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Canadian Factoring and Cash Flow Solutions – How do they Work? Are they alternatives to Business Loans?

Guest post by: Stan Prokop

Article Overview: The article reviews issues around the business owners and financial managers choices surrounding permanent or immediate working capital and cash flow solutions, focusing on cash flow loans and also factoring , receivable financing as an alternative .

Canadian Factoring and Cash Flow Solutions – How do they Work? Are they alternatives to Business Loans?

Business owners and financials managers focus on working capital whilst sometimes not determining whether the business financing solution is a longer term focus, or short term.

We first need to point out the differences between a business term loan and a factoring / working capital type financing solution.

Business loans of a term loan nature tend to be fixed payments. They will bring what we will call permanent working capital into your business. The nature of these loans is that they tend to be 'fixed' in term, payments, and rates. Your business can acquire a working capital business loan in a couple of different ways. The transaction can be facilitated purely on a 'cash flow 'basis. If the lender feels your firm has the cash flow to support the loan a loan will be created around that belief. Your historical and current financial statements (as well as your projections) should validate that your cash flow can meet the payment requirements of the loan.

The cash flow term loan can also be achieved in two other ways; it can be structured around what is known as a mezzanine or subordinated debt basis, or via a sale and leaseback of your assets or real estate. Some business owners feel it feasible to consider a 2nd commercial mortgage on their property, as an alternative to not having to sell the real estate to bring cash back into the firm.

We've covered the term loans portion of a cash injection into your firm. Another popular alternative is a 'factoring solution'. This solution is becoming increasing popular in Canada. We point out that the factoring solution should generally be viewed as an interim solution - our experience is that a firm factors their receivables for a year or so prior to regaining a traditional financing status with the bank for a true margined operating line of credit. To any Canadian business owner that currently factors their assets it is abundantly clear that the costs and processes are significantly more burdensome than a Canadian chartered bank facility - however, they do work, and they work for your firm now!, when you need it.

Canadian business considers factoring when they have capital and debt ration issues in their business. In many occasions the customer has a bank relationship and you need to simply augment that relationship with a factoring scenario for additional capital. The essence of this issue is that you are in fact 'maxed out 'at the bank, notwithstanding your good relationship with them. Business owners quickly find out that banks have limits! Many people don't understand that a properly constructed factor facility can compliment, and not necessarily replace a bank facility. You should seek the advice of a trusted, credible, and experienced financial advisor or intermediary in this regard.

Factoring is a much better solution for new and start up businesses, and if your firm is not in a 'death spiral ' ,but simply experiencing temporary financial losses or one time set backs then factoring is a solid solution .

In summary, business loans for working capital are either fixed / term scenarios or working capital facilities based on current assets such as receivables and inventory. The Canadian business owner must assess his or her needs in that context and choose the right facility that works now, for their business.

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Article Tags: business loans, cash flow solutions, receivable financing, working capital



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