Business Financing Sources In Canada : Funding Options Unveiled

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Unlocking Business Growth: Traditional Financing vs. Alternative Solutions in Canada

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The Evolution of Business Financing in Canada: Traditional vs. Alternative Solutions

Canada's Business financing sources come with various solutions and costs associated with these loans and cash flow monetization strategies to secure funding. For SME/Small business owners, Is it important to understand these costs and alternatives? We think so! Let's dig in.

INTRODUCTION

Securing adequate financing is essential to a business's effective operation and expansion, enabling vital functions such as investment, daily operations, and growth.

In Canada, companies enjoy a broad spectrum of financing avenues. This article intends to juxtapose traditional financing—largely facilitated by banking institutions—with alternative financing models, including receivable financing and asset-based lending. By delving into the pros and cons of each method, business owners can derive insights to guide their choice for funding, ensuring they align optimally with their specific requirements.

CONSIDER CASH FLOW FINANCING WHEN YOUR BUSINESS NEEDS CAPITAL!

Typically (in a perfect world - and we know it's not), business owners & financing managers want to know that they can access cash and loans on an ongoing basis. Knowing and understanding the costs and benefits associated with those different types of financing.

Working capital needs are often the main driver in seeking supplemental financing. When you understand working capital, you are in a better position to source it!

HOW DOES YOUR COMPANY GENERATE CASH FLOW FROM FINANCING

Therefore, you need to know how to measure working capital regarding your overall business needs. That’s part of the problem and challenge because when we sit down and work with clients on operating capital and cash flow needs, we quickly determine that working capital and cash flow mean different things to different business owners.

The problem usually starts with the business owner assessing his working capital needs and business growth plans by looking at the cash in the company bank account. That amount doesn’t reflect the 'near cash' tied up in receivables, inventory, prepaid, etc.

We can go to the textbook definition also (not our favourite way of doing things) and find out that working capital is simply current assets minus current liabilities, calculated by a quick look at your balance sheet. We are not a big fan of that calculation simply because it doesn’t give you a true sense of the turnover of those critical balance sheet accounts such as A/R and inventory. Cash flow is all about the asset turnover of your sales revenue!

By the way, don't assume bigger is better in your total working capital amount. The more funds you have tied up in A/R and inventories will put stress on your cash flow needs. That's where constant asset turnover helps - turning inventories and collecting receivables. You should regularly, at least monthly, calculate your day's sales outstanding and inventory turns.

By the way, even effective payables management will increase cash flow - much to the chagrin of your suppliers! Don't over-manage and ruin vendor relationships which are key to a successful business. Deterioration in supplier/creditor relations is one of the worst things to happen to your business.

So now you have a better handle on working capital, what next? You recognize that cash on hand and growing inventory and A/R aren’t helping your cash flow - you need external financing.

TRADITIONAL VERSUS ALTERNATIVE FINANCING

While both traditional and alternative methods are potential paths for business financing, several significant distinctions exist between them. Here is a list of critical factors to consider when choosing:

Eligibility Criteria: Traditional financing requires a strong credit history and established financial standing. In contrast, alternative financing solutions might be more attainable for businesses with minimal credit or collateral but valuable assets or potential.
Funding Speed: Traditional financing might involve a lengthy process, encompassing extensive paperwork and evaluation processes. Conversely, alternative financing solutions often expedite access to funds, enabling businesses to grasp opportunities or promptly resolve urgent needs.
Cost and Interest Rates: Traditional financing may offer more favourable interest rates for businesses with strong credit profiles. In contrast, alternative funding often comes with increased costs or fees to offset the risk or enhanced flexibility and access to capital.
Flexibility and Control: Traditional financing may impose restrictive covenants or requirements around balance sheet ratios, personal guarantees, and outside collateral, constraining a business's flexibility. On the other hand, alternative financing can offer more freedom, allowing companies to customize their financing strategies to align with their unique needs.

