What Comes First – Finance Strategy or Business Strategy?

Everyone knows business strategy and finance strategy are interrelated. But which one should dictate?

If you are an entrepreneur, your future is your most valuable asset. Let’s face it- investors can only generate interest on their money. It takes an entrepreneur to generate profit! For an entrepreneur, business strategy must dictate finance – never the reverse. Everyone knows business strategy and finance strategy are interrelated. But which one should dictate?

The first place to start is to imagine the future you would want if you had unlimited resources.

When Wayne got turned down by the bank for the $1 million he needed to grow is business, he made an assumption that resources were scare and expensive. Wayne began to dwarf his vision of his company’s future. That’s what happens when you let finance strategy dictate business strategy. Wayne was not even aware of the assumption he had made or the devastating effect on his company- until I brought this to his attention. We worked with Wayne to re-vision his potential, assuming unlimited resources, built upon his deep and real passion and developed a strategy that resulted in him attracting $10mm for a minority stake of his company.

How did an entrepreneur who got turned down by the bank for $1 million get $10 million and keep control? Certainly not based on his past!! He shared his passion about the future he really wanted to build!

When you follow your passion you get the best outcomes: You easily attract customers, vendors, talent and finance. Pursuing your passion lets you capture your best opportunities- for profitable growth. Faster. Safer.

When you don’t follow your passion, you end up with a sub-optimal strategy. The result is extra risk making it much harder to attract customers, vendors, talent and especially financing.

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Is There A Better Way To Finance A Business Loan? Consider An Asset Finance Strategy

When you need asset finance and a business loan in the 2010 economic environment alternatives are great. One of those solid alternatives is an asset based lending arrangement which focuses on what counts, your assets!

As a business owner and/or financial manager you are looking for business financing that makes sense. ABL is the acronym for one of the more exciting business financing alternatives that is growing in popularity every year in Canada. Are we actually saying that asset finance via an asset based line of credit is ‘ exciting ‘? We will let you decide that, but if this financing is easier to achieve than bank financing, is cost effective, and provides you with unlimited capital… well our clients are excited… you make your own thoughts on that!

Asset based lines of credit simply are drawn down by your firm based on the value of ongoing assets. The assets that are always there are inventory, A/R, and to some degree your fixed assets that aren’t already financed. By collateralizing your assets, and, most importantly, leveraging them to the max if you need to, you are creating available working capital.

We are always explaining to clients that this leverage of assets is not taking on debt, you are not borrowing on a long term basis, and you are simply monetizing current and fixed assets based on current values. What are those values, typically they are 90-100% of receivables under 90 days, 40-75% of your inventory, and a liquidation type value on any equipment you want to temporarily monetize. Clients always ask – ‘ Do you mean that we can borrow, if we need to, on a temporary but ongoing basis on our fixed assets?”. The answer is yes, if you are considering this type of financing strategy.

Let’s cover off the two key points clients always tend to focus on when they are investigating this unique business loan strategy- namely costs, and timelines to get the working capital facility in place.

In some ways cost is the most difficult area of explanation and investigation in an asset finance working capital facility. Putting aside the normal due diligence or commitment fee required to get a facility in place the reality is that there are a couple of key drivers that affect pricing. Asset finance revolvers can be just as competitive as a Canadian chartered bank financing (and less onerous to get approved) but prices varies all over the board in Canada because of the fragmented and specialized nature of this type of financing.

Typically we see rates as low as 9% per annum and as high as 1.5% per month. That’s a big spread and ultimately it depends on the size of the facility, the mix of your current assets, as well as any perceived industry or business risk associated with your firm. But again, we remind the reader, what price would you pay for unlimited working capital?

Typically it takes 2-4 weeks to close such a facility. In Canada as we noted the market is fragmented and these lenders are very focused, specialized, and by nature experienced in what they do, which is value your assets and finance them!

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