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Discover the Power of Business Loans and Debt Financing: A Game-Changer for Canadian Entrepreneurs
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Financing & Cash flow are the biggest issues facing business today.
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Maximize Your Business Potential: Unleashing the Benefits of Business Loans and Debt Financing in Canada
Business loans in Canada come with certain rules around debt financing when done. Properly. Let's dig in.
INTRODUCTION:
For a company to be successful in running a business in Canada business financing is critical- Numerous Canadian business debt financing options are available to help owners achieve growth goals, as well as manage cash and exploit new business opportunities. We'll discuss those options as well as several government back programs as well as alternative lending options.
TYPES OF BUSINESS LOANS IN CANADA
A:
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Short-term loans are typically used to address day-to-day operational needs, such as working capital or cash flow management or to purchase inventory. These loans typically have terms of up to one year and may require weekly or monthly payments. Short-term working capital loans are readily accessible and available from numerous commercial lenders as well as online - The borrowing formula relates to the sales and credit history of the company and the credit score of the business owner. Typically these loans are more expensive.
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Medium-term loans are often used for business investment and expansion, equipment and technology purchases, or refinancing existing debt. Repayment terms are one to five years, these loans provide more flexibility and often have lower interest rates than short-term loans which are much more expensive.
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Long-term loans are ideal for financing large capital investments made in the business, as well they are suited for acquisitions. These loans can have repayment terms of five to twenty years and usually offer lower interest rates for businesses that qualify with the required amount of cash flow or collateral.
B. Lines of Credit
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Revolving lines of credit allow a business to draw down funds for cash flow gaps as needed, up to a predetermined credit limit. Businesses pay interest only on the outstanding balance based on the amount borrowed and drawn, and the credit line is replenished and revolves as the business repays the borrowed amount based on incoming receipts and cash inflows.
C. Asset-based Financing
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Equipment financing or equipment loans are used for purchasing business assets. The equipment itself serves as collateral, reducing the lender's risk based on the collateral secured. Equipment leasing is used by over 80% of North American businesses in the purchase of assets.
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Inventory financing provides businesses with the capital needed to purchase and replenish The inventory itself serves as collateral, ensuring that the lender can recover their investment if the borrower defaults. Inventory financing is often combined with accounts receivable financing in a business line of credit solution.
Accounts Receivable Financing
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Invoice factoring and invoice discounting allow businesses to sell outstanding unpaid invoices to a factoring company, which then advances a percentage of the invoice value. Under traditional factoring solutions, the factoring company assumes the responsibility of collecting the payments, while the business receives immediate cash.
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Confidential receivable financing is similar to factoring, but the business retains control over collecting invoice payments. The lender advances a percentage of the invoice value, and the business repays the advance once the customer pays the invoice. With the company having responsibility for billing and collecting there is no notification to the client.
Mezzanine Financing / Cash flow loans - Mezzanine finance is a hybrid of debt and equity financing, providing businesses with capital in exchange for a percentage of future profits or equity. This type of financing is ideal for businesses with strong growth potential but limited collateral - as well the company must demonstrate strong historical and present cash flow.
Commercial Mortgages - Commercial real estate mortgages are used to finance the purchase of company-owned real estate, such as office buildings, retail spaces, or industrial properties.
Merchant Cash Advances provide companies with a lump sum of capital in exchange for a percentage of their future sales. The merchant cash advance options are well-suited for retailers with high credit card transaction volume who wish to borrow money for short term needs /operating expenses.
HOW IS BUSINESS DEBT SECURED? THE PROS AND CONS AROUND COLLATERAL AND GUARANTEES
For the most part, debt is ' secured ' - either by assets or cash flow, or both. For companies with solid, predictable cash flow, a company's promise to pay might be all that is required. That is a rarer occasion. Debt financing is the alternative to equity financing. What types of debt financing work for your business?
By the way, ' unsecured' cash flow loans, also called ' Mezzanine,' almost always cost more, being the lender is ultimately unsecured, relying solely on the delivery of the cash flow promise - they are a hybrid form of debt financing. Different types of business loans vary based on whether they are traditional in nature or from the alternative lending landscape. ' Mezz' financing usually has a higher interest rate attached to the transaction and lenders want to see proven cash flows.
CANADIAN BANKS AND BUSINESS FINANCING
Business owners will often consider bank loans from Canadian chartered banks as the optimal solution - certainly, it’s more often than not the ' go-to. ' However, not all business owners and financial managers understand the bank requirements around secured term lending.
On the other hand, they also don't know there are alternatives. The small business owner should ensure they can demonstrate a good credit history and personal credit report profile - that is a requirement for different forms of financing.
HOW DO BANKS DETERMINE YOUR DEBT FINANCING CAPACITY
From the bank's lending criteria perspective, POSITIVE CASH FLOW is a must for debt financing of any time. Formulas that have been in use forever for CASH FLOW COVERAGE and DEBT TO EQUITY are the key drivers in commercial debt financing. Bank debt is typically ' senior debt ' and is often has the bank in ' first position' over all other lenders. Banks typically document this transaction under a loan agreement called a ' GSA ' - A general security agreement.
