As economic uncertainty continues, many entrepreneurs are still grappling with the lingering effects of higher interest rates, pandemic-era inflation and supply chain disruptions. For some, the tumultuous climate has strained cash flows, hurting their operations and their businesses’ ability to grow.
In this Q&A, three CWB leaders—Rebecca Schoenhardt, AVP and Market Lead in Ontario’s Waterloo Region; Saman Memon, AVP Commercial Portfolio Development; and Steven Belchetz, Market Lead, Private Wealth, Portfolio Manager, CWB Wealth Management Ltd. —discuss strategies for business owners to unlock hidden equity to improve cash flow and how CWB’s uniquely client-centred approach can help.
Key takeaways
- Cash flow challenges for businesses
Businesses large and small are struggling with cash flow due to high interest rates, inflation and ongoing trade uncertainties. Additionally, technological advancements and annual inventory management costs can add to long-term financial pressures.
- Opportunities in acquisition & expansion
Some companies view this period as an opportunity for growth through acquisitions. But, this requires access to liquidity and the ability to unlock equity—which CWB has the expertise to help execute.
- CWB’s relationship-based approach
CWB focuses on relationships rather than rigid lending policies. Their experts consider factors, such as the business’s management experience and overall financial health, to provide tailored solutions that suit each business’s needs.
What pressures are your clients facing when it comes to cash flow for their businesses?
Rebecca: Let’s look at where we are in the current economic cycle. Yes, the Bank of Canada has been cutting interest rates, but many businesses still experience interest rate pressures. Inflation has moderated, but it has not gone away. Then there is the uncertainty and potential economic impacts of recent U.S. trade policy. Broadly, tariffs and counter-tariffs could be inflationary, and many business owners simply cannot pass along all increased costs to their customers. Of course, a trade war could severely slow down the economy, not to mention its effect on the Canadian dollar, which is a real challenge for companies buying goods or services in other currencies.
Saman: This is all happening at a time when many businesses are finding their accounts receivables are already stretched—it’s taking longer to get paid, basically—leading to a decrease in their liquidity
Rebecca: And then there are the longer-term drains on cash flow. Technological advances in manufacturing or inventory management, cybersecurity—these are becoming almost annual expenses for businesses to keep their technology infrastructure safe and up to date. Put all of that together, and the result, I would say, is that many of the independent business we see are facing a liquidity crunch to some degree.
Those are big challenges. But are there opportunities?
Rebecca: Yes, on the other side of the equation, there are some companies who are actually seeing this period as a chance to think about buying and consolidation. They’re seeing an opportunity to vertically integrate by taking over a struggling supplier, or to grow through acquisition by taking over a competitor. The common thread here is a need for enhanced cash flow, and unlocking equity is an option for businesses looking to meet that need.
How does CWB help business owners unlock equity?
Rebecca: We take a holistic approach to finding the places that the business owners can access equity that may be hidden. Often that leads us to equipment and real estate.
For instance, can we refinance a building, or is there equity in a business’s equipment that can be leveraged? We might also look at the business owner’s personal assets—is there a way to leverage those into more cash flow for the business?
What makes CWB different is how closely our business banking people partner with CWB equipment financing and CWB Wealth. There’s no siloes here—we work together to do what’s right for our clients.
OK, so say I need more liquidity for my business, and I come to you—where do I start?
Rebecca: Well, if you’re already a client, then we should be coming to you with solutions! Our relationship managers will help go through your financial statements and identify possibilities. You don’t need to know anyone on Saman’s team—the relationship manager will be working closely with them behind the scenes to create leverage planning. If equipment financing is an option, the relationship manager will bring in the equipment financing team, or if you’re looking at a shareholder loan, then Steven will be brought to the table. You have a person to support you through the entire process, and they will bring the right partners to you.
You mentioned real estate. How can equity be unlocked there?
Saman: Let’s say that among your business assets is one that’s worth $10 million, and there’s only $2 million outstanding debt on it. We would conduct an appraisal to confirm the value of the building and could work out an equity strip, monetizing a percentage of the equity in the property into a credit facility for the business provided the business maintains sufficient cash flow to cover the additional debt obligations. The equity strip should be a planned and strategic initiative with a clear rationale for using funds in a way that supports the company's long-term objectives.
