Business Financing Sources In Canada : Funding Options Unveiled

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YOUR COMPANY IS LOOKING FOR SOURCES OF  BUSINESS FINANCING

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

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

        Financing & Cash flow are the biggest issues facing businesses today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

 

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:

 

1. 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.

2. 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.

3. 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.

4. 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:

 

1. 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.

2. 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.

3. 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.

4. 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

 

1. 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.

2. 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.

3. 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.

4. 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.

5. 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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Working Capital Business Financing Sources

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YOUR COMPANY IS LOOKING FOR CANADIAN WORKING CAPITAL AND BUSINESS FINANCING SOURCES AND ALTERNATIVES!

A Guide to Business Financing Sources for Working Capital in Canada

You've arrived at the right address! Welcome to 7 Park Avenue Financial

        Financing & Cash flow are the biggest issues facing businesses today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

 

  

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.

 

Click here for the business finance track record of 7 Park Avenue Financial

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The Power of Capital: Unveiling Canada's Top Business Financing Options

 

Business Finance Sources must seem like a 'funhouse mirror' for Canadian business owners and financial managers when considering funding the business.

 

They want to know the potential sources of working capital financing & other funding to profit from sales and high growth opportunities while finance a business properly. How to get funding for your business is the eternal conundrum - let's dig in!

 

INTRODUCTION

 

For a long time, traditional financing sources like bank loans and credit lines were the only options for businesses looking to secure funding. But many business owners have challenges in accessing traditional capital, including strict eligibility criteria, and  lengthy application processes.

 

Additionally, traditional financing sources may not always be accessible to startups. Alternative financing sources can provide businesses with more flexible and accessible funding options. Alternative finance sources can provide businesses with the financial support they need to grow and succeed.

 

At some point every business needs external funding  to achieve sales and profit  growth and overcome challenges. Securing financing can be a daunting task for many SMEs in Canada.

 

 

THE CHALLENGES IN  FINANCING A BUSINESS FOR BUSINESS OWNERS IN CANADA

 

 

The challenge? Knowing what financing sources/funding sources are available and what's appropriate for their company!  Whether small businesses are at an early stage or more mature and established, the loans and capital you need will vary. They might come from a traditional or alternative finance environment. Let's dig in.

 

 

OPERATING CAPITAL AND ACCESS TO LINES OF CREDIT  

 

Operating capital is viewed as one of the most critical aspects of business needs and ongoing financial liquidity; put, the ability to meet your short-term and long-term obligations. More often than not, the solution is a traditional bank loan (or alternative finance!) business credit line. The more access you have to this type of funding source helps guarantee your chances of overall financial success. It's a simple bottom line - accessing capital and cash flow to expand and grow.

 

 

UNDERSTANDING WORKING CAPITAL  

 

The textbooks, of course, do a great job of defining working capital. However, the real-world use and understanding of that term differ somewhat!

The reality is that the amount of working capital a company needs depends on your industry and your own business model - that is all part of the ' operating cycle ' of your business - best described as how 1 dollar flows through your company as you make a sale and ultimately collect funds. A small business's challenge is to focus on positive working capital, given the difficulty in raising new funding. Companies in service-oriented businesses typically require less capital as they are less asset-intensive.

 

 

ASSET TURNOVER IS CRITICAL

 

 

Your working capital position will reflect how you run your business as it relates to asset turnover in key current assets such as accounts receivable and inventory, as well as, of course, accounts payable management. In some cases, your management goals will affect how you address these - an example being extending payment terms to clients, etc. That would typically help increase sales but require a higher investment in receivables.

 

WHAT ARE THE TWO MOST IMPORTANT ASPECTS OF WORKING CAPITAL

 

Finance books tell us working capital is calculated by subtracting current liabilities from your current assets. The major current assets are receivables and inventory. When we meet with clients to discuss their working capital needs, we focus on two issues within those working capital components that the finance textbooks don't really touch on!

 

They are:

 

- Turnover of working capital

- Margining of working capital

 

So the key point for business owners is not really what the textbook says. It is that you need to be able to understand how to convert these assets into cash! Of course, we agree that positive working capital (what you have) is better than negative working capital (what you owe)!

 

Sitting down and working through changes in their working capital is one of the most valuable tools in understanding your current and future cash flow needs.

