subject: Looking For User Friendly Debt Capital And Asset Based Financing Choices? [print this page] When corporate partners and venture capital aren't available, or don't make sense the Canadian business owner / manager turns to debt capital and asset based financing for working capital and asset monetization. Wouldn't it be great to have some solid choices in that area? The reality is that you do, but just might not know it. Let's explain.
We suppose we can make the case that debt is lower risk than equity, plus we always know what's going on vis a vis payments of principal and interest. The potential danger is that by virtue of your covenants and the collateralization of assets they may be claimed by your lender who is primarily interested in protecting their capital.
We sometimes thing that the above scenario is how the business owner/manager believes the lender wants to behave. That certainly is not so, as what lender would really want to be repaid from the normal operations and cash flows from your business.
The actual ' assets' of your business are what normally drives most of business financing in Canada. Because these assets have specific values balance sheet accounts such as buildings, inventory, and receivables are in fact the collateral behind your borrowing. No mystery there.
The alternative to hard asset collateral is the cash flow monetization of assets. And , oh yes, you can actually borrow against future cash flows , sometimes even on an unsecured basis if you can prove that historical and future cash flows are real and reasonable and carry a normal element of risk.
How does the lender in Canada measure the risk of cash flow and debt repayment? This is primarily done via two rules of thumb, the cash flow formula known as EBITDA , as well as the ratio ( we call them relationships ) of your total debt to your total shareholder equity . These ratios and calculations are then typically embedded into a loan document that makes them, in essence, a condition of the loan. Bottom line, a healthier business with good cash flow and low or reasonable debt has a great chance of achieving more debt capital. If EBITDA and debt / equity are ' out of whack ' then its safe to say that challenges in obtaining debt capital and asset financing will ensue!
When accessing both debt capital and asset financing its important to determine what category or timeframe you are looking to address. By that we mean short term financing of one year or less, long term financing that typically might be 3-5 years, and finally ongoing line of credit financing for your daily ongoing operations
While debt capital in Canada primarily comes from banks, insurance companies and pension funds for medium sized to larger corporations there are numerous independent commercial finance companies that address the start up and SME sector in Canada. It' all about knowing who to turn to and when. The key point to remember? It's a simple one. Assets can be financed!
Bottom line today. Pretty simple - simply that asset financing and cash flow financing for debt capital are available through collateralizing your receivables, inventory, equipment, real estate, etc. The trick is knowing who, what, when, and where! Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in your debt capital and asset finance needs.
