Financing must innovate
- April 9, 2013
by Tim Wilson
Strategies to access money to improve your business
There is a lot of talk these days about innovation, but there is also some confusion as to how this might apply to financing in the manufacturing sector.
After all, Canada’s conservative approach to banking is often credited with helping us survive the worst of the downturn, yet that same approach can make it hard to get help. Fortunately, there are some low-risk, inventive strategies that can make a difference.
“We do accounts receivable financing, which is different from banking,” says Tracey Carlson, Senior accounts manager with Liquid Capital BC Corp in Vancouver. “And we lend on the credit worthiness of our client’s customer, not the clients themselves.”
Also known as invoice discounting, this is a smart way to ensure that payroll is covered before accounts receivable have been settled. Carlson says Liquid Capital is able to take a lot of the administrative work off of their manufacturing clients’ hands, so that they can focus on their core competencies. “We do back office services, including account collection,” says Carlson. “We wait five days and then pick up the phone. This is business to business, and makes a huge difference to mid-size companies that don’t want to upset their clients.”
Liquid Capital will even do a credit check free of charge–an area where small and mid-size businesses tend to have weak competencies. “After the check we then know if we can finance off that account,” says Carlson. “Usually we are charging 1.25 to 1.75 per cent for a 15 day period, and then after that it goes to a flat rate on .1 per cent a day.”
To carry that for a year could be expensive, but to bridge a slow period when the work has to get done, and you are waiting on payment, can make all the difference. Liquid Capital will pay out 80 per cent of the receivable upon approval.
“We can handle a receivable of $5,000 a month, and can go up to $10 million a month,” says Carlson. Most of our business is in the $25,000 to $300,000 range.”
Carlson gives the example of an invoice out for $150,000 when a company’s line of credit is maxed out and management is staring down $40,000 in payroll. Missing that payroll is not an option–people will up and look for another job–which makes invoice discounting a viable strategy for ensuring liquidity.
Gary Fitchett, principal author of The Canadian Business Financing Handbook, agrees that invoice discounting–also known as factoring–is becoming increasingly popular. But it’s not the only game in town. “There is also mezzanine structuring, some creative forms of equity sourcing–angel financing particularly–specialty leasing, and specialty trade financing,” he says. “I expect these varied sources to continue to expand.”
Years ago, businesses only went to the bank for financing, and usually only for simple working capital secured by accounts receivable. But banks have changed, and now offer more varied structures and security for financing.
“The marketplace has grown extensively, with many varieties of structures and sources,” says Fitchett. “Aside from factoring, a job shop could get an advance from a customer. There are also inventories on consignment– paid as used–and extended terms from suppliers.”
Depending on a shop’s ability to stomach loss of control, Fitchett says it could also consider joint-ventures with customers or suppliers, as well as share plans with employees.
“Most businesses start with what I call ‘love money’ as their initial source of external financing,” says Fitchett. “It is usually desirable to have commercial terms, but a business person can often negotiate softer terms which are helpful in the early stages of the business.”
Either way, Fitchett says that all parties should ensure that the details and terms are in writing. It's crucial to make sure financing –whether the standard debt-to-equity ratio of two to one, or as a per cent of available cash flow–has to be supported by good business planning and solid record keeping.
One popular way to expand your business is to get machine and equipment vendors to help finance the sale of their own products. The best play is often to avoid the banks and to find independent, knowledgeable parties that have the clout to offer attractive terms. One example is Element Financial Corporation.
Element Financial has three things going for it: it’s independent; it has $1.5 billion in total assets; and it specializes in vendor financing, making it easier for job shops to get favourable deals from equipment manufacturers in a wide range of areas.
“We provide sales financing programs that allow dealers to offer purchase financing to their customers,” says John Sadler, senior vice president at Element Financial. “These secured equipment financings are designed to be incremental to the other forms of financing that the end user of the equipment would typically have in place with their bank.”
Which is to say, Element Financial can bring into play pre-existent working capital facilities, commercial real estate mortgages, and operating lines of credit to make sure a shop is getting the greatest visibility into all its options. SMT
Tim Wilson is a contributing editor.