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Innovative Funding Solutions: How Alternative Finance Business Loans are Changing the Game
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The Rise of Alternative Finance Business Loans: How to Capitalize on this Growing Trend
Business loan success, whether it's bank loans or alternative finance often has owners/managers wondering if they've got what it takes.
INTRODUCTION
Small and medium sizes business owners know they are the backbone of the Canadian economy. But financing their businesses with traditional bank loans can be a major challenge, if not impossible. Alternative lending options can provide that access to business capital on terms that often can be more flexible than bank loan financing. Let's take a look a the type of financing available and which type of alternative lending solution might be suitable for your business.
We're going to try and eliminate the word ' painstaking' from your challenges around funding your company in the SME COMMERCIAL FINANCE marketplace. Let's dig in.
WHAT IS ALTERNATIVE LENDING?
Alternative lending is a type of business financing that provides access to capital outside of traditional banks, most notably bank financing. Various types of Canadian business financing solutions are available under the 'alternative lending ' umbrella - from term loans to business credit lines, as well as numerous other specialized niche financing solutions that are cash flow and debt finance based.
Demand for alternative financing is increasing among early-stage firms and smaller businesses that are growing - Many tech companies in the ' fintech ' business landscape benefit from these alternative lending services versus traditional financing, with a new level of funding confidence to borrowers.
Alternative business lenders provide quick access to capital and are flexible in nature - often custom-tailored to a company's unique situation.
Business funding needs arise out of a number of requirements for any owner/mgr who is focused on growing the company's sales. Typically those needs come from the desire to expand, introduce new products or take on new contracts, or even acquire a competitor.
HOW DOES ALTERNATIVE BUSINESS LENDING WORK?
Understanding how alternative business lending works is all about the type of loan and business financing you are looking for - As in any type of business finance, your firm must be able to demonstrate repayment. Alternative lenders offer more flexible and less restrictive qualification criteria around the numerous financing solutions available.
The main benefit business owners see in alternative finance funding is faster approval than more traditional financial institutions such as banks - Amortizations vary by type of loan, but it can be stated that alternative loans are typically more short-term in nature - Whether it is asset-based financing or a cash flow financing payments are structured around the unique business model and industry of the borrower.
Interest rates in alternative finance are more competitive than even, in some cases they are competitive and lower than bank financing but on balance, alternative financing costs more but provides access to capital.
Are Alternative Finance Business Loans the Key to Your Company's Success?
Financing your business can come from traditional (typically ' bank ') or nontraditional finance sources. Suffice it to say alternative finance has been very much on the rise since the great recession of 2008-9 and the Covid pandemic of recent times!
Each category of loan has different requirements that will help guarantee financing success- therefore our question is - Have you got what it takes?
Small and medium-sized firms, whether you like it or not have both traditional and alternative lenders looking at owner finances and credit history. While many newer forms of alternate finance (asset-based business credit lines, a/r financing, sr&ed tax credit financing, etc) place much less emphasis, and in some cases almost no emphasis on the personal credit of owners suffice to say a higher personal credit score is better!
The absolute fundamentals of any business loan revolve around your ability to provide, or at least ' talk to ' a business plan and cash flow and revenue forecast. These are very basic requirements - they are not rocket science. Also, this is not a good time to be a dreamer - realistic projections win.
GOVERNMENT LOANS
In some cases, all the financing you might need will be ' collateral ' based. Hopefully that’s business collateral and not personal assets! As an example the GOVERNMENT GUARANTEED SMALL BUSINESS LOAN requires no personal assets to be pledged, and actually finances leasehold improvements as well as fixed asset/equipment needs.
Recent changes in 2022 to this federal government loan program included a new cap on financing being increased to 1.1 Million, as well as numerous other finance categories being available under the loan program such as lines of credit, working capital, intellectual property, franchise fees, etc! Government small business loans come with attractive interest rates and limited personal guarantees, unlike a traditional bank loan which requires a full guarantee and potential external collateral.
Also, many EQUIPMENT LEASING firms are able to finance your asset and equipt. needs without outside collateral or a focus on personal owner credit.