TRADITIONAL FINANCING SOURCES

In choosing between traditional and alternative business financing methods, several key distinctions should be noted:

Eligibility: Traditional financing typically demands robust credit history and financial stability for financing such as bank loans. However, alternative financing could be more accessible to businesses with limited credit or collateral but with significant assets or potential.
Speed of Access to Funds: Traditional financing can involve a protracted process with considerable paperwork and assessments. Man business owners have found that alternative financing often opens access to funding, assisting businesses in seizing opportunities or addressing immediate needs.
Cost and Interest Rates: Traditional financing can provide better interest rates for creditworthy businesses. In contrast, the increased costs or fees associated with alternative financing typically balance the risk or flexibility it affords.
Flexibility and Control: Traditional financing may enforce strict requirements, limiting a business's manoeuvrability. Conversely, alternative financing allows for more customization, enabling businesses to tailor their financing approaches to specific circumstances.

You achieve external financing by the profits you generate from your business and working capital facilities via a bank loan or business line of credit or solutions via an independent commercial finance company. Your needs might be seasonal or ongoing, depending on your industry.

Other more traditional alternatives are bank operating lines of credit. These come with the best rates, currently in Canada's 6-7 % range in early 2023. The only problem? Great rates but difficult financing to achieve as Canadian chartered banks demand solid financials when granting this facility. A better way to achieve full liquidity via this method is to consider a factoring or asset-based facility.

ALTERNATIVE LENDING FINANCING COSTS

Rates in Canada range from 9% / annum to 1-1.5% per month based on your overall financial position and the size of the facility. But they offer you 100% working capital for all your business financing needs, so that’s a good trade-off. 99% of the time you will have increased your available credit availability by 100% as your receivables are margined at 90%. Inventory financing is also a key part of a non-bank business credit line.

So back to our sources of financing and the costs associated with those sources. Of course, you can either generate a working capital term loan or, if it’s a larger facility, it might be called a Sub debt or mezzanine loan. Mezzanine capital comes with a higher interest rate as it is viewed as high risk compared to financing backed by collateral.

Essentially they are unsecured cash flow loans with rates in Canada ranging from 10-15% - they are traditionally on a fixed term / fixed-rate basis on principal repayments - 5 years is common. Large corporations issue bonds.

CAPITAL FROM DEBT OR EQUITY?

You can also put more permanent equity into your business via the equity route injection of bringing in a new shareholder. We are clear with clients that this is the most expensive form of financing because you are giving up future ownership when you access additional equity capital via angel investors, or a venture capitalist/venture capital solution, or some other source of equity.

FINANCING YOUR COMPANY'S BALANCE SHEET - CASH FLOW LOANS VERSUS ASSET-BACKED LOANS

Other miscellaneous sources of business financing come with various costs but a significant upside to your funding chances. These include:

Sale leasebacks - refinancing existing owned assets for cash flow

A/R Factoring / Confidential accounts receivable financing - accelerating cash flows via receivable finance solutions which reverse negative cash flow via financing sales revenues - this is not debt financing - it simply monetizes your most liquid asset - accounts receivables!

Small business in Canada is a huge users of factoring solutions. Cash generated via factoring is used for day-to-day business expenses - The risk is especially high for growing businesses. They tend to have higher accounts payable and receivable and greater sums in inventory and other assets.

Bridge loans - helps minimize cash outflows via effective refinancing of business-owned assets or existing loans.

SR&ED Tax credit loans - The Scientific Research and Experimental Design (SR&ED) program serves as Canada's R&D tax credit scheme and is notably generous. Businesses can recover up to 64% of their eligible expenses through this program, either as a tax credit or a cash refund.

Using research tax credits can significantly boost your company's cash flow, lessen your dependence on borrowing—from friends or financial institutions—and increase your available capital. In turn, this facilitates company growth and reduces debt accumulation.

SR&ED refundable tax credits provide cash inflows from your r&d investments - repayment terms are flexible, with no monthly payments being made during the period of a Sred loan - SR&ED and the Federal government guaranteed loan program are the two most popular government financing programs in Canada.

Merchant advances for retailers/business credit cards /short-term working capital loans / small business loan solutions for increased cash flow management - a positive credit report on owner/owners is required.

Equipment financing - for new and used assets - monthly principal and interest payments on equipment and technology - a finance lease/capital lease is the most commonly used vehicle for acquiring assets via a ' lease to own ' finance strategy - equipment lease payments are tax-deductible as a business expense

Non-Bank Credit Lines - asset-based lending business credit lines for short-term loans and covering day-to-day business expenses - as a business grows, credit facilities can be increased almost automatically.

Government Guaranteed Loans - SBL loans benefit startups and businesses with limited collateral or credit history. By guaranteeing a portion of the loan, the SBL reduces the risk for lenders, making it easier for companies to qualify for financing.