SOME FIRMS MAY HAVE A VARIETY OF LENDERS
When we talk to clients about new debt financing options, one of the issues that always must be dealt with is relationships with other creditors. On occasion, this requires unwinding of agreements between lenders, requiring additional time to complete the financing required.
WHAT NEEDS DO BUSINESS LOANS ADDRESS?
Business loans can finance various needs - these include:
Working capital,
Fixed and capital assets
Acquisitions
WHEN IS DEBT ' TOO MUCH ' - THE DISADVANTAGES OF DEBT FINANCING
The $64,000 question in debt financing is almost always how much debt can your business manage. Too much debt creates a highly leveraged company - Done right, it's great for ROI, done wrong... a recipe for business failure.
When accounting for debt on your balance sheet, term loans will always be broken down into current and long-term. The current is the total of the loan that will become due in the next year. On the other hand, revolving credit facilities simply... revolve... and are based on levels of inventory or accounts receivable, or both.
THE DOWNSIDE OF DEBT FINANCE
Debt is, of course, the alternative to equity - in a low-rate environment, the capital cost is low, and payback can more easily be justified - however, rates have started to increase substantially. The negatives relate to what we have already talked about:
Taking on too much debt
Potential business failure
Implications around personal guarantees
Payments are fixed - i.e. they must be made!
CONSIDER DEBT FINANCING VIA THE GOVERNMENT OF CANADA SMALL BUSINESS FINANCING PROGRAM FOR A TERM LOAN
Government-backed Loan Programs
A. Canada Small Business Financing Program (CSBFP) The' SBL LOAN ' provides loans to both new and small businesses for purchasing real estate, equipment, or financing working capital. The federal government guarantees a large portion of the loan, reducing the risk t financial institutions such as banks and credit unions who underwrite the program for the government. Thousands of small businesses utilized the program in Canada, allowing businesses to access capital at competitive rates where financing might otherwise not be available.
The Business Development Bank/ BDC offers various financing solutions via term loans, commercial mortgages and equipment loans.
In 2022 significant changes were made to the Canada Small Business Financing program introduced major changes to the program with increased loan amounts and improved loan conditions - The maximum loan amount under the program was increased to 1.1 Million dollars and new financing classes around intangible assets, franchise fees, working capital and lines of credit were introduced.
A new financing product, the line of credit, was introduced for working capital costs, with a maximum term of five years. The maximum interest rate for lines of credit is prime + 5%, with a registration fee of 2% of the authorized amount and an annual administration fee of 1.25%. Other changes include provisions for the release of a guarantor, non-compliance, transfer of loans, and additional clarifications.
A good personal credit score from the borrower is required under this guaranteed loan program - typically in the 650 range for a credit rating.
For the SME sector in Canada, the Government of Canada Small Business Loan is a solid debt alternative that can be very attractive versus an unsecured bank loan and its various requirements. New businesses and start ups are particularly attracted to this loan. It's a bit similar to the SBA loans' offered in the U.S. under the Small business administration. Why? It has attractive rates, repayment without penalty, and a lesser Personal Guarantee implication.
The advantages of debt financing always become more obvious when you have structured financing under flexible terms and conditions, as well as of course, the interest rate on your transaction. Business owners should make sure they understand various other benefits, such as the ability to pay back without penalty, etc. Interest payments can be calculated on a fixed or variable rate option for the monthly payment based on final loan approval.
Government SBL loans are for small business owners who want to achieve one of the best finance solutions for small business loans in Canada and are available from participating financial institutions such as banks and credit unions. Interest paid on debt financing is tax deductible for a business expense. Two other crown corporations, Farm Credit and EDC provide financial support to the agriculture and export sector respectively.
At 7 Park Avenue Financial, we encourage business owners to separate personal assets from business expenses and needs, and a bad credit profile in your personal life will almost always affect SME borrowing success.
CONCLUSION - BUSINESS LOANS DEBT FINANCING
Navigating the different types of business loans and debt finance solutions can be challenging for Canadian business borrower. Having the proper knowledge about what type of funding your business needs, as well as having the ability to compare loans is key to supporting business growth and long-term success.
Tired of wasting time searching for angel investors, VCs, family and friends, etc?!
For a proper explanation of the right type of business loans and business credit for small businesses, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your debt financing needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is the eligibility and application process around business loans and debt financing?
To apply for a business loan, lenders consider factors like credit history, business plan, collateral, and debt service coverage ratio. Debt financing costs and fees include interest rates, origination fees, prepayment penalties, and late payment fees.
To select the right loan, businesses should assess their needs and objectives, compare loan terms and conditions, and evaluate lenders and their reputations around issues such as competitive interest rates. Unlike equity financing debt interest repayment flexibility should always be considered when you choose debt financing for business finances. A business loan calculator is a useful tool to calculate finance payments, etc
Click here for the business finance track record of 7 Park Avenue Financial
