in Canada. What are the methods that Canadian business uses toensure that working capital investment is maximized? Let's dig in.When business owners/financial managers are challenged on how to finance inventoriesit's important to focus on two areas - we'll call them
' tips' and ' traps'!
Financing inventory typically revolves around either retail or commercial concerns.Smaller retail businesses have a huge challenge as banks and other commercial lendersare reluctant to lend against inventory. Compounding the problem is the fact they viewthat type of business as an ' all cash ' business - so why would it need financing?Typically when inventory is financed by a bank or commercial concern it's important torealize that it's always financed at cost. Another good thing to know is that in certaintypes of financing actual physical counts, inspections, or appraisals will be required byyour lender - again typically a bank or non bank commercial lender . That won't always be required, but on occasion it’s an absolute must. The lender needs to determine the
'margin formula '
that they will lend against on an ongoing basis.Margin formulas vary significantly based on several key factors. They include an analysisof which one of the three stages your inventory is in (raw materials, work in process, andfinished goods). Businesses that are able to demonstrate they have perpetual inventorysystems in place stand a much better chance of ' borrowing power ' when it comes tofinancing inventories as part of your overall ' current assets'.Your overall gross profit also plays a key point in financing. Ultimately important is thelenders / banks opinion on how marketable your goods are under a worst case ' forcedsale ' scenario.Many business owners consider the Canadian Small Business Loan program for thefinancing of their business. They wrongly assume that the program covers some sort of working capital, cash and inventory components. That is not the case!
In that program only 3 classes of assets