A Comprehensive Guide to Preparing Your Company for Financing

Words by our CFO & Co-Founder, Sigfried Legeay

In conversations with our clientele and prospects, I have noted a recurring misunderstanding between the need for investment and the necessity for cash financing.

It is palpable, the sting of our occasional refusals for financing. In our shared industry, we fully grasp the challenges that come with being denied critical funds to nurture growth.

Investment vs. Cash Financing: Making the Distinction

At Canxchange, it is crucial to distinguish between investment and cash financing. While both entail a transfer of funds, the underlying principles, risks, and rewards differ considerably.

An investment involves the capital infusion into a company in exchange for shares or debentures. This is founded on belief in the company’s prospective growth, tolerating considerable risk for potential future high returns. For instance, if a firm anticipates demand for a particular cannabinoid compound and requires resources to manufacture it, they might seek investment. The potential ROI can be substantial if successful, but failure can lead to significant losses, even bankruptcy.

Conversely, cash financing is a provisional loan to facilitate ongoing operations, often backed by assets, receivables, or evaluated based on a company’s credit risk. Consider the same company, which now has an established product. Distributors are on board but impose lengthy payment terms. To manage expenses in this period, they might turn to cash financing.

Deciphering Cash Financing from a Lender’s Perspective

Cash financing is a short-term lifeline, and it’s imperative for lenders to ascertain associated risks. Lenders gauge:

• Company’s Credit Score: Analytical firms provide these, relying on diverse data to project potential defaults and suggest credit limits.

• Loan Insurability: Lenders prefer loans that qualify for trade credit insurance, which often correlates with the company’s credit score.

• Business Trading History: Past interactions and repayment histories with the lender matter.

• Jurisdiction: Operating in regions with efficient, reliable, and transparent legal systems is preferable.

• Management Cooperation & Compliance: Lenders value honesty, transparency, and cooperation during their risk assessments.

Sculpting Your Company for Financing Eligibility

Your company’s data essentially mirrors its operational DNA. In our tech-dominated age, transparency is paramount. Although cash financing generally favours businesses operating for 18+ months, you can lay the groundwork for future growth from day one.

Here are CanXChange’s top suggestions:

• Timely Account Publication: Update your financials with local registries promptly post each accounting cycle to accurately represent your financial health.

• Prompt Bill Payments: It’s simple; pay your bills when they are due.

• Financial Diligence: Ensure your financial records are up-to-date and generate cash flow projections monthly.

• Transparency in Applications: When seeking financing, honesty is non-negotiable.

• Limit Balance Sheet Charges: Minimize external financial obligations.

• Maintain an Unblemished AML Profile: Ensure your operations remain compliant and free from suspicious activities.

• Collaborate with Reputable Partners: Engage with clients and suppliers known for integrity and best business practices.

• Perseverance: Aim to consistently meet eligibility criteria by maintaining impeccable business conduct.

In conclusion, the path to financial viability and attractiveness to lenders requires dedication, transparency, and a commitment to best practices. It’s a journey, and every step counts.

To discuss opportunities for your cannabis business, contact a member of our team today: [email protected].