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Loans for Working Capital - Two Things Canadian Business Owners Need to Know

Guest post by: Stan Prokop

Article Overview: What type of working capital loan is best for my firm .Information on Canadian working capital strategies for business financing for short and long term needs .

Loans for Working Capital - Two Things Canadian Business Owners Need to Know

The search for loans for working capital, and relating financing needs tends to be never ending for Canadian business owners and financial managers. Let’s examine two key aspects of working capital financing in Canada.

1. Working capital needs are both short term and long term – Which solution does your firm need?

2. Once your company has determined the type of working capital you need what are your options and how to do pursue those successfully and in the least amount of time?

We’ve stated that working capital is both a short term and a long term need. Let’s examine that key point. When we talk to clients about working capital needs it becomes apparent they are often confused by ‘textbook issues ‘as compared to real world issues. The textbook of course tells us that working capital is a simple calculation – go to your balance sheet, subtract current liabilities from current assets, and , voila! There’s your working capital. The perfect answer, right? The reality is that business owners must consider two key elements not often covered off in the textbook – they are

- What is the right amount of working capital for my firm based on historical, current and future needs – is it a temporary need or a short term need. Also, turnover of current assets is critical and many Canadian business owners and financial managers don’t know how to measure turnover. Recall our textbook definition of working capital as stated above. The reality is that if you have a large number that’s working capital goodness, right? Not necessarily, because if those assets of accounts receivable and inventory aren’t turning then your working capital is sluggish and your investment is the buildup f those key assets are in fact significantly impaired.

We’re talking about short term needs vs. long term needs as we have stated. You may have had historically enough cash flow for working capital to satisfy your overall sales growth needs. But what if you have a large new order or contract you need to fulfill. That more often than not necessitates a short term need for cash flow to fulfill purchase orders, contracts, etc.

So what have we learned – simply that working capital can be measured - however it has to be analyzed with respect to your firms ability satisfy current and future revenue needs . Clients we talk to often have trouble understanding the working capital dilemma, which is simply that your sales and profits are not necessarily tied to your cash flow. Determining that too late is usually a painful experience for most of our clients.

So how can we ‘alleviate the pain ‘? Let’s move on to point number two, which is what options are available to Canadian business owners seeking working capital financing.

Two options are in fact available for your firm when considering a working capital solution. One of those options is to take on more debt, and enter in a working capital term loan – this is simply a cash term loan with a fixed repayment and term – typically three to five years. For larger firms this might be called subordinated debt, or mezzanine financing, but for smaller and medium sized companies in Canada we can simply say ‘it’s a working capital loan ‘! This type of financing puts permanent working capital into your business and allows you to feel comfortable that you can meet short term obligations such as lease payments, etc. If there is a disadvantage to this type of financing its simply that in reality you are adding more debt to the balance sheet, as the working capital loan is debt .

Does working capital always have to be additional debt? Definitely not. The other solution is to monetize your working capital assets. By working with an experienced, trusted, and credible working capital advisor you can monetize current assets such as receivables, inventory, and equipment, without taking on further debt. Yes you are leveraging those assets, but the reality is that your balance sheet rations still stay intact. For smaller and medium sized firms in Canada these solutions come under several names, working capital facilities, asset based lines of credit, or even a standard operating line of credit with a Canadian chartered bank that allows you to margin receivables and inventory .

In summary, we have covered off the need for business owners to determine what type of working capital they need, albeit short term or long term . Solutions available come in the forms of working capital term loans, or, perhaps a more attractive option, the monetization of those working capital accounts to leverage cash flow.

Focus on your working capital needs, determine the best solution, and obtain expert advice on the best method of increasing cash flow for your firm for current and future needs.

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Article Tags: business financing, canadian business, loans for working capital



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