BANK LOANS
Finding a great commercial business banker (notice we said banker, not bank) is worth its weight in gold. Given that Canadian banks are the closest thing to an oligopoly (think monopoly) loan requirements rarely differ at banks. Your banking success will deliver loan rates and unlimited access to capital if... and it is a clear "if"... you have:
Owner personal credit
Business commercial credit history
Assets
Cash Flow
Mgmt Depth
TYPES OF ALTERNATIVE BUSINESS LENDING
As we have said each business financing category has some absolute basic requirements. Some of the basics in the alternative finance category? They include:
Term loans - These loans tend to be short-term working capital loans/ merchant cash advances with simple qualification criteria based on a formula of sales and the owner's personal credit history. Repayment tends to be over a 1-year period and financing is quickly accessible, even from an alternative lender such as fintech online lenders, but financing costs are high for small businesses.
A/R Financing/ invoice factoring - Any business with growing sales can benefit from receivable financing - Financing is based on the size and quality of your receivables and factoring facilities allow a business to receive funds as the business generates sales for its products and services - Financing charges are based on a small percentage of the invoice amount, and the requirement to show aged receivables of reasonable credit quality must be met - Invoice financing is probably the most popular type of alternative finance used by Canadian businesses
Inventory Finance - A marketable inventory of goods that can readily be priced and sold as the fundamental collateral of an inventory loan
Non-Bank Asset Based Lines Of Credit - receivables, inventory, and fixed assets are combined into one borrowing facility that can be used on an ongoing basis - Funds are drawn as needed and the business pays for only the amount of facility used in these alternative business loans that mirror bank lines of credit
Sr&ed Tax Credit Financing - the ability to produce a credible SR&ED claim with appropriate documentation - Any Canadian business that conducts r&d is probably entitled to receive refundable tax credits under Canada's Scientific Research and Experimental Development (SR&ED) Tax Credits. While most companies are eligible for these credits, it can take months before claims are approved- Companies can access sr&ed tax credit loans, allowing companies to receive immediate access to their accrued investment tax credit refund. SR&ED financing benefits the company and helps Canadian companies focus on R&D and advances innovation in Canada.
EQUIPMENT LEASE FINANCING - Businesses requiring new assets and technology to increase new equipment to increase production can benefit from equipment lease financing. Businesses can finance new and used equipment and lease financing is a solid cash flow management tool that conserves existing credit lines and helps match cash flows against the life of the asset being financed.
Bridge Loans/Sale Leasebacks - equipment or real estate assets that have been appraised or valued to mutual agreement between business owner and the lender
CONCLUSION - UNLOCKING THE POWER OF ALTERNATIVE FINANCE BUSINESS LOANS FOR CANADIAN BUSINESS
Most SME businesses in Canada will eventually face the challenge of accessing capital - while Canadian banks are the primary ' go to ' the inability of the banks to fund many businesses because of their borrowing guidelines ultimately hinders the growth of many businesses, Startups have an even bigger challenge - Canadian business is turning to alternative lenders to access the funding they need for their growing businesses.
Still not feeling like going it alone? In many cases, your firm has the ability to improve both improve or make more attractive your loan success by working with 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your business loan, banking needs, and alternative solutions for small business owners and growing businesses who can't access traditional loans.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What are the pros and Cons of Alternative Business Lending
Alternative financing is easier to qualify for and funding approval is quicker than banks and business credit unions. Application criteria are generally less strict so companies looking for financing can address cash flow issues with various types of cash flow and debt financing solutions in alternative lending.
The downside to alternative financing via an alternative business loan is the higher cost of borrowing given repayment periods are typically shorter- In some cases, additional collateral and personal guarantees may be required.
What is BDC’s Working Capital Financing
BDC / Business Development Bank is a government crown corporation, a non-bricks and mortar bank, unlike traditional lenders, that provides business financing to entrepreneurs. BDC’s working capital financing solutions allow businesses to finance growth projects and launch new business initiatives, BDC is a complementary lender and its financing solutions complement existing business lines of credit.
Click here for the business finance track record of 7 Park Avenue Financial
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