Working Capital and Marketing Capital.
This article continues the series of articles about the value of properly prepared business plan for entrepreneurs seeking small business financing. In this article we will talk about working capital requirements, marketing capital requirements and financing options available from different lenders.
Working capital, required for the business development in order to execute strategic plan, is super important. Without working capital available, strategic plan simply won’t be implemented, and entrepreneur could waste a lot of time on nothing really. Quite often own cash flow generated by the business is not enough in order to undertake any strategic plans and changes. The same goes for marketing, very rarely business owners can invest substantially higher amounts into marketing without going out of their own earnings and borrowing funds for marketing program implementation.
Canadian entrepreneurs have very little options when it comes to getting working capital money, cash flow support funding and marketing funding. As previously mentioned the first step is properly prepared strategic plan and business plan. Second part is to try to gather as much personal financing as possible, since amount of personal funds will drive possible amounts of small business loans or cash flow loan for the business.
Most banks have no programs to finance working capital requirements for small business loans. Our firm has several lenders that given properly prepared business plan, strong credit profile and net worth of the entrepreneurs could offer working capital financing and marketing capital financing. Working capital and marketing financing is registered on the title of corporation, and personal security guarantee, typically not including charge registrations for personal properties of borrowers.
What are the major criteria in order to qualify the business for working capital financing?
- 2 years of strong financial performance
- Continuous improvement of the business performance
- Clearly identified uses of funds
- Properly prepared strategic plan, business plan
- Justified budget for the use of funds
- What are the typical uses that working capital funding Is used for ?
- Short term salary coverage
- Petty cash requirements
- Small equipment purchases
- Printing needs, office needs
- Promotional efforts and incentives
- Marketing requirements
Is there any typical debt service coverage required to qualify for working capital financing?
Yes of course, debt service coverage ratio definitely has to be over 1.1X, but ideally debt service ratio has to be over 1.25X to make sure there is enough room for accidental costs and expenses during the first year of new loan absorption.
Many entrepreneurs ask us if working capital financing or marketing financing can be used partially for their personal expenses. The official answer is no, but if the business is owner operated, and entrepreneur is involved in the business full time, then working capital financing obtained through a small business loan program partially could be used to offset personal expenses, since most business owners finance their businesses out of their personal pocket this is reasonable.
What kind of marketing expenses could be financed from small business loans funding working capital requirements ?
When we get this question from entrepreneurs, we normally look into their previous marketing initiatives and expenses and look for items that worked well and that did not work well as well. There is no point of funding marketing efforts that did not work previously, don’t forget continuous business improvement is one of the criteria’s of the funding but also future goal as well.
Also for small business loans to be as efficient as it can, marketing financing should be allocated to the programs and initiatives that are expected to bring maximum results. We can use historic data as a bench mark, but also our associates have extensive knowledge and data base of strategic plans that worked well previously for similar businesses, so our advice counts a lot here.
How quickly working capital financing, could be obtained through small business loans program?
Typically our associates can deliver a result from 2-4 weeks from day 1.
As usual, we would like to answer any of your questions in person and wish Happy Financing every one!