flow and business credit access. To some extent the term 'loan' in working capital actually reflects a line of credit scenario, not taking more debt on to your balance sheet.
It is possible though in Canada to get a working capital term loan, for larger and medium size companies this is known as sub debt. Payments are fixed and in general the loan is unsecured and based on your cash flow ability to repay, both historically and projected.
If that is not the solution for your firm, what is then? The other solutions are a true bank operating facility, if, and sometimes that's a big if, you meet bank criteria for lending. Other real world and more probable solutions for working capital finance business credit are asset based lines of credit, working capital facilities of a non bank nature around your inventory and receivables, or simple receivable financing via an invoice discounting facility.
