Finance Column: Exploring Alternative Financing

One of the biggest struggles Canadian manufactures are faced with, particularly successful ones, is managing cash flow.

When business is good and the market is active there are plenty of opportunities to grow your business, whether it is from existing clients or new prospects, but it is managing these opportunities that can create problems. It is almost a “Be careful what you wish for” scenario.

A lot of potential clients seek me out because they are looking for ways to put more equipment on their floor without taking funds from their working capital.

Bringing on new business, or larger volumes from existing clients, puts pressure on cash flow because of all the additional expenses required to support the new opportunity—this could be anything from needing to purchase more material, increases in tooling, more operators or programmers, and the list goes on—none of which is financeable beyond using a bank operating line, which for most businesses, big or small, is usually very limited in relative terms to what is actually needed.

The reason most bank lines are limited is because the security required by any bank, or tier one institution, can be two or three times what they are prepared to put in place. Since the bank is in a very secure position they are able to offer relatively cheap rates for an operation line (normally a couple points above prime), but it’s also the very reason why only a small amount of funds are available.

It really isn’t drastically different than a standard mortgage where the rate is low, again in relative terms, since the lending institution is in an equity position from the onset, and the amount of funds lent are only a percentage of the value of the property.

One of the first places a growing company can look to raise working capital is from the equipment currently on their shop floor. Most traditional lenders do not place much value on manufacturing equipment, but an asset-based lender, particularly one who has a background in machinery and equipment, will happily raise money against good used equipment since they understand re-sale values and know where an active market can be found in the unlikely event of a default.

However when machinery and equipment is being evaluated for these purposes it is important to understand how a lender looks at values. The exit strategy for any lender would be selling the equipment at auction, so the amount loaned against the equipment will be based on what it is perceived to bring at said sale less any costs associated with getting it picked-up, delivered, cleaned and/or repaired.

There is no doubt the healthier the business the better the loan-to-value ratio, but equipment itself may not raise the amount of capital required and other avenues need to be found.

Even though this is a great strategy for adding new equipment to the floor, a question I often get is how to raise enough money to purchase an industrial unit or buy a commercial property. As my customers grow and become more successful they look at their monthly rent cost and realize that same money could be used to make a mortgage payment.

In this instance another place to look for capital could be the world of private mortgage lending. Private lenders are equity lenders. First they look at the quality of the property and their relative security position on it. Next they look at the borrower’s situation to determine whether or not the individual is someone they want to do business with.

Unlike banks who have an application process based on a rigid scoring systems, private lenders adopt a common sense approach to lending. They understand that not all income is verifiable, and sometimes a person’s credit score could have been adversely impacted for justifiable reasons or be non-existent in the case of new immigrants.

Private mortgages are filling a growing need as banks are becoming increasing more stringent in their lending criteria, often shutting their doors to self-employed individuals. Private lenders on the other hand create their own lending guidelines, and they often provide a quicker more flexible method of financing.

Regardless of whether it is equipment financing or mortgage lending, moving beyond a traditional bank may provide an opportunity which would otherwise be unavailable. Till next month…

Ken Hurwitz, Senior Account Manager with Blue Chip Leasing Corp. in Toronto, has years of experience in the machine tool industry and now helps manufacturers of all kinds with their capital needs. Contact Ken at (416) 614-5878 or ken@bluechipleasing.com.