 

A fine balancing act is created, one in which you are liquidating your receivables and inventory on an ongoing basis, but at the same time managing to keep your short term obligations to suppliers current. Vendor financing/trade credit should always be explored if possible to reduce business and financing risk and should never be underestimated. They are equally as important as external sources of funds.

 

Another hard reality of business financing is that working capital varies by company and in general by industry. The amount of turnover in inventory and Accounts Receivable varies considerably in every business. Managed well internal sources of finance to reduce your funding needs.

 

We have discussed the definition and importance of working capital. So what are the sources of those funds? Your company should have that aforementioned overdraft or operating line of credit with the bank in a perfect world.

 

 

CAN YOUR COMPANY SATISFY THESE  CRITERIA FOR BANK FINANCING / BANK LOANS?

 

 

This is the cheapest and lowest cost method of financing short-term cash and working capital needs in Canada. The challenge is, of course, being able to meet the bank's criteria for lending, which include personal guarantees, additional collateral possible, and imposed loan covenants and ratios.

 

 

ASSET  BASED LENDING / ASSET FINANCING SOLUTIONS SATISFY BUSINESS CAPITAL NEEDS 

 

A growing and more popular solution of raising funds is asset-based lending. This has little focus on the bank qualities demanded by Chartered banks and is more focused on what we discussed above, your firm's ability to margin and leverage current assets and turn them over more quickly, thereby increasing sales and profits, albeit at a higher financing cost of capital. The disadvantages of bank loans must be balanced against the higher cost of non-bank finance solutions.

 

SOURCE OF FUNDING SOLUTIONS IN CANADA :

 

A/R Financing / Factoring  / Invoicing Finance / Confidential Receivable Financing / Receivables loan - ( Suited for high growth firms and firms who are challenged in accessing bank capital.

 

Inventory Loans

 

Equipment Leasing

 

Asset-based credit facility - Non-Bank lines of credit

 

Bridge Loans/Sale Leasebacks

 

SR&ED Tax Credit Financing

 

Working Capital Loan / Merchant Cash Advance

 

  

BENEFITS OF ALTERNATIVE FINANCING SOURCES  

 

A prime advantage of non-conventional financing platforms lies in their adaptability. Contrary to traditional financing methods, these channels can offer capital to businesses irrespective of their scale or credit standing. Furthermore, these alternative finance options can expedite the funding process significantly, a crucial factor for businesses that need to seize growth prospects swiftly.

An additional boon of non-traditional financing methods is their capacity to connect businesses with a broader spectrum of investors. This advantage can facilitate firms in forging relationships with backers, allowing them access to fresh networks and resources, thereby aiding their growth and progression.

 

 

  

HOW TO DETERMINE YOUR FINANCING NEEDS  

 

Ultimately each Canadian business owner must understand their working capital needs and determine which solution works best for the most common funding sources for their business/industry when it comes to financial structuring.  Knowing which stages of financing and business lifecycle stage you are in vis a vis your growth cycle is key. Funding with debt must be carefully managed to ensure the debt/equity relationships stable.

You will either require or benefit from a financing business plan outlining your business needs, cash flow budget,  and growth plans. 7 Park Avenue Financial business plans meet and exceed commercial banks and non-bank lender requirements. Some owners choose to go the long route and explore grants for starting up a business.

The vast majority of firms in Canada aren't ready for equity financing and those venture capitalists yet as their source of funds - venture capital, friends and family, crowdfunding, bootstrapping, private sources of financing,   angel investors, private equity .. all of these dilute your ownership and, in 99%  of cases, are very complex transactions when it comes to the world of small business in Canada, versus accessing commercial loan options.

 

CONCLUSION - SOURCES OF FINANCE FOR BUSINESS / FUNDING FOR GROWTH

 

Financing sources of funds for business can be used to both start a business and acquire a business.  Finance for a business acquisition typically involves a term loan for the acquisition and ongoing operating financing. Financing startups is always a major challenge for entrepreneurs. Franchise financing for entrepreneurs is also a specialized financing solution and requires unique expertise.

 

Access to capital is key to all businesses in Canada - even large branded firms regularly seek capital to meet obligations and grow. Each industry typically has a unique funding model. It is important to access the right funding source to ensure you can properly repay obligations without impacting your business activity as you address how to get funding for your business.

