Positioning… we checked, and it’s simply about ‘ being in the right place’. When we first talk to many clients who are looking for working capital and business loan financing we sometimes find that they are unable to properly communicate their historical , current and of course future financial position.
Your firm will always need outside financing if you are going to grow, and the reality is that achieving financing success is a lot different than running your business to put it simply… raising money isn’t quite like making money! We’ve always felt that the financing process should not be as stressful as it seems; so whether you’re dealing with a bank, commercial credit union, or an independent finance firm you need to be able to present your data in a compelling manner.
The most important tool you have in that communication challenge is your financial statements. They bring light into what we could call ‘ conversation darkness’. Business owners of small and medium sized businesses in Canada simply need to be able to convey what their financials tell about their company.
If we had to focus on one key area re: positioning of your firm it’s simply the challenge of showing your firms ability to repay debt. The majority of debt financing in Canada is of course secured. If your firm over performs, increases sales, and generates significant profits your lender , whether that is a bank or a commercial finance firm does not benefit any more than if you didn’t have that solid financial performance we mentioned. So again, any lender is always focusing on repayment.
Typically your positioning on a commercial financing is well served if you are able to demonstrate what lenders call a primary source of repayment – 99% of that time that is going to be operating cash flow. Other assets or strengths of your firm are always going to be a secondary source of repayment – i.e. additional collateral, your personal guarantee, etc.
Whether it’s in Canada or elsewhere a business loan financing its going to always come down to certain ‘ ratios’. We have always thought that that is such a mechanical term and description, and have tended to use the work ‘ relationships’. Your ability to position certain ‘ relationships’ in your financial statements are fundamental to business loan financing approval.
So what ‘ relationships’ are those underwriters (underwriters = people you will never meet) looking for. Some of those are your gross margins, your net profits, which are usually benchmarked against companies in your own industry.
Working capital and debt financing makes much more sense to the lender when you have a positive net flow of funds. Simply speaking that’s your cash flow, which most lenders calculate by adding your net income and deprecation. The number that we consistently see ‘ traditional ‘ lenders applying to cash flow is a 1.25:1 ratio… or relationship.
Want to better position your working capital needs? Then be prepared to address or talk to your operating cycle. Knowing how long it takes to collect your receivables, turn your inventory, etc is what working capital analysis is all about. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in the proper positioning of your firm… for financing success!