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Bank Financing alternative solutions are, in many ways, the new normal. Canadian business owners and financial managers are constantly seeking bank alternatives as they start and grow their businesses. Traditional bank loans seem more difficult to achieve for thousands of business owners and their financial managers in Canada, and we're not talking about just pandemic time.
KEY POINT - It's interesting to note that all alternative finance mechanisms we discuss are in fact available from Canadian chartered banks. But it will always come back to the criteria in place as to your ability to access the above solutions at low bank rates. The traditional pre-requisites for accessing bank credit are the length of time in business, balance sheets that reference positive equity, profit history, cash flow coverage, and owner personal credit history and collateral.
Alternative finance solutions when sourced and used properly take the uncertainty out of financing your business and that's what business owners are looking for. While not widely regulated by the government many of the industry is self-regulated by their own trade associations and are governed by Canadian borrowing laws.
The good news is there are numerous options to consider, all the way from invoice finance techniques to short term working capital loans and online lending 'p2p' solutions known as commercial merchant advances.
WHO ARE THE ALTERNATIVE LENDERS?
Generally these are what's known as non bank lenders that serve SME commercial finance needs. They are usually not banks and typically are not deposit takers.
Many of the new clients we meet at 7 Park Avenue Financial find their bank arrangements have been rescinded and in more severe cases find themselves in special loans and workout categories at their bank. The good news is there are independent lenders/commercial finance companies that are very able in providing business financing to the SME sector in Canada.
Alternative lenders focus predominantly on sales and assets and can provide niche solutions ranging all the way to full-scale business lines of credit. These facilities support both growth and daily operations. Numerous types of ' factoring ' solutions are a keys source of financing for thousands of businesses in Canada. They are the new alternative to the traditional ' bank loan '. Other solutions as we have noted include equipment leasing, sale leasebacks on assets owned, and loan advances based solely on future sales projections.
While large corporations have access to all sorts of capital, in some ways unlimited, businesses in the SME COMMERCIAL sector struggle to find options that make sense and are balanced against what is usually a higher cost. Let's dig in.
One author in the U.S. recently offered up that business owners must ' spank their banks ' when it comes to access to business capital. While we suppose there are a hundred reasons to ‘spank’ U.S. banks (anyone remember 2008), those reasons don't really exist in Canada, as we're known to have probably the strongest banking system in the world, pandemics included.
So our banks tend not to go bankrupt, they don't go to jail, they do provide safe investment vehicles... and they have all the capital in the world - IT'S JUST DIFFICULT TO ACCESS BUSINESS CAPITAL AND QUALIFY FOR FINANCING.
So what's our point? Simply that the owner/manager in SME starts to look outside the box at non-bank alternatives.
What Are Some Popular Utilized Alternative Funding Sources In Canada?
Those alternatives include:
Accounts Receivable Financing - Commonly called factoring, or invoice discounting this is one of the most efficient and quick ways for a company to generate cash based on sales. In North America alone billions of dollars are financed every year according to industry statistics from FACTOR CHAIN.
A/R Financing fundamentals are easy to understand. Instead of the typical waiting period for commercial collections, which these days is anywhere from 30-90 days companies can enter into a financing arrangement to ' sell ' their receivables as they generate sales. Financing can be for some or all of their a/r portfolio, at the company's choice.
There are some key differences in bank credit lines and a/r finance via a commercial lender - the commercial finance company looks mainly at the quality of your receivables while the bank look at overall risk in dealing with your firm. Traditional bank lending is focused on your balance sheet and cash flow generation while the a/r financing firm focuses on your invoices as the collateral.
A/R Financing has a ' fee ' attached to it, not an interest rate, often a key misunderstood point in commercial receivables finance. That fee is typically between 1.5-2%, but if your firm has good profit margins and can sustain that reduction in profit a very strong case can be made for financing receivables.
Inventory Finance - A wide variety of inventory financing solutions are available through asset backed lenders who specialize in the valuation and financing the turnover of inventories. Most common is the combining of inventory financing into an asset based business credit line allowing your company to borrow on the combination of a/r and inventory.
Short Term Working Captial Loans/Merchant Advances- The growing popularity of short term unsecured loans for businesses cannot be denied. This ' peer to peer ' lending solution provides upfront capital based on a simple formula of your annual sales. The two main criteria are your ability to demonstrate your sales revenues through either your financial or bank statements, as well as a requirement for the business owners to have decent personal credit histories, the proverbial ' credit score '.
Typically small business owners with credit scores under 600 have a challenge in obtaining this financing, simply demonstrating that commercial lenders of all size look at how you run your personal finances as a reflection of your business.
