Advisory board: Get the capital you crave

Jeff Llewellyn, President & Managing Director of Corporate Finance at Norris Penny LLP in Calgary

What can a business do to improve its access to capital in today’s tightening credit market?

Canadian banks are still in better shape than their global counterparts, but recent market turmoil has dampened their willingness to maintain their previous risk levels. As a result, they’ve tightened the parameters within which they are willing to provide debt financing. Companies are having to provide more detailed information to be considered, and businesses in some sectors are finding it difficult to get a bank to look at their projects.

Creativity counts
With traditional lenders tightening their belts, companies have to craft creative solutions to meet their financing requirements. Mezzanine financing is one such solution. Banks or specialized lenders can provide subordinated debt, which is then recognized as equity or quasi-equity by senior lenders. While mezzanine financing is a more expensive option, it’s one way to make your project more palatable to traditional lenders.

You can also explore alternative lenders. Banks need to see strong working capital, a strong equity position and good cash flow. Alternative lenders are more willing to look at other aspects of the business.

Subordinated-debt lenders, for example, tend to make their decisions based on your free or surplus cash flow (i.e., cash available after debt servicing) rather than on assets or overall leverage.

Asset-based lenders (ABLs) are another option if your business model fits their requirements. ABLs look at financing receivables and inventory without the standard covenants traditional senior lenders require. Asset-based lending is not limited to the stringent debt-to-equity covenants and other financial ratios required by traditional lenders. ABLs base their financing on the quality of the assets being financed.

Depending on the specifics of your loan with an ABL, there may be few or no covenants. A fixed-charge coverage ratio, a measure of the available cash flow from the business, is typical to ensure the borrower can satisfy financing expenses. Monitoring fees, which the lender charges to keep an eye on the assets of your business, are normally charged on these types of loans.

ABLs may be a more expensive form of financing, but the additional costs can be worthwhile, particularly for businesses that are growing at a rapid rate or have limited fixed assets.

Cost versus opportunity
Should you explore more expensive forms of financing? You may have no choice, given what could be further tightening of credit policies by the lenders.

Credit markets continue to tighten, and this is not limited to the traditional sources of financing. A business-case analysis comparing the cost of different forms of financing and the cost of not proceeding with your project is recommended.

Preparation is key
Some lenders have a focus in a certain industry or sector. If you have a project that aligns with their focus, and if their risk-management team can obtain a good understanding of your project or business, you may be able to raise debt from that institution. The key to approaching lenders is preparation. The more information you can provide, the faster you’ll be matched with the appropriate source of capital and the better able the lender will be to make a timely decision.

Carmine Domanico, President of Cristal International,an HR strategy consultancy in Brampton, Ont.

How can I identify the employees with the most leadership potential?
That’s the right question, because the raw material of great leaders is developed long before they work for an organization. The environment in which they are born, raised, educated and socialized has a big impact on their future leadership capacity, as it’s there that they develop their leadership skills: social, organizational, communication and decision-making. Allowing people to hone those skills with excellent on-the-job opportunities has an even bigger impact.

To spot those people who have the potential to create work environments that engender the great morale among engaged teams that drives customer satisfaction, I suggest using psychometric assessments, which can accurately describe people’s work-style preferences, such as how they engage with others, what type of information they enjoy working with, what they consider when making decisions and their operating style.

Start by assessing your best current leaders to develop a model that shows what it takes to be a good leader in your organization. Then, test people in your talent pool, comparing their profiles against the model; those who match closest are your best leadership candidates. Use the knowledge gained from this analysis to design an appropriate leadership-development plan for each individual, which includes mentoring and coaching. Successful leaders don’t just happen; someone takes the responsibility to develop them.

Joy Nott, President of the Canadian Association of Importers and Exporters in Toronto

What’s the best way to ensure that my product qualifies for duty-free treatment under NAFTA?

Trade agreements can be helpful but tricky things. Under the North American Free Trade Agreement (NAFTA) between Canada, the U.S. and Mexico, exporters can enjoy the benefit of shipping duty-free goods; the trick is in demonstrating that the goods qualify for the NAFTA exemption from tariffs. The simplest way to do this is to obtain a NAFTA certificate of origin, but important responsibilities are attached to doing so.

Let’s say, for example, you’re a Canadian wholesaler that has just entered into a contract to sell goods to Mexico, and the customer and/or broker is asking you for a NAFTA certificate of origin. The only way that you, the wholesaler-exporter, can sign off on the goods is to go back to the manufacturer and ask if the goods qualify for duty-free treatment under NAFTA. If they do, then you can supply your customer with a NAFTA certificate of origin. Sounds simple, but it’s not. You must do your homework first.

When you sign a NAFTA certificate of origin, you are attesting that the information you are providing is accurate, you are agreeing to maintain records related to the product and you are acknowledging that the goods comply with NAFTA. So, can the manufacturer provide a certificate of origin to you? Are they willing to work with you to prove, if necessary, that the goods qualify? If they do provide a certificate or attest that the goods qualify, is their reputation solid enough to warrant your faith in them?

Remember, it’s not only this sale that’s at risk; so is your reputation with Mexican customs officials, customers and future buyers. A ruling against the product could also affect sales to U.S. customers. If you are selling the same product in the U.S. under NAFTA and it turns out that a false declaration or an error has been made, even if it happened only in Mexico, you must notify all your U.S. clients that the product no longer qualifies for NAFTA preference. This notice will require those U.S. clients to amend the import entry voluntarily and pay any applicable duties. Talk about a customer-service meltdown! Then there’s the question of whether you are obligated by the terms of the sale agreement to reimburse a given customer for the duty paid to the authorities and any out-of-pocket costs regarding this sale.

Trade agreements provide conditional duty relief, facilitating trade with other nations. The key lies in due diligence. Know your product and its components, know your market and, perhaps most critical, know your suppliers. The margins can be small, with very little room for error.