First Financial Coach

Article by Stan Prokop

Film, television, and digital multimedia financings are always a challenge to Canadian based productions, but recent trends in the industry allow for a number of new and aggressive ways to finance your ongoing productions. For many participants the playing field is somewhat complex, as it is a mixture of industry, government and private sector financing that ultimately bring financing and cash flow to the success of your work. No one seems to be disputing the tremendous growth in the industry, particulary in Canadas major entertainment centres of Toronto, Vancouver, and Montreal.

Canadian content is king when it comes to financing strategies. As the industry if financed on a much larger scale in the U.S. there is always a challenge for Canadian productions in all entertainment sectors to find both short term working capital and significant long term capital and equity. The support the industry is getting from both provincial and federal sectors continues to be quite overwhelming.

The financing of tax credits in film, tv, and digital media, either through the Scientific Research and Experimental Development program, of the various other supported programs is one of the strongest ways to achieve interim working capital and help to balance your debt/ equity investments in any particular production. The good news is, that with the experience of a trusted and credible financing advisor in this area even accrual financing can be applied to these sorts of tax credits. That only means one thing of course – getting your funds immediately, and not waiting for the ultimate tax credit refund under the particular program under which your production is domiciled.

We are often asked if Canadian chartered banks play a role in these types of financing, and the answer is – yes, but very selectively. We have met and worked with specialized personnel from the banks in the area, and they clearly are ‘ boutique functions ‘ of the bank as a whole. Naturally though access to funds themselves is not a problem, as Canadian banks continue to be a world leader in liquidity, tier one capital levels, and access to funds.

So how do entertainment entrepreneurs access this capital. We simply believe that you must seek and search out experienced, trusted and credible advisors in this area. Financial people tend to be somewhat unable to predict ‘ hits and misses ‘ in the entertainment and media sector, we’ll let the creative type do that, but if there is access to financing available through areas such as tax credit financing, gap financing, accrual financing, etc its safe to say lets let the financial people handle that!

In our experience tax credit financing tend to be a minimum of 200k+ and up in Canada, and can of course go into the millions of dollars, so access to capital and who you are working with is very important. Naturally since out tax credit system and the financing of those credits infers a ‘ Canadian content ‘ ‘Canadian Equity ‘ requirement the additional pressure of having to finance just in Canada by virtue of the tax restrictions places just a bit more challenge of financing.

When does tax credit financing work best – In our opinion its when current programs are maximized and monetized simply from a timing perspective, accessing your capital now, not at some later point in time.

Your ability to discount now that future receivable or revenue stream is one of the greatest tools you have in financing prodcutons and content from a debt perspective. Actually its not even really debt, because you are simply monetizing or discounting an asset such as a tax credit receivable. You are raising cash flows against current receivables.

In Canada there is several billion dollars of tax credits awarded annually to the industry, so the ability to monetize these prior to final approval and audit, subject of coruse to your certification eligilbility, is one of your greatest assets from a financing and cash flow perspective.