The amount you can receive under these loans is typically 15-20% of your annual revenues so a business with revenues of 1 Million dollars will qualify for a 100-150K loan. Rates are generally quite high in this type of financing but the quick and easy approval and access to working capital have garnered great appeal to many businesses, retailers included. The online borrowing totally focuses on cash flow and sales revenue.
Equipment Financing
Sale/Leaseback / Bridge Loans - If your company owns equipment that has no liens on it and is generally unencumbered the sale-leaseback financing solutions provides immediate cash value for these assets, simply by entering into an arrangement to ' sell ' the equipment back to the finance firm, and then leasing it back, and naturally your retain full use of the equipment/asset. The lease payments become a monthly expense on your income statement and your firm generates immediate cash flow for working capital purposes.
Tax Credit Financing - ( SR&ED & MEDIA Tax Credits - Both Film/Media tax credits, as well as the Federal SR&ED tax credits which is a refundable tax credit that is financeable via a short term sr&ed loan cand provide valuable cash flow for newer firms focused on putting cash into their r&d efforts.
Asset-Based Lines Of Credit - Business credit lines, or more appropriately ' asset based lines of credit are full operating revolving credit facilities from the asset based lender. This product offering competes with the standard bank revolver line. The benefit of the 'ABL' credit line is that it provides all of the cash flow you need by combining the borrowing power of your receivables, inventory, and even equipment into one margined borrowing facility that your firm draws down as needed. Credit limits are extremely flexible and tend to grow with your assets and sales.
Purchase Order Financing - Many companies find themselves in the position of being able to receive large orders and contracts that would be a significant growth factor in their business, but they often have to decline this business as they are not in a position to have the working capital in place to fulfill those orders and contracts.
Under this alternative financing method, your supplier is paid directly by the commercial finance company allowing you to fulfill orders and sustaining the 30-60 day period between supplying your client and waiting for payment.
The order and receivable are taken as security for the P O financing solution. The transaction is closed when the final payment is made to your firm by your client. In many cases suppliers are located in Asia so the ability to fund these transactions is a very creative way to grow business. Similar to factoring and a/r financing solutions you must have very good gross margins to cover the 2-4% fee on this type of financing.
Absence of any one of those bank criteria can quickly derail your bank application. We almost find it humorous that business owners or their financial managers go from bank to bank only to be told the same response.
Bank alternatives in Canada are offered by commercial finance firms. They might be small, large, Canadian, U.S. owned, and in some cases geographically focused. They provide all the solutions offered by banks and typically have a much higher risk appetite as they are motivated by profit and growth also. Almost all firms only specialize in certain loan/finance segments, so it’s important to seek out an advisor who can help you navigate the waters and speak the lingo!
WHY ALTERNATIVE FINANCING?
Although some may consider alternative financing solutions as ' outside' the system industry statistics tell us they are becoming more mainstream than ever. You can call it ' FINTECH ' non-traditional but it is more utilized than ever before . Some have called it an ' improvement ' on traditional business financing. These solutions cover a wide range of business needs, including lender finance/ funding for lenders, SME Commercial Finance funding, acquisition financing, etc.
Many of the alternative lenders utilize newer forms of technology that enable transactions to happen quickly with greater improvement to the customer borrowing experience. Cash flow and invoice financing solutions are widely available to ease the cash flow crunches that many businesses in the SME sector face daily outside of their bank relationships. It's very safe to say the rise of the internet made a lot of this happen!
Technology and internet marketing allows Canadian businesses to access business capital that were previously the exclusive domain of the Canadian banking system. The wide variety of financing solutions available allows Canadian commercial borrowers the option to choose from a wide range of niche financing solutions.
Access to capital is faster than ever, and previously underserviced Canadian commercial borrowers
are finally finding business credit accessible whereas before they were considered ' underbanked'. Access to cash flow is faster than ever and borrowers are now able to, for the most part get all the funding they need based on their sales and assets.
Business owners will perhaps be surprised to know that many alternative lenders have partnerships and funding relationships in place with Canadian banks. Unlike the banks though they do not require historical financial strength and the strong credit history that is associated with the bank borrower. Many of the alternative lending players are funded by private investors, private equity firms, and rely on these investments to fund their loans.
Canadian business borrowers should view alternative lenders as specialty lenders who typically are focused on one unique financial offering, allowing them to have significant expertise in key niche areas. Banks of course offer a broad array of financing products and it is sometimes challenging to locate a banker specific to your needs.
So, bottom line. The Canadian business owner / financial manager can spend all their time blaming (spanking) their bank or they can choose to seek out real world solutions that exist for the financing they need.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in the evaluation of a bank financing alternative via alternative funding that will allow you to grow or start a business.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2020
