Tweet

What is the Financing Cost and Options of Different Sources of Financing

Guest post by: Stan Prokop

Article Overview: Canadian cash flow and working capital alternatives for your business;Information on how Canadian business owners and financial managers assess cash flow needs and how they should consider different sources of financing the the financing cost of those different options .

What is the Financing Cost and Options of Different Sources of Financing

What are my available sources of financing and what is the financing cost of those sources and options ask our clients? When we are talking working capital it all comes down to your firm's ability to raise and utilize cash flow on an ongoing basis.

We will discuss what some of those sources of financing are, and more importantly the costs and benefits associated with those different types of financing for Canadian business owners

When you understand what working capital is you are obviously in a better position to source it! You therefore need to know how to measure working capital in terms of your overall business needs. That's part of the problem and challenge, because when we sit down and work with clients on working capital and cash flow needs we quickly determine that working capital and cash flow mean different things to different business owners .

The problem usually starts with the business owner assessing his working capital needs by looking at the 'Total Cash 'line in his bank account. That is of course cash on hand, and doesn't reflect working capital, which is the funds he has tied up in receivables, inventory, prepaid, etc.

We can go to the text book definition also ( not our favorite way of doing things ) and finding out that working capital is simply current assets minus current liabilities, calculated by a quick look at your balance sheet . We are not a big fan of that calculation, simply because it doesn't give you a true sense of the turnover of those critical balance sheet accounts such as A/R and inventory. A quick example simply is that most business owners assume the larger the 'working capital' numbers the better shape they are in - in fact the exact opposite is true because they require cash flow to fund that higher investment in receivables and inventory.

The best way to measure working capital efficiency is on a regular basis to calculate your receivable and inventory turnover. They are either getting better or worse, and your working capital improves or deteriorates in the same relation.

You should also focus on business liquidity because suppliers and creditors will bear the brunt of your inability to fund your business - and deterioration in supplier / creditor relations is the worst thing that can happen to your business.

So now you have a better handle on working capital - what next. Well you clearly recognize that cash on hand and growing inventory and A/R isn't helping your cash flow at all - you need external financing. You achieve external financing by the profits you generate from your business, plus working capital facilities via a bank or independent finance company. Your needs might be seasonal, or on going, depending on what industry you are in.

So back to our sources of financing and the costs associated with those sources. You of course have the option of either generating a working capital term loan, or, if it's a larger facility, it might be called a Sub debt or mezzanine loan. Essentially they are unsecured cash flow loans with rates in Canada ranging from 10-15% - they are traditionally on a fixed term, fixed rate basis - 5 years is common. You also have the option of putting more permanent equity into your business via an equity injection of bringing in a new shareholder. We are perfectly clear with clients that this is the most expensive form of financing, because you are giving up future ownership.

If you can't raise capital for a working capital loan call your suppliers. Are you kidding, customers ask?! Well partly, what we mean to say is simply that your working capital increases when you slow payments to suppliers - that's a double edged sword re supplier relationships, so tread cautiously on that one.

Other more traditional alternatives are bank operating lines of credit, these come with the best rates, current in the 4-5% range in early 2010 in Canada. The only problem - great rates but difficult financing to achieve as Canadian chartered banks demand solid financials when they are granting this type of facility. A better way to achieve full liquidity via this method is to consider a factoring or asset based facility - Rates in Canada range for 9% / annum to 1-2% per month based on your overall financial position and size of facility . But, they offer you 100% working capital for all your business financing needs, so that's a good trade off.

Many clients approach us for other working capital sources, such as a sale leaseback of unencumbered assets, or a bridge or bulge loan on equipment and real estate to shore up working capital. These are great short term, but no long term fixes.

Understand what sources of financing are available to your firm, knowing their costs, and executing on facilities or solutions that make sense for your business is the true working capital and cash flow solution for Canadian business. Speak to a trusted, credible, and experienced business financing advisor to guide you to the right business financing decision.

Related Articles
  What Most Business Owners Dont Know But Need to About Business Financing
  How to Finance Your Franchise Business Opportunity
  0% Financing May Not Be The Best Deal
  How to Get a Car Loan Financing With Bad Credit
  12 Types of Business Financing in Canada - Which Do You Need? Commercial Loans & Cash Flow Finance
  Preparing For Financing Accounts Receivables in Canada - AR & Contract Finance Must Knows!
  Canadian Franchise Financing – Made in Canada Solutions!
  How to Finance Your Franchise
  5 Sources To Consider When Accessing Capital
  Franchisors as a Source of Financing
  Canadian Business Financing - Tips on Securing Financing For Your Business
  Inventory Financing & Purchase Order Financing in Canada
  Finding Information on Small Business Loans
  How To Finance A Franchise – Your Options and Risk
  Working Capital Financing
  Reality Check ! Financing your Restaurant Business via a Franchise Business Loan is Possible
  How to Get Financing For Your New Small Business by Sharon Fullen
  Franchise Financing – A Canadian ‘ how to’ Model !
  Taking debt now does not mean it is forever
  Franchise Business Financing Canada – (Preparing your strategy)

Article Tags: cash flow, financing cost, sources of financing, working capital



Related Forum Posts
grants for restaurants - Well friend I don’t have any idea about government grants for restaurants, but I will recommend that you may try on some banks who offer loans for small business where the government will have some guarantee. Beside that Restaurants business is very risky so some of banks who gave some Financing Loans they will look at on it if there is enough solid business plans.
Re: How to finance your independent movie - Hi, The video doesn't come up with its own URL... But it's the very bottom video on the page. Here's the description of it: Financing, Production and Social Impact of Feature Films Host- Carol Atwood - Founder, Spartacus Media Enterprises Panelists: Bill Johnson - Co-Founder and Partner, Inferno Distribution Steven Haft - Producer, Media Consultant Michael Goorjian - Actor, Producer, Writer
re: restaurant start-up - I'm not sure about government grants for restaurants, but my recommendation would be to approach a lender that offers loans under the Canadian Small Business Financing Loan program where the government will guarantee 85% of the loan. You can borrow up to $250,000 to finance equipment and renovations under this program. Restaurants are very risky business, however some of the Chartered Banks will look at restaurants if there is enough of an initial equity investment and you have a solid business plan (experienced management team, good concept and strategic location).
Re: What Franchisors Want From Franchisees - Thanks for the follow up Russell. I found the following tip to be especially helpful: [quote="RussellWebb":2vqd3szf]Financing arrangements will vary - if you can show that you have 20% above all of your start-up costs, this would help. The more assets you own the better.[/quote:2vqd3szf] By the way, is there a way for someone to achieve a close to "1000" credit score? I've always paid off my Visa bill and car payments on time... but I bet my credit score is not even between 800-1000. I wonder what the secret is to 1000?
Re: Kevin's Case Study #8 - How do you attract a finance expert? - I think the best way to find any reputable accountant would be by recommendation. If you cannot get one by recommendation then you should put those you narrow down your search to through an in depth prescreening process. Check the out their firm with BBB and make sure they are licensed & registered. Always check credentials and make sure they graduated from the schools they claim to have attended. Financing should be found in accordance to the type of financing you need and the type of business you are financing. You should always get prequalified before commiting to an application. You should seek out those financial institutions that specialize in the type of financing you are seeking and then check to enure they can finance your type of business.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

The Death of the Sales Magazine

Unharnessing Creativity in Business

How to choose your executive coach -1

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.