Article by Stan Prokop

Producers and owners of Canadian content in the areas of film, television, and animation credits are not always aware that they have the ability to monetize or cash flow their Canadian tax credits in Canada. The three types of productions that we have referenced are provided with solid financing assistance from the federal and provincial governments in Canada. Your ability to monetize these tax credits, and turn them into cash flow at time of filing, (or in some cases before) can make or break the overall financing success of your venture. Successful results can be achieving by working with a credible, trusted and experienced finance partner for your tax credit financing in Canada. The financing of these tax credits creates, in effect premium additional cash flow to allow you to enhance your initial equity and debt and gap financing strategy. Let’s use a simple example wherein a Canadian produce in film, TV, or digital animation is financing a venture through equity and debt, and let’s say it’s a 50/50 proportionate relationship. The non equity portion of these ventures is often balanced with some sort of distribution agreements in Canada or elsewhere in the world. One strategy you could consider is to of course ensure prior to commencement and production that you qualify for and are eligible for the maximum amount of tax credits related to your venture. Let’s say our example consists of a 1 Million dollar independent film, and there is a 500k equity and debt component respectfully. In our example, if properly qualified and document the film owner, producer, etc can qualify for a tax credit that might easily come into the 200k-250k range. Is that the end of our example? Absolutely not – what we are saying is that you can immediately finance that claim, either at time of filing, or in some cases earlier, and utilize that cash flow for all sorts of purposes related to your venture / production.As Canadian production and content continues to play a hefty role in the producing of Films, direct to video, pay per view, and digital products the ability to finance these ventures is always a challenge. Very few of Canada’s banks and large financial institutions play a role in this type of financing; we therefore recommend to clients that they seek out the expertise of a credible, trusted and experienced advisor in this area. Maximizing your claim value and eligible cash flow are of course the rewards of working with the right party. Larger and well known studios require financing also, but the true challenge is for independent producers and their investors who have budgets that are often ten million dollars and under, sometimes quite significantly under that threshold we just referenced. The reality also is that the industry seems to be breaking all records in areas of growth and economic activity and new forms of content and distribution. The bottom line is that as demand increases and distribution structures improve the need for financing and tax credit financing in Canada is also increased.If a production can be properly pre-sold and distributed, and tax credit financing utilized as an integral role in initial production cost financing – well, that simply creates a perfect formula for financial success. To be successfully financing a production must have the proper amount of leverage, different exit and distribution strategies, and the proper utilization of tax credit and tax credit financing.Working with the proper parties can often achieve 50-75% immediate financing of your tax credits in Canada. The remainder is of course simply a buffer for the lender to allow for financing costs themselves, and any time lapses in the final approval and cheque from federal and provincial players that regulate the new generous tax credits. Tax credits are increasingly generous in Canada – just in the last year or so a number of enhancements have been made to the various programs at various levels of government. Take advantage of these credits, and further investigate monetizing those credits at time or filing of prior to maximize the cash flow and overall financing strategy of your film, TV, or animations projects.

Article by Stan Prokop

Lease Financing – Canada continues to be challenged, as is the rest of the world, for financing options and alternatives for asset financing and acquisition. Every Canadian firm has probably examined all their financing options over the last year or so., which have been particularly difficult re obtaining proper business credit and financing.

Prudent business owners will examine all their financing options in the Canadian market place. Naturally they are looking for solid rates, terms, and structures for every aspect of their business financing needs. For equipment acquisition that often is a lease financing scenario. The very positive aspect of equipment lease financing in Canada is that is can serve the financing needs of Canadian business at every stage of the business cycle, start up, growth and expansion, and special project needs.

Most leases for business financing of assets in Canada tend to have three to five year terms. The quick questions for asset financing in Canada is ‘ so what can’t be financed ‘ because currently almost every type of asst is financeable based on proper credit and structuring of a transaction. That of course means vehicles, machinery, plant equipment, computer technology and software, etc!

The smartest thing a business owner can do if they are not ‘ lease savvy ‘ is to work with a trusted financing advisor or intermediary who has credibility and experience in this area of finance.

Leasing works best and is most applicable to Canadian business financing when your company has high capital requirements in excess of your ongoing cash and credit lines. In many cases leases represent 100% financing, sometimes it is 100%+ financing as leases can cover delivery, installation, maintenance, etc.

Preservation of working capital is top of mind for most business owners, and leasing fits that challenge nicely.

The general rule of thumb in leasing is the old adage, ‘ if it appreciates buy it – if it depreciates lease it!’ When your asset and capital expenditure items will need replacement or will have depreciated significantly in a three to five year period – well… thats the time to consider lease financing.

We believe strongly that leasing is best provided in Canada by independent third party firms who specialize in this type of financing. What the leasing industry likes is that equipment financed via lease earns profit and generates revenues for Canadian firms.

As you contemplate a business financing lease you should ensure that you are addressing and thinking about some key issues – They are basic but important -

1. Your lease term should generally match the estimated life of the asset – bottom line? Don’t enter into a 5 year lease for a personal computer upgrade… they might not last that long.

