Working Capital Loans and Financing is a term that has different meanings to Canadian business owners and financial managers. One of the most popular (we actually feel it’s the best) loans for small and medium sized businesses in Canada is a loan commonly known as the Government SBL, or Small Business Loan. The essence of this loan is great rates, terms and structures – i.e. 3% over prime, nominal personal guarantees and re payment terms of 5-7 years.
Sounds great, right? Yes, we agree. But many business owners seeking working capital loans are dismayed when we tell them that the program only finances three things and it’s many times not the three things they are looking for. They are looking for Cash! The program only finances equipment, leaseholds, and real estate.
Working Capital loans are actually available from what people consider traditional sources. One of the Crown Corporations within the Canadian government actually focuses very significantly on cash working capital loans. These loans are structured as term loans, have fairly competitive rates, and repayment terms of 5 to 6 years. They are also unsecured, which means they rank behind and senior lender or security you might have in place. The only commitment to repay is the guarantee of the company as a promise to pay, and a full or partial guarantee by the owners personally. We point out that the majority of business loans and financing in Canada does in effect require some level of guarantees from the owner.
A great way to address why your Canadian firm requires working capital loans and financing is to address the root of the issue, which is to fully understand your receivable and inventory requirements. Those are the key drivers of any working capital need. The holy grail of working capital is when you can grow your business, reduce inventories and turn them faster, and increase receivable collections. Increasing a/r collections either via more efficient methods of collection, of selling your receivables as you generate them ( that’s called invoice discounting or factoring ) is the most optimal way to generate working capital financing .
Naturally the challenge in doing all that is to ensure you can still maintain your projected sales and profit growth.
If your company has a significant inventory investment at all times you can obtain direct loans in Canada against that inventory. Bank financing traditionally is the route many larger and established businesses take when they required working capital for inventory purchases. However when your firm can’t qualify for the full extent of financing that you need then a direct inventory working capital loan is best.
Our recommended working capital loan is actually not a loan that adds additional debt to your balance sheet. It’s a facility which margins your receivables and inventory to proper market valuations. This generates the additional cash flow and working capital you are looking for, and, as importantly, doesn’t add debt to the balance sheet.
The best way to generate your own working capital loan to your firm is to improve collections and delay payments to suppliers. The latter must be done carefully of coruse, so as not to mis manage vital supplier relationships. However, clearly it’s every man for him in business financing, so you should focus on negotiation the best payment terms you can with valued suppliers who will usually extend solid payment terms when they see you as a viable and long term customer.
So whats our bottom line summary on working capital loans and financing in Canada. It’s simply that you might not necessarily need a true loan and in fact should be accessing your working capital accounts such as inventory and receivables for financing. But true working capital loans are available in Canada – work with a trusted credible advisor to find a solution that meets your needs.