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A Guide to Business Financing Sources for Working Capital in Canada
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Leveraging Business Financing Sources to Optimize Working Capital in Canada
Working capital and small business financing sources are available to Canadian business owners and financial managers in several ways.
INTRODUCTION
When we speak to clients about their needs and answer their questions in this area, it is simply a case of pointing out all the alternatives available and discussing what features and benefits of each type of facility make the most sense for their particular firm and industry.
Working capital represents a business's lifeblood and measures a firm's operational liquidity and short-term financial status. For firms operating in Canada, identifying the appropriate business financing to preserve and enhance more working capital is critical to growth, expansion plans, and continued profits.
Procuring the ideal financing is essential to a business's growth success. Business funding provides the needed resources to finance day-to-day operations, enter new markets, and invest in new technology and assets.
Business owners must examine various financing options to ascertain the best-suited solution to their unique requirements and situation. Each alternative comes with its benefits and drawbacks.
CHOOSING THE RIGHT SOURCES OF FINANCING FOR YOUR BUSINESS
Choosing the right source of business financing is a vital business consideration. This decision calls for an assessment of numerous elements including the expense of capital, the level of control maintained, accompanying risks, repayment conditions, and harmony with the business model. The secret to success lies in striking a perfect equilibrium between cost and risk while simultaneously ensuring the funding source resonates with the company's immediate and future objectives.
WHAT IS WORKING CAPITAL FINANCING?
Working capital financing is employed to fund your company's investment in short-term resources such as the company's investment in inventory and accounts receivable on the balance sheet - Working capital refers to key liquid current assets - short term financing solutions are also providing liquidity to support everyday operations like salaries/wages, overhead expenses, and other miscellaneous costs.
Gross working capital is the total amount of funds a company has in current assets versus Net working capital, which is the surplus calculated after deducting all current liabilities from current assets in measuring short term financial health and temporary working capital needs.
Often, small and medium enterprises rely on this form of financing when existing assets fail to cover their immediate liabilities.
SECURED VERSUS UNSECURED LOANS
Most working capital loans and financing alternatives are secured, but that is not the case 100% of the time. With reasonably good financial health and equity in your firm, a cash working capital loan can be achieved at solid rates, terms and structures. This is generally not the norm, though, as most lending to small and medium businesses in Canada is secured somehow.
TRADITIONAL FINANCING OPTIONS - CANADIAN BANK LOANS AND LINES OF CREDIT
Financing typically brings to mind traditional options like bank loans and credit lines, often the primary go-to for numerous businesses. Banks and similar financial institutions provide these solutions with longstanding reliability. Let's delve deeper into each choice:
Bank loans: Term loans from banks are set financing amounts to be repaid over a set term, with interest. Suitable for businesses showcasing good business credit history and solid financial performance around cash flow, profits, and healthy balance sheets.
A bank loan provides stability due to the lowest fixed interest rates and repayment terms. However, startups or businesses with low credit scores might find bank financing not accessible - these firms should consider various alternative lending solutions.
Lines of credit: This versatile financing option permits businesses to borrow up to a defined limit, functioning similarly to business credit cards—Companies borrow and pay back as necessary, paying interest only on the borrowed sum, a revolving line of credit that fluctuates.
Lines of credit suit businesses needing short-term financing or those desiring a financial buffer for unforeseen expenses.
SMALL BUSINESS FINANCING VERSUS LARGER CORPORATE FINANCE SOLUTIONS
For larger corporations, unsecured cash flow loans are more often than not called ‘subordinated debt,' and they are term loans structured around the analysis of the company’s ability to repay based on future cash flow forecasting.
Small business financing for smaller firms is simply a working capital solution that might have some covenants attached relative to ongoing profits and cash flow metrics. Again, we can summarize these offerings by saying that cash flow unsecured loans are generally only available to firms with very good financial health and prospects and qualify for bank loan criteria for approval.
ASSESSING TYPES OF WORKING CAPITAL LOAN SOLUTIONS
In certain cases, the working capital and cash flow loans we have described above often relate to acquiring a business, with the funding provided to acquire the business.
LOANS VERSUS CREDIT LINES
A more common ‘working capital loan' is, in effect, not a business loan per se but the financing of receivables and inventory / raw materials. In effect, your firm leverages these assets and turns them into ongoing working capital as you create inventory and receivables on an ongoing basis. In a line of credit facility, the business will pay interest only on funds drawn under the facility in this working capital finance solution from a lending institution.
THE GOVERNMENT OF CANADA SMALL BUSINESS FINANCING PROGRAM
Many business owners come to us and ask if there are ‘government loans' for working capital. The reality is that there is nothing available in Canada in that regard. The most common, successful and popular government loan program is the CSBFL program; thousands of businesses utilize this loan. The program is one of Canada's best loans to small businesses - bar none.