2. Ensure your monthly payments reflect your repayment and cash flow budget and request seasonal or quarterly payments if applicable

3. Determine what type of lease you need – capital lease to own, operating lease to use and return, it’s that simple

Properly structured leases (we recommend using a lease advisor) can impact in a positive way your financial statements and tax issues. These should be discussed with your accountant, or as noted, lease advisor.

Some equipment leases can float, most quite frankly are fixed rate – Rates currently in Canada are very low and competitive in the 2010 business environment.

In general lease approval in Canada is solely based on your ability to pay, so a proper package should be put together demonstrating you’re historical and future cash flows, etc. Naturally that type of info is required in almost any business financing.

Leasing in Canada – examine the possibilities!

Article by Stan Prokop

Franchise Financing in Canada continues to be both a great opportunity as well as a challenge in obtaining the right financing, the right amount of funds, and most importantly the rates, terms and structures that will maximize your opportunity as a franchise entrepreneur. Clearly the concept of owning ones business in an already success and proven business model is appealing to many Canadian business people, men and women alike.

When clients come to us for franchising assistance they are focused on a number of key different areas relating to the financing and acquisition of their franchise. Many franchisees do not have a financial background – their experience is often based on their career and industry experience in the field they are looking to be a successful franchisee in. Therefore we encourage all franchisees to seek the advice of a credible, experienced and trusted financing advisor who can guide them through the franchise financing process.

So what are those prospective franchisees looking for? They are looking for the right amount of funds that will finance their venture to the extent that it can meet their profit expectations based on their own personal financial contribution, as well as of course the borrowed funds.

The century old phrase ‘character / capacity/capital ‘applies to all borrowing, and certainly franchise financing is no exception. The financier wants capable trustworthy borrowers who are prepared to make some sort of contribution of their own from a financial perspective. Credit quality of the borrower is one of the many factors in franchise financing. It is certainly not impossible to get financing if you have either a low net worth or a tarnished credit score, but it certainly becomes more challenging.

As a franchisee you want fast turnaround in the financing component of your new business. Our experience is that if the owner is properly prepared, with a decent business plan and all the necessary miscellaneous documents, that a franchise financing can generally be completed within 2-4 weeks. Miscellaneous documents that are part of the entire financing process include your personal financial information ( net worth, etc), as well as items such as your executed franchise agreement, proof of deposit, your premises lease, etc. Some clients come to us for a 5-7 year term financing for their new business, but they only have a 3 year premises lease. Your premises lease must match the term of your loan, that’s just common sense. If there is no premises there is no business, and therefore there is no loan payment. Again, just common sense.

Franchises in Canada are financed in several different ways, the major method being a specialize loan program called the CSBF program. Additional financing is done via term loans for working capital, equipment financing for hard assets. And generally a small operating line of credit at the opening of the business.

In the current more challenging financial and economic environment we believe the best franchise financing is achieved by combining several of the above financing options in a structure that makes sense for the business based on cash flow repayment ability and the collateral involved. Many soft costs such as franchise fees cannot really be financed, so they are often taken care of with the franchisees own investment portion of the total venture.

As a general rule it is somewhat easier to finance the purchase of an existing franchise, as the assets, cash flow, and overall value of the business are more established.

So let’s recap some key bottom lines on franchise financing -

- Start your financing discussions and preparation early on in your business venture process

- Determine what mix of financing you need, which will be combined with your own investment

- Ensure you have a proper presentation and business plan – if you don’t have one get one done by an expert

- If you don’t have a financial background seek the advice of an experienced franchise financing advisor who can work with yourself and the franchisor to get the best total overall franchise financing solution for your proposed new business, relative to rate, term and structure and any collateral required.

That is a successful franchise strategy.