Or let’s say the business is in a capital expenditure-sensitive industry, and its capital leases are draining liquidity. We could look at taking those leases and back them with the equity in the building. This opens the door to stretch the amortization and free up cash for the business by easing the high debt burden they had been carrying.
And how does unlocking equity in equipment work?
Saman: Sometimes business owners don’t realize they have built up significant equity in their equipment—trucks, trailers or any other machinery.
Our equipment financing team can appraise the value of a company’s equipment and see how much equity is available. The business may be able to leverage its equity to secure additional funding or refinance its existing debt over a longer period. This works to reduce regular payment obligations and improve cash flow.
Rebecca: One example was a company that needed liquidity after one of its major customers defaulted on payments. That resulted in the business really tapping into its revolving line of credit and struggling to run day-to-day operations. But the business had some unique machinery—literally one-of-a-kind—that had great potential in this company’s industry. We brought in our equipment financing team to see if they could refinance the machinery, tap the equity and amortize it over a longer period. They came up with a plan to extend the amortization from three or four years to 10 years—giving the business a substantial break in terms of their payments and freeing up cash flow.
Saman: Another way we can do this is by looking at their personal assets, and that’s where CWB Wealth comes in.
Steven: That's correct, Saman. Imagine I'm a seasoned business owner in need of some liquidity, but lacking sufficient assets within the business. How could I leverage my personal holdings to inject cash into the business?
One approach is taking a loan against a non-registered investment portfolio rather than cashing out and realizing capital gains. For example, with a $2 million portfolio, you could potentially free up $1 million as cash. You can then invest that amount into your business as a shareholder loan, allowing your assets to continue growing while providing the necessary funds.
Another option is using personally-owned real estate as collateral for a loan or secondary line of credit. Although more complex due to marital circumstances or co-ownership, it remains a viable option. Additionally, whole life insurance policies can serve as collateral for unlocking cash.
Partnering with a bank that specializes in both commercial and personal lending is beneficial. At CWB, our teams collaborate to ensure your loan is justified, secure, and the best fit for accessing additional resources.
What are the risks of leveraging personal assets for your business?
Steven: I've seen firsthand the importance of leveraging personal assets wisely for business needs. It's crucial to have an informed discussion about the risks and have a clear repayment strategy.
Using your personal wealth shouldn't jeopardize your retirement plans or hinder your transition out of the business when the time comes. Partnering with advisors who can provide long-term planning, considering five, ten, or even fifteen years ahead, is key to making smart financial decisions.
In conclusion, leveraging both business and personal assets can provide the necessary liquidity to grow your business and navigate financial challenges. By understanding the value of your business equipment and exploring personal assets such as investment portfolios, real estate, and whole life insurance policies, you can unlock significant funding opportunities. Working with a bank like CWB, which prioritizes personalized service and flexibility, can help you tailor financial solutions to your specific needs and long-term goals.
Next steps for business owners:
- Consult with financial advisors: Engage with wealth management and lending experts to develop a comprehensive plan for leveraging your assets without jeopardizing your retirement goals.
- Evaluate your equipment: work with your CWB Relationship Manager and equipment financing team to appraise the value of your machinery and determine the available equity.
- Analyze personal assets: Review your non-registered investment portfolio, real estate holdings, whole life insurance policies, or other assets to assess your comfort with using them as security for a personal loan.
- Partner with the right bank: Choose a bank that offers a holistic approach to lending, prioritizes relationship-building, and provides flexible financing solutions tailored to your business size and needs.
- Prepare quality financial statements: Work with reputable accounting firms to ensure your financial reports accurately reflect your business health and facilitate better lending decisions.
- Monitor and manage risks: Maintain regular communication with your bank and financial advisors to stay informed about your financial situation and adjust strategies as needed.
By taking these steps, you can effectively leverage your assets to secure funding, improve cash flow, and ultimately grow your business.