Inventory financing in Canada. What are the methods that Canadian business uses to ensure that working capital investment is maximized? Let's dig in.!br>
When business owners/financial managers are challenged on how to finance inventories it's important to focus on two areas - we'll call them ' tips' and ' traps'!
Financing inventory typically revolves around either retail or commercial concerns. Smaller retail businesses have a huge challenge as banks and other commercial lenders are reluctant to lend against inventory. Compounding the problem is the fact they view that type of business as an ' all cash ' business - so why would it need financing?
Typically when inventory is financed by a bank or commercial concern it's important to realize that it's always financed at cost. Another good thing to know is that in certain types of financing actual physical counts, inspections, or appraisals will be required by your lender - again typically a bank or non bank commercial lender . That won't always be required, but on occasion it's an absolute must. The lender needs to determine the ' margin formula ' that they will lend against on an ongoing basis.
Margin formulas vary significantly based on several key factors. They include an analysis of which one of the three stages your inventory is in (raw materials, work in process, and finished goods). Businesses that are able to demonstrate they have perpetual inventory systems in place stand a much better chance of ' borrowing power ' when it comes to financing inventories as part of your overall ' current assets'.
Your overall gross profit also plays a key point in financing. Ultimately important is the lenders / banks opinion on how marketable your goods are under a worst case ' forced sale ' scenario.
Many business owners consider the Canadian Small Business Loan program for the financing of their business. They wrongly assume that the program covers some sort of working capital, cash and inventory components. That is not the case! In that program only 3 classes of assets can be financed - equipment, leaseholds, and real estate.
Is there a winning way that we constantly recommend and implement for clients looking for inventory finance? The answer is that most successful financing in this area is in the context of a combined credit facility that also financed receivables. Two sources of financing exist here - The Canadian Chartered bank, and, in some cases even better: Non bank asset based lines of credit.
While the bank or commercial non bank lender places a higher emphasis on receivables due to their more immediate liquidity they also fully realize those sales are generated from inventory turnover. While banks differ in Canada on inventory margins it is non unusual in ' ABL ' (asset based credit revolvers) to achieve anywhere from 30 - 75% borrowing power.
Oh, we almost forgot. Why can't used submarines be financed? We would offer up that they can't be readily liquidated, and valuation is extremely hard to determine. Although we suppose the lender could utilized a ' FLOATING DEBENTURE '!
If you want to beat the challenge of inventory finance in Canada seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record, allowing you to achieve the business finance you require.
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Stan Prokop - founder of 7 Park Avenue Financial – www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing. Info re: Canadian business financing & contact details :
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