Article by Stan Prokop

Floor plan financing in Canada is clearly a niche financing industry. The landscape for floor plan financing has changed dramatically over the years, with this type of financing become a very specialized field. When clients ask us for floor planning information several key points are always up for discussion. We will focus our article information on non-automotive floor plan financing.Canadian wholesalers and retailers in non automotive markets often find it critical to keep sufficient inventory on hand for product sales, demonstrations, and order fulfillment. This type of focus on inventory is important to Canadian business owners and financial managers. Your business has the need for inventory and floor plan financing that gives you’re the amount of credit limit you require to grow and prosper.Interest rates charged on floor plan financing are important – equally as important is your ability to maintain enough gross margins to absorb floor planning charges and still generate a profit.Floor plan financing in Canada is available for any wholesaler or retailer who is aligned with reputable manufacturers. Historically floor plan financing was for select industries but now it has broadened to a variety of consumer and commercial products. In the 1980′s and 1990′s floor planning of computers for OEM’s and Value added Resellers was an important component of the computer industry.Floor plan financing is all about inventory. You need inventory as your products are sold to your customer based.In many cases it also makes serious sense to ensure you have a financing program in place with the customer base also that is a logical extension of the floor plan financing that you yourself carry.Floor plan financing is somewhat of a ‘ risk’ based financing, in that your floor plan lender always carries the risk that your firm might sell product ‘ out of trust ‘ – which is the finance terminology for the collateralization of your inventory by your floor plan financing firm. A significant amount of emphasis in any floor planning arrangement is the focus that is put on your firms overall all credit worthiness and ability to conduct business in an honest and ethical manner. Clearly your business model also necessitates that your have strong inventory and control systems in place which allow you to report regularly on the inventory that is financed. In Canada the Person Property Security Act and the concept of ‘security interest ‘is the lending documentation by which your inventory is financed and collateralized.While physical inspections and regular and ad hoc audits are a key element of floor plan financing clearly the use of technology and the internet has significantly enhanced your ability to interact with your floor plan lender. At the root of all floors planning is the ability for the manufacturer, yourself, and the floor plan financier to communicate effectively. The overall all credit worthiness of your company drives the final decision on what amount of maximum floor planning credit line can be provided. We often speak to our clients regarding floor planning facilities on the need for your business to understand your inventory turns – in a perfect world you want to have a strong inventory turnover which will drive a lower cost of carrying floor plan financing.In many cases the receivables you generate out of a sale of inventory can help to bolster your overall floor plan financing arrangement. The ‘ worst case scenario ‘ in any floor planning arrangement is your firms inability to pay the floor plan financing at which point measure are taken to repossess product. No one wants that of course. That’s the most negative aspect of floor plan financing – the positive aspect is that it provides tremendous financing power for sales growth.Floor plan financing is a key element of business finance for any wholesaler or retailer of manufactured products by well known household and industrial names. Speak to a credible, trusted and experienced financing in this area to determine how floor plan financing in Canada works and how it may improve your revenues and profits.

Article by Stan Prokop

Most Canadian business owners and financial managers probably don’t know, in our opinion at least, that financing options exist in Canada for purchase orders and inventory. In covering off financing alternatives such as this with clients we tend to lump these two types of ( relatively unknown ) financing in with the terms ‘ alternative financing ‘ and asset based lending.Clients who typically have a need for inventory or purchase order financing have typically been unable to arrange traditional financing with their banks or other term lenders.One of the most common needs that drives these types of financings is the global economy – what do we mean by that. Simply that many clients are telling us that their new suppliers over the last several years are in the U.S. and China, and in some cases Europe. Naturally it is obvious that suppliers in those countries are unable to extend credit to Canadian firms. You know what comes next! They require cash up front in order to release goods.Even in the best of economic times Canadian business would have a challenge in financing inventory and contracts, paying up front, etc. 2008 – 2009 and the start of 2010 certainly is hardly the best of times, so Canadian firms, especially small to medium size, face huge challenges in generating cash flow and working capital to fund inventory and purchase orders. (Let’s not forget that at that point you have only made the sale and now you have to wait 30-60 days or longer to get paid. Therefore your investment in inventory and receivables becomes even greater.What is the solution? That solution is simple to consider inventory or purchase order financing as a mechanism to finance your business. This type of financing can be arranged for firms of all size, it will ensure your suppliers get paid promptly, and can be generally set up within a 30 day period if you employ the services of a trusted, credible and experienced business advisor in this area. So what is involved in P.O. financing and inventory financing and how does it work. Any type of business financing requires a standard application process, i.e. info on your firm, its owners, your current financial position and prospects, etc. Naturally strong emphasis is place on the actual orders and contracts those selves, or the type of inventory that you require that needs to be financed. It is somewhat important that your clients and suppliers can be validated – i.e. are they legitimate companies who have the ability to either supply your firm, pay your firm, etc. A well known name as a client or supplier certainly helps, but with the assistance of the internet, Dun and Bradstreet, and other sources most companies can be validated today from anywhere!When you purchase orders are financing your suppliers are paid up front on your behalf – you pay the purchase order firm generally as soon as you are able to generate a sale and receivable. For that reason it is necessary to ensure you have either a banking or receivable financing/factoring facility in place Purchase order financing has a higher cost of finance that traditional financing, so it is also important that you have some good gross margin profit on your transactions, as those solid margins help offset the cost of the financing.In summary, purchase order and inventory financing are becoming more popular in Canada, although many business owners are still unfamiliar with this unique type of financing. While the financing is costly it can nonetheless help you grow sales and profits tremendously. Investigate this financing with a specialist to determine if it’s the right growth driver for your firm.