 

We've shown several methods to financing a company by accessing small business financing options and capital sources in either traditional l or the newer alternative financing solutions in Canada. How does the business owner source funding and access the best capital structure and sources of credit?

 

Companies have the choice of:

Debt Financing

Cash Flow Financing /  Asset  Monetization

Equity / Mezzanine Finance

 

  

 

 

Non-traditional financing platforms offer numerous advantages to businesses, such as expedited funding procedures, adaptable qualification prerequisites, and exposure to an extensive investor network. However, these sources also carry their own set of hurdles and risks, encompassing potentially higher interest rates or equity contributions, and potential forfeiture of business autonomy.

 

Prior to diving into alternative financing, it's crucial to meticulously assess your firm's requirements, growth trajectory, and the associated risks and rewards of each capital source. By undertaking thorough research and making well-informed decisions, you can pinpoint the financing avenue that best aligns with your business's distinct aspirations and necessities.

 

Planning your business growth financing business needs? Seek out and speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor, to understand what business financing sources of capital are available and which work best for your company.

 

Let our team demonstrate sources of financing a business that works for your company and gives you optimal financial leverage, and helps avoid business failure, whether it's early stage financing for small business or growing your sales of products or services.

 

  

FAQ:FREQUENTLY ASKED QUESTIONS  / PEOPLE ALSO ASK / MORE INFORMATION 

 

 What are some different types of Financing Sources 

Different types of  financing sources  available to business owners include -

Crowdfunding

Peer to Peer Lending

Angel Investors

Venture Capitalists

 

  

  What are some pros and cons of Alternative Financing Sources  

 

  

Alternative financing platforms can furnish businesses with numerous benefits, yet they are also coupled with distinct challenges and risks. Here are the pivotal advantages and disadvantages associated with non-traditional financing sources:
Advantages

    Adaptable qualification requirements

    Accelerated capital disbursement process

    Exposure to a broad spectrum of backers

    Possibility of receiving valuable insights and support

Disadvantages

    Elevated interest rates or equity contributions

    Potential forfeiture of business autonomy

   Risk  of default
 

  

 What are 9 Small Business Funding Sources In Canada?   

 

Canada showcases an array of financing avenues curated to cater to the distinct needs of small businesses. Comprehending these options can empower entrepreneurs to make well-informed funding decisions. The following are some key capital sources:

1. Government Loans:

2. Asset Financing: Companies reliant on specific equipment can consider asset financing, utilizing the said equipment as loan collateral. Leasing companies allow businesses to upgrade assets and technology

3. Bank Credit Lines: Banks' revolving credit facilities endow businesses with flexible access to capital based on their requirements.

4. Receivables Financing: Invoice financing permits businesses to utilize unpaid invoices as collateral, thus enabling effective cash flow management.

5. Government Funding: Government bodies across various tiers offer financial programs and incentives to bolster small businesses via grants and subsidies

6. Emergency Funding: During the pandemic, special subsidies and relief programs were launched to provide financial aid to businesses in distress - for example the Cerb program

7. Venture Capital Funding: Venture capital firms can offer funds to startups and companies poised for growth, aiding in their accelerated expansion.

8. Loans from Family and Friends: Procuring loans from personal networks can be an alternative, but transparent communication and definitive repayment terms are crucial.

9. Crowdfunding: Startups often resort to crowdfunding platforms to validate product concepts and secure funds from a wider audience.

 

When is the right time to seek funding for my small business?

 

 It is recommended to seek funding before the need becomes urgent. Planning ahead and having a well-structured business plan will increase your chances of securing financing. Start exploring funding options when you have a clear understanding of your financial needs and a solid plan for loan repayment and business growth.

 

 What are the different sources of small business financing available in Canada? 

 

Canada offers a range of financing sources, including CSBFL  loans, asset finance, bank lines of credit, receivables financing, government funding, emergency funding, venture capital funding, family and friend loans, and crowdfunding. Each source has its own eligibility criteria, benefits, and considerations.

 

 How can I use small business financing effectively to grow my business?  

 

 To use financing effectively, think like an investor and strategically invest the funds in areas that will generate returns. Consider investments such as acquiring new equipment, expanding marketing efforts, or enhancing operational efficiency. Treat the funds as if you have earned them and diligently invest them to earn back more.