However, the application process for SBL loans can be intricate and lengthy. Entrepreneurs must supply comprehensive financial details and business plans and demonstrate their capacity to repay the loan. Despite these challenges, SBL loans represent a feasible financing solution for many small businesses. The Canada Small Business Financing Program is sponsored by Industry Canada, our Canadian version of the U.S. small business administration and the SBA LOAN - transactions are term loans that bring long-term debt to the balance sheet.

Commercial Mortgages: Commercial mortgages present a long-term financial solution for enterprises aspiring to buy or develop real estate. These loans, backed by the property, generally come with competitive interest rates.

GOVERNMENT GRANTS

Business Grants and Competitions From Private and Government Agencies For Small Business Financing & start-up funding

Entrepreneurs can tap into business grants and competitions as alternative sources of funding. Generally offered by government entities, non-profits, or foundations, grants support specific sectors or initiatives. These non-repayable grants can serve as a valuable source of non-dilutive financing. However, they often come with stringent eligibility requirements and require detailed proposals outlining the proposed utilization of funds.

On the flip side, competitions provide entrepreneurs with a platform to present their business concepts to a jury, with the potential of winning monetary awards or investments. Academic institutions, accelerators, or venture capital entities typically organize these contests.

Involvement in such competitions can offer funding, invaluable visibility, and networking possibilities. Nevertheless, the competition can be intense, requiring entrepreneurs to deliver a persuasive pitch and a robust business plan to differentiate themselves

. Talk to 7 Park Avenue Financial about financing for matching funds on grants and eligibility criteria.

Talk to 7 Park Avenue Financial about which financial institution offers the program - Typical loan request size is to a maximum of 350k - More money, up to 1 million dollars, is available if real estate is purchased under the program - Leasehold expenses and other assets and technology can be financed under the program which also has very competitive interest rates.

CONCLUSION - FINANCING SALES & BUSINESS ASSETS

Obtaining adequate financing is pivotal to your business's growth and prosperity. Given the wide array of financing sources, it's crucial to probe and assess each option to pinpoint the one that aligns best with your needs.

Conventional financing sources like banks and credit unions may offer lower interest rates, albeit with more stringent eligibility criteria.

You can make a well-informed choice by comprehending the advantages and drawbacks of each financing source and contemplating factors like funding volume, repayment conditions, and eligibility requisites.

Develop a strong business plan, foster relationships with lenders and investors, enhance your credit rating, brace for due diligence, and solicit expert advice to boost your odds of successfully locking in business financing. With the appropriate funding, you can elevate your business and realize your entrepreneurial ambitions.

In the Canadian business financing landscape, traditional financing options through banks have long been the go-to choice for many businesses. However, alternative financing solutions such as receivable and asset-based lending have gained traction, offering greater accessibility, flexibility, and speed.

Small businesses, and for that matter firms of all sizes, need proper financing - Want some help in determining what your financial statements say about your financing needs and how much cash is required, as well as identifying what solutions are available? Most businesses almost always require capital.

The decision between conventional financing and alternative options hinges on a business's unique situation, objectives, and preferences. Businesses can identify the best-fit funding sources for their unique needs, fostering growth and success, by meticulously examining eligibility, funding speed, costs, and adaptability.

To help assess the appropriateness of various financing alternatives for specific business needs, seek advice from financial professionals or experts.

Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with positive cash flow and overall business funding needs for more cash for your new or established business venture.

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

What is a cash flow statement?

A cash flow statement tells you how much money enters and leaves your business in a given period. The cash-flow statement, a component of a business's financial statements, shows the changes in a business's available cash over time. A company's cash flow statement will highlight the business's operating cash flow. It is one of the three sections of a firm's financial statement.

What is the main difference between traditional financing and alternative financing solutions?

Traditional financing typically involves banks and includes options such as business loans and lines of credit. Alternative financing solutions, on the other hand, offer non-traditional avenues like receivable financing and asset-based lending, which may be more accessible, flexible, or tailored to specific business needs.

Are alternative financing solutions only suitable for small businesses or startups?

While alternative financing solutions can benefit small businesses and startups, they are not limited to these categories. Businesses of various sizes can explore alternative financing options based on their specific requirements, including those related to cash flow management, asset utilization, or growth opportunities.