Article by Stan Prokop

We read very recently that critics of film tax credit financing in the U.S. ( This was in Philadelphia ) felt strongly that the benefits of tax credit financing were negligible and did in fact not stimulate economic growth or tax revenue.We certainly don’t intent to weigh in on U.S. politics, but it seems very clear that the Canadian governments, both federal and provincial still strongly feel that the economic benefits of the recent tax credit increases over the last year or two in fact do bring in some cases a multiple of 5-10 times in financial benefits to the government. The bottom line is that film, television and digital animation credits in Canada are some of the most generous in the world, and these credits play an integral part in the financing of many productions in our aforementioned 3 key entertainment areas. In order to stay on top of film TV and digital animation financing it is necessary to understand key elements of tax credit financing in the Canadian environment. Financing of a production can be a daunting, frustrating, and complex journey. Ultimately you want to also ensure you have access to an experienced, credible and trusted financing advisor in this specialized area of finance.Two key strategies are most commonly used in tax credit financing – essentially the actual financing of a tax credit when it is certified and in fact filed, and, equally,or perhaps more popular, the financing of tax credits now on the assumption they will be certified and eligible for government financing. This 2nd process we have describe here could be called ‘accrual tax credit financing ‘.As a producer, director, or owner of a project (Perhaps you are all three?!) you want to ensure you interpret the different tax credits properly – that will allow you to maximize the financing you are eligible for.Most commonly use also want to set up a separate legal entity for each project, one that allows you to maintain specific and separate legal and financial records for that project.As unpopular it might be to focus on areas such as payment of taxes, keeping filings up to date, etc you must ultimately attend to these key issues as they are intrinsic to the proper financing of a tax credit. The financing of a tax credit is clearly one of the most innovative methods in which you can generate valuable cash flow and working capital for your production. In many cases other parts of your debt and equity financing will always come back to your ability to both generate tax credits, and even moreso, finance them in a timely and economical fashion. When you utilize a film finance tax strategy you are in effect helping to reduce part of the complexity of the film financing process. We can’t keep forgetting that our advice also refers to television and digital animation credits also. Monetizing your film tax credits demonstrates your ability to ensure you are exploring the latest trend in entertainment finance – While equity and banking credit are more challenging to obtain then ever the tax credit finance strategy clearly creates a win for all parties. It monetizes a great source of financing, and the fact that you are not giving up expensive equity or taking on additional leverage debt clearly makes for a positive financing strategy. No payments are made on tax credit financings, and your advance is ultimately set off against final receipt of government funds, which can be sometime in the future.

