Inventory options available to Canadian firms are potentially stand alone, or in conjunction with a current financing strategy employed by your company.
Firms require inventory financing to support both on going growth, and, on occasion, large new orders or contracts.
If you company is looking for inventory financing you probably fall into one of the following categories:
1. You require financing for your goods as part of an existing asset based line or credit, or a ' one of ' purchase order financing ' scenario
2.
Your firm is financed via a Canadian chartered bank but you do not qualify for inventory financing under this facility - (Many customers we work with are just able to finance receivables under their bank line, but not inventory)
3. Your firm is financing inventory through a chartered bank facility but the margining of this inventory per the bank formula continually places working capital challenges on your business.
Customer who require inventory financing also need to be clear on and understand the different components of inventory , and how they are viewed by an inventory lender . Inventory in Canadian business financing tends to be in one of three categories, raw materials, work in progress, and finished goods.
We spoke above of inventory as a part of your firm's working capital or operating line facility with the bank. Most of our firm's customers have bank financing that is margined based on 75% of their receivables under 90 days, and a fixed amount of percentage of inventory. Banks probably understand least, and are least able to address the inventory issue. In fairness to the banks there are hundreds of industries, and each industry has unique inventory qualities re salability, liquidation value, etc.
When your company does not have any inventory financing and inventory is a component of your current assets you are clearly challenged from a working capital and cash flow point of view.
So what's the solution? Our firm is of the opinion that the best solutions for inventory financing in Canada is a non bank asset s based line of credit. This is a true working capital and revolving facility that margins your receivables, AND your inventory! Moreover the margining of the inventory is significantly larger than you typical bank advance or cap on inventory. That is because a true asset based lender takes time to understand the breakdown and value of your inventory in your business model.
Although this type of financing is more expensive than bank financing you have significantly more liquidity to your business - that's important!
When we meet with customers to share with them inventory financing solutions we try offer up tools that will allow the customer to quantify their inventory investment. One very basic tool is the ' INVENTORY IN DAYS SALES ' ratio. It is calculated by taking your inventory and dividing by your average days sales. (Sales per year/365!)
You can calculate this annually, quarterly. Monthly etc. An increase in the inventory in day's sales ratio means that purchasing is taking place faster than selling, or that sales are declining and inventories are not declining at the same percentage. It's a great business measurement tool.
In a perfect world your ratio should not be varying too much.
In summary, inventory financing - Canada is a challenge for Canadian business owners. The best solution in our opinion is a true asset based line of credit. Finally, businesses that have a solid inventory component in their business model should employ tools to measure the overall quality and turnover of this key asset.
Work with an experienced and credible business financing advisor if you need assistance in Inventory Financing in Canada.