A solid business plan is a key program requirement - 7 Park Avenue Financial prepares business plans for clients that meet and exceed bank and other commercial lender requirements.
WHAT DO GOVERNMENT LOANS FINANCE?
Government financing alternatives may present a viable business financing alternative for businesses satisfying certain requirements.
The Government Of Canada Small Business Financing Program: SBL loans are loans for small businesses in Canada with less than 10 Million dollars in sales revenue. The government guarantees loans to approved lenders such as commercial banks and some credit unions.
Changes to the Canada Small Business Financing Program in 2022 provide for long-term loans, sources of working capital and line of credit solutions, and a new 1.1 Million dollar loan cap, including affordable working capital loans for seasonal variable working capital needs.
Small business loans via the federal government program are solid financial alternatives as they have competitive interest rates and extended repayment periods. They are appropriate for businesses that align with the Canadian government eligibility standards and provide funds for business needs, such as working capital, equipment procurement, or commercial real estate purchases.
Talk to the 7 Park Avenue Financial team about how we can help expedite government loan financing.
Grants: These are non-repayable resources granted by the federal and provincial governments or other bodies to bolster specific business functions, research, or projects. Grants, not requiring repayment, thus become an appealing option for businesses. However, they are highly competitive, and the application process can be intricate and lengthy. Talk to the 7 Park Avenue Financial team about grant financing / matching solutions.
DON'T FORGET TO FOCUS ON ASSET TURNOVER AND REDUCE YOUR FINANCING COSTS
Some critical factors must be assessed and addressed when looking for a working capital solution. Many firms we meet can cure their working capital solutions by affecting a better turnaround in their receivables and inventory. Those are any firm's key working capital components of any firm to help address the company's short term operational financing needs via retained profits, etc.
A business has access to internal and external sources of capital, such as trade credit and delaying payables to vendor and trade sources - internal sources of financing and cash flow management. Businesses can also offer customers a prepayment discount if they pay before the terms credit period.
ACCOUNTS RECEIVABLE FINANCING / CONFIDENTIAL A/R FINANCE
If your firm has been self-financing, you should consider a working capital or an invoice discounting facility. This injects immediate working capital into your company and is not treated as a loan on your books. You are simply converting accounts receivable money owed to the business into quick cash.
Financing a business through accounts receivable factoring involves converting outstanding invoices into immediate cash. In this process, the factoring company pays a large portion of the unpaid invoice total - typically in the 80-90 % range - Companies receive the remaining balance, less financing costs, when the client pays the invoice.
Factoring as a financing method and working capital example is available solely for businesses that operate on credit terms. In this arrangement, the borrower (the seller) delivers a product (or service) and bills the customer, expecting payment at a future date. This anticipated future payment is recorded as an account receivable (a current asset) on the seller's balance sheet.
THE SHORT-TERM WORKING CAPITAL LOAN REVOLUTION
Sometimes, a merchant cash advance, known as short term loans / working capital loans, might make sense for your business. These loans also finance future revenue receipts from credit cards / future credit card sales, which might apply to a retailer.
Many business owners we meet don’t even do basic cash flow planning. A straightforward template you can set up can easily show you what cash is coming in over the next three months, for example, and you already know your fixed and variable expenses. It’s as simple as that.
Working capital needs can be either short-term or long-term in nature. The cash working capital term loan we discussed earlier is a long-term solution for permanent working capital. On the other hand, converting your receivables and inventory via a working capital facility via a non-bank is immediate short-term cash flow.
CONCLUSION - SOURCES OF FINANCING IN CANADA
Are those venture capitalists/ angel investors not in sight !? ( Venture capital in Canada is for the smallest percentage of borrowers in Canada - and requires you to give up owner equity. Friends and family are a solution, but rarely the right one unless you're bootstrapping a startup or are ok with an angel investor-type partner.
Selecting the appropriate financing option for your business is a major decision that could significantly influence the business's financial success. Understanding the advantages and disadvantages of various financing alternatives and assessing your specific requirements is critical.
It's crucial to seek professional advice and do the right amount of research on any business financing alternative.
Navigating the business financing landscape to secure working capital is critical to the success of any business operating in Canada. Understanding the intricacies of these sources, analyzing business needs, and making educated decisions are crucial for companies aiming to increase their working capital and boost their growth.
Work with a trusted, credible, and experienced advisor in real-world Canadian Business Financing solutions for small businesses in Canada.
Let the 7 Park Avenue Financial team assess your needs, evaluate the solution, and focus on implementing a facility based on the benefits of that type of financing. That is cash flow and working capital planning 101 when you want to finance your business for the growth potential you want to achieve.