Article by Stan Prokop

Cash flowing and the monetization of your film tax credits in Canada can be a very large aspect or part of your overall production financing success in today’s challenging entertainment finance area.Whether your film is 100% Canadian, or a co – production you should be aware that your tax credits for Ontario film grants, B.C. film grants, ( those seem to be the most two popular provinces ) can be financed for cash flow and working capital. It is certainly not unusual that tax credit can be anywhere from 25-40% of your overall finance plan, and if that is not significant then we don’t know what is! Its that sort of cash flow and financing commitment that keeps your productions moving forward from a viewpoint of the equity and debt investors you need to engage to successfully finance a production, whether that be television, film, or of course the ever growing digital animation area. Those funds become an intrinsic part of what is generally known as the ‘soft money ‘component of your production. When you rationalize Canadian film tax credits into your overall production financing you can make a strong case that even if a movie or TV show is shot elsewhere than in Canada in certain instances it makes total sense to use Canadian cast members, and post production, all of which significantly contribute to your tax credit status. Everyone seems to agree to day that film, digital animation and TV financing is very much a ‘cobbling together ‘of resources which will end up funding your entire plan. The concept of co productions and co ventures seems to be a very strong part of what is happening now in independent film and TV financing. While film tax credits seems to be falling apart and in fact disappearing in many parts of the world the Canadian environment is very robust. Tax credits can be financing on a ‘when filed ‘basis, or, if your production has good credibility and financial reporting, financing can be provided on an accrual basis. Clients will often ask what the pre requisites are for tax credit financing in Canada. As different and unique as is the entertainment industry the reality is that you’re simply need some careful up front planning and documentation to ensure you can qualify and obtain financing for your tax credits. Generally that comes in the form of having pre sold some of your product in question ( a film, tv series, etc ) and having a financing plan in place that address the three components of debt, equity, and tax credits. Having a specific budget in place for your project, and having that budget validated with respect to which amounts will qualify for tax credits is critical. We can assure you that if your budgets haven’t been reviewed by a proper entertainment accountant then that will be a part of your financing term sheet with respect to requirements for the proposed financing. While some experience in having been approved on previous projects for tax credits is desired, it is not a 100% pre requisite – but when hasn’t experience ever not helped in business and in financing?Whether you view the financing of film tax credits as a mainstream or alternative strategy the reality is that this will make up a key component of your financing. Ultimately you have to be able to verify your numbers and provide some level of clarify around your eligibility for the tax credit. In Canada tax credits can be financed on a when certified and filed basis, or, even more attractively, on an accrual basis. Funds are reimbursed to you as you spend them, in effect doubling up on the cash flow and working capital requirements of your project.Speak to a trusted, credible, and experienced film tax credit financing advisor in Canada who can provide you with financing information that should allow you to complete you’re financing in the most cost effective manner to yourselves as owners of your productions.

Article by Stan Prokop

It’s not a myth or urban legend. Financing inventory and financing purchase orders in Canada is actually possible and in most circumstances the cost of this financing is significantly offset by your firms ability to increase sales, generate additional profits, and lower competitive pressure .The bottom line is of course more larger orders and contracts, in some cases from clients you were not able to satisfy in the past based on our financial strength or other challenges.Let’s step back a bit and define some of our key metrics. In its simple form the financing of inventory is simply your ability to finance, or rather, ‘ margin’ inventory on an ongoing basis. The inventory is of course simply the collateral. Clients talking to us about seeking specialized inventory financing are often in the position of having inventory form a large part of their current assets, in conjunction with accounts receivable of course. So in a perfect world you go to your Canadian chartered bank and ask they to finance you inventory and free up cash flow. It’s that simple right? We can hear you already in the background, and we’ll be the first to admit it’s not a perfect world. Even seasoned Canadian business owners and financial managers realize the inventory is not high on the list of bank financing in Canada, especially if you are a small or medium sized firm that does not have the bench strength to satisfy typical bank criteria which focus around everything EXCEPT inventory, i.e. ratios, covenants, external collateral, personal guarantees, etc.For inventory financing to make sense you should realize that your inventory has to be marketable, it can’t be old, stale and slow moving. You also have to be in a position to demonstrate that your inventory turns regularly, and that you have sufficient gross margin to carry the financing costs associated with financing inventory and financing purchase orders. P.o. Financing is of course the ‘ kid sister ‘ to inventory finance, and such a facility contemplates direct payment to your suppliers by the p.o. financier , allowing you to of course satisfy supplier payment amounts and terms, while at the same time fulfilling client orders and contracts .So if the bank is not your best bet how actually are these two asset categories financed? The reality is they are financed by specialized firms, and in the case of inventory pure play financing we encourage clients to bundle their inventory financing with a full asset based lending line of credit via a non bank private finance firm. This type of facility margins both inventory and A/R to maximum leverage, giving you in essence unlimited working capital to grow.To qualify for financing inventory and financing purchase orders you should generally have solid management and industry experience, good accounting and reporting around your inventory, as well as the aforementioned marketable product that can be resold by the financier if a problem arises.Speak to a trusted credible and experienced Canadian business financing advisor on ensuring your understand the benefits and qualifications for this valuable financing tool and strategy.

