Debt Financing And Business Liquidity For Canadian Companies

Debt financing for your Canadian business

Debt financing for your Canadian business. Should you... and when? That's the key questions the Canadian business owner and financial manager takes a look at when assessing business liquidity.

No one is going to argue that the focus should not be on profits, but the reality is that if you have too much business debt, or aren't properly monetizing current assets you're going to be in a situation where the last of your concerns are going to be profits, you'll in fact be fighting for business survival.

Notwithstanding the type of debt your company needs it's in fact the level of that debt that is going to be the key focus of any financing partner you're looking at. That partner's focus is very clear: getting repaid!

So are there in fact some ways you as a business owner or manager can determine what the right amount of debt is? Ultimately it's a case of ensuring that business liquidity is there to properly augment future business success.

We point out to clients that there is not magic formula for the right amount of debt; there are some industry standards though and that relates to the fact that different industries and business models require different amounts, and types, of debt financing.

The average business owner thinks of ' the bank ' when it comes to measuring debt. They are of course the masters of ratios (we have always preferred to call them relationships) and the covenants that come with those ratios. We're also not necessarily in agreement if some of those rations and calculations accurately reflect whats going on!?

Case in point? The proverbial ' current ratio ' which many bankers and lenders focus on as a key measurement of debt and business liquidity. By going to your balance sheet and taking current assets and dividing them by current liabilities we're told that a 2:1 ratio is generally desirable, and that higher is better. But our point? It's simply this in fact might be a poor measurement if receivables and inventories are growing... BUT NOT TURNING!

Debt financing in Canada brings interest repayment. That's where interest coverage comes in - you want to be in a position to generate enough positive cash flow, at a minimum, to repay that debt. The quick formula if net income plus deprecation divided by interest expense. Here to the bankers tell us that 1:25 to 1 is a desired ratio that reflects positive business liquidity.

The total debt you carry in relation to your equity in the company is a very valid discussion point when it comes to your ability to achieve the amount of debt financing you need. And how you use that borrowed money, via leverage, is also key.

So whats our take away today when it comes to accessing the right amount of debt via business liquidity solutions Simply that you do need to understand how debt financing is score carded , by your lenders and yourself as an owner .

Using debt properly won't put you in a cash crunch and will allow you to grow your business.

Speak to a trusted, credible and experienced Canadian business financing advisor on sourcing debt financing that makes sense for your business liquidity needs. That might include bank debt, cash flow loans, equipment financing, subordinated debt, or merger and acquisition financing. It's score carding and measuring that's the trick!

by: sprokop

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