Business Financing . Are You Making Right Decisions On Borrowing And Collateral Leverage Loans?

Your business financing in Canada

Your business financing in Canada. When it comes to priorities and important things on our ' to do' lists borrowing and leverage, collateral loans, and credit facilities are surely at the top of our list - or at least we think they should be. Here's why.

Canadian business financing is all about financial decisions, ie when to make them, and making them properly with informed clarity. But what type of financing is in fact best for your firm, and will it allow you to both maintain and grow profitability, or even, dare we say it... get to a profit point.

We don't hear a lot of clients talking about ' leverage ' but it's a simple key concept in business finance. They way that you lock into your fixed costs is in fact all about our term ' leverage '. As sales increase naturally your fixed costs don't -- they're fixed! So in the good times sales grow and profits grow quite nicely . (We all kind of vaguely remember the good times, right?)

On the other side of the coin when sales go flat or down those profits kind of disappear pretty quickly. We suppose that if you're highly leveraged and sales are great those profits look pretty good.

So at the end of the day , its about borrowing and locking into the right amount of debt - that's the financial leverage, and on the other side its the operating type leverage related to your fixed costs.

Each business owner and financial manger tends to develop their own comfort level around the amount of debt they are comfortable with. In the case of the larger public companies there are some generally acceptable rules around debt ratios, etc

The thing that Canadian business owners must keep in mind that it's all about borrowing for the right reasons and making sure that you get a good return on those borrowed funds.

Collateral is a key factor in the type of debt your company takes on. We always remind clients that your lender has no upside; ( the collateral you have makes them feel comfortable they won't be participating in the downside !) he or she just has their collateral and agreed upon interest rate.

One of the big challenges we see all the time is the reality that in a lot of firms sales and profits are all over the place - that of course makes it difficult to know how much debt you can take on , or by how much you can comfortably increase your fixed costs if you're expanding, etc. A quick common example is airlines - if they acquired/financed a lot of new planes and then had poor load factors... well you know the rest...! I guess we're saying in a perfect world that it might be good for you to conservatively assume 'worst case ' scenarios and then take on an appropriate amount of debt you can repay .

In Canada business can take on debt in the forms of:

Bank loans

Equipment leases

Working capital term loans

etc.

But, and its important, they can also monetize assets without increasing debt - this is done thru :

Bank revolving facilities

Asset based lines of credit

Receivable and supply chain facilities,

Monetizing their tax credits if they have them .

So, our take away? Simply that you should get a handle on your debt leverage and your fixed cost leverage and borrow for the right reason with the right financing vehicle - loans, or asset monetization.

Speak to a trusted, credible, and experienced Canadian business financing advisor on whats right, and not right, for your company.

by: sprokop

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