Let the 7 Park Avenue Financial team assess your needs, evaluate the solution, and focus on implementing a facility based on the benefits of that type of financing. That is cash flow and working capital planning 101 when you want to finance your business for the growth potential you want to achieve.
FAQ: FREQUENTLY ASKED QUESTIONS
What are the benefits of alternative lending?
Some may think that when people need financing, they are forced into traditional methods like loans from banks and other traditional lenders. However, there is an alternative option for entrepreneurs looking for working capital and startup funding; it's called "alternative lending."
Successful startups and growing companies need working capital to grow. With no funding, they may never get off the ground- a scary reality for any entrepreneur seeking success in today's competitive market. If you're looking to avoid a traditional lender route, many options are available that could help a business thrive! Finding out more about alternative financing methods is the first step towards getting what you deserve when it comes time to grow revenues and profits.
What is purchase order financing?
Purchase order financing is a short-term commercial finance option that provides capital to pay suppliers upfront for verified purchase orders. In such an arrangement, a third party agrees to provide a supplier with enough money to cover a customer's purchase order. Purchase order loans can finance an order in its entirety in some circumstances or just a portion of it in others.
What is the merchant advance short-term working capital loan?
In return for a portion of daily credit/debit card revenues in the future, one can obtain merchant cash advances (MCAs), which are up-front payments into the company bank account based on future sales. The MCA is a sale of future income rather than a loan. Although this type of financing is pricey, it can be the best option for a company that performs a lot of credit card transactions but has little or no credit history. Companies in a seasonal business might use this short term finance solution for funding operating expenses.
What are crowdfunding and peer to peer lending?
In recent years, alternative financing options for raising funds have gained popularity among businesses, offering new avenues to secure funding. These options leverage technology and the power of the crowd to provide financing for share capital. Here are two alternative financing options worth considering:
**Crowdfunding:** Crowdfunding platforms, such as Kickstarter and Indiegogo, have revolutionized the way businesses raise funds/capital. With crowdfunding, businesses can pitch their ideas or projects to a large audience and collect small contributions from individuals. Crowdfunding is suitable for startups and businesses with a compelling story or innovative product that can resonate with the crowd. However, it requires careful planning, marketing efforts, and the ability to create a compelling campaign to attract backers.
**Peer-to-peer lending:** Peer-to-peer lending platforms, like LendingClub and Prosper, connect borrowers directly with individual lenders. Businesses can apply for loans and receive funding from individual investors. Peer-to-peer lending offers flexibility, competitive interest rates, and faster approval compared to traditional bank loans. However, it may not be suitable for businesses with poor credit or those in need of large loan amounts.
What are the pros and cons of angel investors and venture capital for equity financing?
For businesses with high-growth potential, venture capital (VC) and angel investors can provide significant funding and expertise. However, these options come with their own set of advantages and disadvantages.
**Venture capital:** Venture capital firms invest in early-stage or high-growth companies in exchange for equity. They provide not only capital but also guidance and mentorship to help businesses scale rapidly. Venture capital is suitable for businesses with an innovative product or service, a large market opportunity, and the potential for significant returns. However, securing venture capital can be highly competitive, and investors often require a substantial ownership stake and influence in the business.
**Angel investors:** Angel investors are high-net-worth individuals who invest their own money in startups or early-stage businesses and can assist a company in raising short-term capital. They provide capital, expertise, and industry connections to help businesses succeed. Angel investors are more flexible than venture capital firms and often invest in businesses that are too small or risky for traditional venture capital. However, finding the right angel investor can be challenging, and the process often involves networking, pitching, and building relationships.
What are factors to consider when choosing a financing option?
When evaluating and comparing different financing options, several factors should be taken into consideration:
1. **Business stage and growth plans:** The financing option that suits a startup may not be suitable for an established business. Consider the stage your business is in and its growth plans to determine the right financing fit.
2. **Creditworthiness and financials:** Lenders and investors assess the creditworthiness and financial health of your business before providing funding. Understand your credit score, financial statements, and other relevant factors to determine which options you qualify for.
3. **Interest rates and fees:** Different financing options come with varying interest rates and fees. Consider the cost of borrowing and ensure it aligns with your financial projections and ability to repay.
4. **Collateral requirements:** Some financing options and working capital loans may require collateral to enable the business to raise funds, such as real estate or inventory, to secure the loan. Evaluate whether you have the necessary assets to meet these requirements.
5. **Repayment terms and flexibility:** Consider the repayment terms, such as loan duration, payment frequency, and flexibility. Ensure they align with your needs around more working capital and cash flow for business operations.
6. **Industry-specific considerations:** Certain financing options may be more prevalent or suitable for specific industries. Research industry-specific financing trends and consider whether there are options tailored to your sector.
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