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Working Capital Financing – Does My Firm need a Working Capital Loan

Guest post by: Stan Prokop

Article Overview: Working capital financing Alternatives for Canadian Business.Information on how Canadian business owners and financial managers can assess working capital needs . An overview of working capital financing solutions.

Working Capital Financing – Does My Firm need a Working Capital Loan

Clients we meet with often want to need if they require additional working capital financing for their overall business growth and survival. They also, as prudent business owners, want to know what alternatives are available for financing consideration.

Lets answer question # 1 first - we can some facetiously say that the answer will be similar to your lawyers answer to most questions - you may need a working capital facility or loan, or you may not ..!

What do we mean by that? The key issues in working capital financing is understanding what it is, why it is needed, and what alternatives you have as a Canadian business owner of financial manager to access that additional capital .

Let's get back to our key point, which is simply that we need to first understand what working capital is. We can go by the textbook definition, which is simply go to your balance sheet, take current assets, subtract current liabilities - and voila ! You have your working capital amount. Let's bore down a bit and truly understand this number and what it really means to your firm on a day to day basis.

Your current assets are of course your inventory and receivables; your current liabilities are your payables and what you have upcoming in loan and lease payments everyday. As a business owner you know that these numbers change everyday, and that as your business grows you require a larger investment in accounts receivable, inventory, and a buffer of cash on hand for miscellaneous issues, emergencies, etc.

Now let's examine a very key point that will help you understand the thrust of our message. Higher working capital is preferable, but if your inventories and receivables aren't turning then higher works against you, because you have built up assets that aren't turning, and it cost you money to build up those receivables and inventory.

So the reality is that you have three options in assessing your working capital financing needs. They are as follows:

1.Focus on higher turnover of receivables and inventory - and stretch your payables as long as you can so as not to lose your valued supplier relationship

2.Monetize your working capital in a more efficient manner - i.e. negotiate an operating line of credit with your bank based on receivable and inventory margining - Alternatively supercharge your current assets by what is known as an based lending']);"> asset based lending facility

3.Consider a permanent working capital term loan - this is a long term, generally 3-5 years cash loan that is repaid in specific installments. Essentially you are committing long term working capital into the business which will help alleviate growth needs.

So in summary, what is our bottom line? Its simply that you need to understand what working capital is - you need to determine if you can generate working capital internally or externally, as per our options # 2 AND # 3 above. Speak to a trusted, credible and experienced advisor in Canadian working capital solutions and you will be on the way to increased sales and profits via a proper business financing strategy.

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Article Tags: working capital financing, working capital loan



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