 

  

What factors should I consider when choosing a funding partner?   

When selecting a funding partner, consider factors such as their understanding of your industry, reputation, terms of the funding, and their value proposition. Conduct thorough background research on potential partners and ensure they align with your business goals. Choose a partner who not only provides financing but also adds value to your business in the long term.

 

 What are common sources of funding for business? 

 

Numerous funding sources for equity and debt financing  are available for businesses, each with its own set of benefits, requirements, and potential drawbacks. Here are some of the most common sources of funding for businesses via debt capital and equity financing -

Personal Savings: Often the first source of capital for many entrepreneurs is their own money , personal assets and personal savings play a key role in starting a business.
 

 Friends and Family: Some business owners turn to their personal networks for initial funding, often in the form of loans or equity investments.

Bank Loans: Traditional bank loans are a common source of funding, though they often require a strong credit history and collateral for business loan approval

Government Of Canada Small Business Loans:  The Canadian government  provides loan guarantees to small businesses with revenues under 10 Million dollars , making it easier for them to secure bank loans which are guaranteed to banks by the government. Start up financing is often achieved via the  government small business loan

Venture Capital: Venture capital investors  and investment banking firms  invest in startups and growing businesses with high growth potential in exchange for equity ownership interest - Venture capitalists provide funds to high growth businesses in exchange for an equity stake - Very few small businesses qualify for VC Funding

 Angel Investors: Similar to venture capital investors  these are wealthy individuals who provide capital to startups in return for equity or debt repayment.


Grants: Government agencies and non-profit organizations often offer grants to businesses in certain industries or regions, or those led by individuals from specific groups. Talk to 7 Park Avenue Financial about grant financing
 

 Private Equity: Private equity firms invest in mature businesses, and private equity financing means taking a controlling interest  via preferred or common stock with the intent of improving efficiency before selling for a profit. A very strong growth history is required for most private equity transactions.

Trade Credit: Suppliers may offer trade credit, allowing businesses to delay payment for goods or services.

Invoice Financing or Factoring: Businesses can sell their outstanding invoices to a factoring company for immediate cash. Financing solutions such as Confidential a/r financing allow business to bill and collect their invoices and receive same day funding for commercial invoices for the products and services sold to clients

Asset-Based Lending: Businesses can use their assets, such as equipment, real estate, or inventory, as collateral for a loan.
 

What are different types of government funding programs in Canada?

 

In Canada, various government agencies offer different types of funding programs to support businesses. Here are some of the prominent ones:

    Canada Small Business Financing Program (CSBFP): This program helps businesses obtain loans from financial institutions by sharing the risk with lenders. It's aimed at small businesses or startups in Canada that make under $10 million in revenue per year. Start up companies often make use of the federal loan guarantee progam

 Business Development Bank of Canada (BDC): BDC offers a range of financing solutions including loans and equity investments to help  Canadian established and start up businesses businesses grow and succeed.

 Industrial Research Assistance Program (IRAP): Administered by the National Research Council of Canada, this program offers financial assistance to qualified small and medium-sized enterprises committed to innovation, technology-driven new product development or new business application processes.

Strategic Innovation Fund (SIF): This fund aims to spur innovation for a better Canada by providing funding for large-scale, transformative and collaborative projects in the areas of research and development, commercialization, and business growth.

Canada Job Grant (CJG): CJG provides direct financial support to individual employers who wish to purchase training for their employees. It's designed to help businesses to improve the skills of their workforce.
 

 Scientific Research and Experimental Development (SR&ED): This is a tax incentive program to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada. Talk to the 7 Park Avenue Financial team about financing sr&ed credits .

    Export Development Canada (EDC): EDC provides financing to Canadian exporters to support their international business growth.

    Federal Economic Development Agency for Southern Ontario (FedDev Ontario): This agency provides funding for businesses and non-profit organizations in Southern Ontario to help create jobs, support innovation, and encourage economic growth.

    Agri-Innovation Program: A part of the Canadian Agricultural Partnership, this program is aimed at accelerating the pace of innovation by supporting research and development activities in agri-innovations.

 

Click here for the business finance track record of 7 Park Avenue Financial