Working Capital & Cash flow Challenges for Small and Start up Firms in Canada

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Business owners for new and smaller firms are keenly aware of the challenges they face in raising working capital facilities with traditional Canadian chartered banks.

Banks by their nature and charter wish to loan against good collateral, which in many cases cannot be raised by the entrepreneur. As often as we criticize our banks for not lending aggressively to small business we do forget that they make only very modest interest rate profits on a small business. The basic arithmetic is should be know to all – the bank takes depositor money, pays currently a 2-3% yield to us depositors, and lends it to small business in the current 5-6% range. On a bad loan the bank can lose it call, and on good loans they are only making 2-3% spread. And of course they have branch staff, infrastructure, branches, technology, etc all invested in their business. They have costs also. We aren't defending the banks, but we think it is important that we all understand the arithmetic.

Small business and new businesses are often in high growth mode. As such there is no track record of cash flow, profits, etc that can be tracked and somewhat predictable. In fact the profits and cash flows are quite volatile.

The business owner and financial manager finds that the banks find it very challenging to lend to their business simply because it is difficult to assess the risk with all the volatility we spoke about.

Banks are interested in minimizing risk – and the business owner for a small and medium sized firm is usually a very unlikely candidate for a venture capital type investment. The venture capitalists don't mind the risk, they like an ultra good return also!

In general commercial chartered banks in Canada do not make sizeable loans to small and medium sized firms. Certainly banks are approached the but the business owner soon finds that the banks simply does not understand their business. In many cases the firm has acquired possibly too much debt already, and at the end of the day there is just not enough collateral for the bank.

Personal guarantees and the pledging of personal assets becomes a major discussion point, and collateral required often is 2-3 times the value of the loan.

Small and new businesses desperately need lines of credit and overdraft facilities, which are unfortunately restricted by cash flow and debt ratios that the bank requires. The old adage seems somewhat more true than every – the chartered bank can lend to a small business as soon as they don't need it!

What are the alternatives to these huge working capital challenges – we feel that the two strongest alternatives are non bank working capital facilities, also know as factoring and receivable financing , as well as a true working capital cash loan sponsored by the federal government bank for business .

Stan Prokop is the founder of 7 Park Avenue Financial. See www.7parkavenuefinancial.com

The company originates business financing for Canadian companies and is a specialist in working capital and asset based financing of all types . For more information or contact details please see : http://www.7parkavenuefinancial.com/Home_page.html