Article by Stan Prokop

Purchase Order financing, as well as inventory financing is two relatively new alternative financing solutions in the Canadian business environment. These two solutions provide additional flexibility when combined with traditional financing sources provided by your Canadian chartered bank or independent finance firm.

Traditional business financing in the context of working capital and cash flow revolves of course around the traditional current assets of receivable and inventory. Even if your firm is well financed and has a traditional bank line of operating credit you may have challenges in fulfilling large orders and contracts. This challenge becomes equally daunting when you don’t have traditional financing, so the ability to generate cash to fulfill larger orders and contracts becomes seemingly impossible.

Purchase order financing can provide you with the capital to fill those large orders and contracts, and, if properly put in place; can be very complimentary to your current financing.

As we have noted the concept of purchase order financing, aka ‘P.O. Financing ‘is a relatively speaking, new phenomenon in Canada.

So how does it work? Simply speaking financing is put in place to cover your material costs and direct labor costs, which are of course a significant part of your order or contract. We can safely say in many businesses that is 60-70% of the total order or contract based on most gross margins in any industry.

Your firm therefore has the working capital to finance your production.What’s left of course is essentially the profit on your P.O. or contract.

While it sounds relatively simply and easy we would point out some key critical issues that will allow the Canadian business owner and financial manager to determine if his or her firm qualifies for such financing. We can first of all say there has to be sufficient proof that your purchase order or contract is with a valid, credit worthy party. Naturally if there is any doubt that your order might not get paid, or that the customer is not credit worthy that precludes successful completion of any purchase order financing.

You should also not view the purchase order financing as a long term financing solution, it is not that. The funds are generally repaid immediately when you have completed your order / contract.

There are also some technical issues that need to be addressed if you have secured financing arrangements in place already. For example, if your firm has a bank line of credit they would be required to acknowledge the security that is taken in the Purchase order and resulting receivables that you create out of that order.

In our own experience Purchase order financing frankly works best when there is not a secured lender in place already, but that’s just our firm’s observation. Additionally on occasion certain other collateral or personal guarantees might be required. We would hasten to add that if you have already provided guarantees to the bank or other firms it would seem logical that you would provide them on the purchase order financing, which is somewhat of a riskier transaction for the lender.

Another very critical point is the whole issue of gross margin. The issues are that you need good gross margins to complete purchase order financing! A firm that is in low margin very commodity oriented business is not a strong candidate for P.O. Financing, because the combination of cost of goods, labor, overhead costs, and financing costs of the financing leave very little for the business owner. So categorically good gross margins make a much better P.O. Financing deal.

So why has this type of financing become popular – that’s fairly easy to understand. First of all the current Canadian business financing environment is challenging – therefore any alternative financing vehicle has a strong chance of being embraced and becoming more popular. After that it simply makes sense that p.o. financing can be very successful for your firm if it gives your company working capital you didn’t have,, it allows you to grow and profit at greater levels, and overall improves your competitive positioning within your industry.

We strongly recommend that if you consider Purchase order financing that you enlist the services of a credible experience business financing advisor who can maximize your cash flow and working capital with this unique innovative type of financing.