How does receivable financing (factoring) work, and what are its benefits?

Receivable financing, or factoring, involves selling outstanding invoices to a third-party financing company at a discounted rate in exchange for immediate cash. The benefits include improved cash flow, accelerated revenue cycles, reduced credit risk, and the ability to focus on core business operations rather than collections.

What assets can be used for asset-based lending, and what are the advantages?

Asset-based lending allows businesses to use assets such as accounts receivable, inventory, or equipment as collateral for obtaining a loan. The advantages include increased borrowing capacity, more flexible terms, improved liquidity, and the potential to unlock the value of remaining idle assets.

Is crowdfunding a viable option for business financing in Canada?

Yes, crowdfunding has gained traction as a viable option for business financing in Canada. It involves raising funds from a large number of individuals through online platforms. Crowdfunding can benefit startups or businesses with unique products or services, as it provides capital, helps build a customer base, and creates brand awareness.

What are Factors to Consider When Choosing a Financing Source

When deciding on a financing source for your business, it's important to consider various factors that can impact your decision. Some key considerations include the amount of funding required, the purpose of the funds, the repayment terms, the interest rates, and the eligibility requirements. It's also crucial to assess the potential impact on ownership and control of your business. Each financing option has advantages and disadvantages, so it's important to evaluate them carefully and choose the one that aligns with your business goals and needs.

What Are Some Tips for Successfully Securing Business Financing

To access debt financing, develop a comprehensive business plan: Highlight your industry knowledge, market understanding, and growth potential with a robust business plan detailing your objectives, strategies, and financial forecasts.
Cultivate connections with financiers: Increase funding opportunities by networking and fostering relationships in the financial sector. Engage in industry events, join professional groups, and gain insights from seasoned entrepreneurs.
Boost your credit score: Enhancing your credit score can greatly increase your chances of securing funding. Regular bill payments, minimizing outstanding debts, and correcting credit report errors can help.
Be ready for due diligence: Maintain readiness for rigorous assessments by lenders and investors. Keeping all financial, business, and legal documents well-organized can expedite this process.
Engage financial professionals: Contemplate seeking help from financial advisors, accountants, or attorneys who are experts in business financing. They can offer invaluable advice and help simplify the funding process's intricacies.

What is Private Equity

Private equity, a form of venture capital, involves an investor acquiring an ownership stake in your company in exchange for money. These investors aren't interested in running your business; they focus on companies on the verge of profitability, which possess robust business plans and solid ownership structures.

They require precise financial statements and projections to evaluate potential business development opportunities. This type of investor is often equated with terms like equity financing or equity funding.

This option could be suitable for entrepreneurs who have conducted thorough industry research, are prepared for an infusion of capital, desire the perks of an expanded network, and are searching for financial and resource support. They have a range of methods to finance your business, including repayable loans, debt financing, debt programs, equity financing, or providing capital in return for stock or ownership, among others.

What Are Angel Investors

An angel investor invests in early-stage businesses rather than offering a debt capital solution. They comprehend the inherent risks, are adept at evaluating potential, and can offer valuable advice and networking opportunities to augment your success, considering your investment in the business.

Your potential for high growth is intrinsically linked to your network, execution ability, and comprehension of your circumstances. Angel investors excel in partnering with you in these domains. They supply resources, capital, research, industry connections, programs, services, financing, investment, and focus, among other things, to aid you in expanding your initiative or accelerating your growth.

Consider seeking a local angel investors club or organization for assistance. Engage with successful entrepreneurs, inquire about their early stages, and find out who they might know in the angel investor community or those who invest their funds in businesses.

What is a VC / VENTURE CAPITAL INVESTOR

Venture capitalists use other people's money (sometimes their own) to invest in early-stage businesses through common or preferred stock. Typically, they don't engage much with very early-stage (angel) investments; they focus on firms poised for high growth or potential.

They anticipate acquiring an ownership stake in the company in return for their investment. They are interested in profits, understanding that these might come later. They desire to contribute to the company's success, although they don't intend to operate the business.

Angel investors might be better suited to funding opportunities for small businesses, whereas venture capitalists tend to invest in startup companies. Conversely, a venture capital investment could be more appropriate for later-stage or high-growth companies. Most small business owners do not meet the criteria for venture capital funding.

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Tuesday, June 27, 2023