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ALTERNATIVE SOURCES OF CAPITAL FOR YOUR BUSINESS
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South Sheridan Executive Centre
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Oakville, Ontario
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The New Era of Small Business Financing: A Comprehensive Look at Alternative Funding Options
Sources of financing in Canada can of course include alternative funding options that are typically non bank solutions. What are some of these finance solutions, When do these make sense for your firm, what are the costs, and how do they work? Let's dig in.
INTRODUCTION:
As a business owner you want to be able to navigate the changing landscape of alternative business funding in Canada - Why ? Simply that it allows you to stay ahead of the game .
As your business evolves you need to meet changing financing needs - At 7 Park Avenue Financial, our goal is to ensure you understand the latest trends and financing strategies, allowing to you secure capital and growth financing!
Naturally, some types of financing have drawbacks and we will demonstrate best practices and finance options in today's economy
WHAT IS ALTERNATIVE FINANCE?
Alternative finance refers to the different source of financing that allows a business to obtain business capital to start or grow business operations, outside of loans from traditional banks loans of various equity financing sources. Examples of commonly used alternative funding include asset-based lending, factoring, sr&ed tax credit financing, government loans, etc.
These sources of capital allow a business to fund sales of products or services as well as expand business operations and improve cash flow.
WHY DOES A COMPANY NEED ALTERNATIVE FINANCING
A company can find itself in need of alternative financing for many reasons. Whatever the situation may have been the end results seem more often than not to always come back to issues revolving around sales, profits, and cash flows.
So at that point, it of course still needs to ‘pay its bills as well as hopefully grow. Small businesses have been known to search everywhere for funding, up to and including the proverbial ' friends and family, peer lending, angel investors and venture capital! Those venture capitalists can be a tough bunch when it comes to demanding equity in your business!
What then are some of the actual sources of alternative finance when a bank loan is not available and where do they come from? In some cases they might be obvious commercial financing vehicles; other times owners might not consider less obvious sources of financing which might include working with vendors/suppliers, landlords who are uniquely part of the cash flow and creditor/debtor relationship.
WHO PROVIDES CANADIAN BUSINESS FINANCNG SOLUTIONS - KEY SOURCES OF ALTERNATIVE FINANCE
We could call those internal type relationships and solutions, but when it comes to external solutions they are as follows:
Commercial financing companies
Insurance Companies
Specialized divisions of Canadian chartered banks
Government and Crown Corporation financing - Financial assistance via federal government loans under the Canada Small Business Financing Program
Asset based lenders - ABL lenders compete with traditio
Equipment financing firms
FUNDING SOLUTIONS FOR YOUR COMPANY
If your firm can work with any or a combination of these entities the following solutions are potentially available:
Receivable Financing - Receivables finance, also known as factoring is one of the most popular methods of obtaining funding based on the business asset of outstanding receivables - These are either financed or purchased, providing the business with immediate cash as it generates sales - This financing is popular because it eliminates long payment cycles take by clients which can lead to severe cash flow/working capital problems.
Government Small Business Loans
Working Capital term loans from Canada's Crown Corp Bank/BDC
Short Term Working Capital loans/ Merchant Cash Advance -
Working capital loans that are short-term in nature have become very popular as alternative funding sources - they are easily accessible and allow businesses to quickly obtain the capital they need - they are a good potential solution for businesses that don't have a lot of past credit history, as the formula for lending revolves around the future sales of the business and the owner's personal credit score, The downside of this type of financing is the relatively high cost/high-interest rate, which can lead to repayment challenges in this type of debt funding under this financing business model.
Tax Credit Monetization (primarily SR&ED Bridge loan Financing)
Asset based non bank business lines of credit (Typically called ' ABL Financing')
Unsecured cash flow/mezzanine loans
Lease Financing -
Lease financing allows companies to lease new or used equipment and other assets and technology that are needed to run the business - equipment financing solutions allow a business to conserve capital and preserve existing credit facilities while having access to financing to acquire assets needed to run and grow the business.
In order to access these types of financing your firm must be in a position to demonstrate it has some long-term viability despite whatever your recent circumstances might be. The ability to show some strong management expertise and to address why your own particular industry is viable is also key. Interest rates will vary with the type of financing and lender you access so owners may want to ensure they understand the risks and benefits of any financing they undertake.
SPECIAL LOANS / TURNAROUND FINANCING
In certain cases, we've met with clients who have been asked by their bank to terminate the bank/client lending relationship. Typically the client is now in a specialized category called ' SPECIAL LOANS ' and banks typically provide some form of reasonable notice that new financing sources will be required for your company.
We feel business owners are somewhat naive in thinking that they can replace one Canadian chartered bank with another when their firm is in some sort of financial distress or challenging situation.
We would point out that in today’s more conservative commercial lending environment it’s difficult to replace financing for a fairly healthy company, let alone one that is experiencing challenges when it comes to options for small businesses.
KEY TAKEAWAYS
Alternative finance options are becoming increasingly popular with SMB companies in Canada
Traditional bank financing continues to be difficult to access based on the eligibility criteria of Canadian banks
Business owners and financial managers must evaluate and consider the pros and cons of every type of financing, along with costs and eligibility criteria
Alternative funding options are more quickly accessible and help businesses with cash flow needs around growth and day-to-day operations
CONCLUSION
Canadian business owners continue to face unique financing challenges in obtaining the capital they need. The lending standards of banks who lend money to businesses have tightened significantly - which becomes a challenge for a business to obtain the financing it needs from traditional financial institutions
Alternative funding options help a business access capital and the ability to run a business and grow operations.
If you are looking at options that will ' stand up ' for your company in areas of financing investigate those options - Talk to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with alternative funding options that make sense and allowing your company to achieve the high growth potential you are aiming for.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK /MORE INFORMATION
What are some common types of alternative funding options for businesses?
Some common types of alternative funding options for A business include , as well as the business owners' own money, equity-type financings such as crowdfunding, peer-to-peer lending, venture capital, angel investors, and business incubators. These are more expensive than business loans via debt financing solutions for more established businesses.
How do venture capitalists and angel investors differ as sources of funding for businesses?
Venture capitalists focus on investing in high-growth startups, many of whom are technology-type businesses with the potential for large returns on investment - Angel investors tend to invest in early-stage companies and are often in a mentor relationship with the company. Both venture capitalists and angel investors will demand some level of control and equity in the business. This type of financing is not suited to small business owners who prefer alternative financing options around monetizing sales and assets for the cash flow a business needs via more traditional loans.
What are some alternative sources of financing for businesses beyond traditional bank loans?
In addition to the funding solutions provided by a bank business loan, companies can access alternative finance sources from asset-based lenders, equipment lessors, providers of working capital loans via merchant cash advances, and receivable financing/invoice factoring companies. Many technology-based firms can access Saas Financing and SR&ED tax credit financing. Alternative funding options should be viewed in the context of advantages to the business and the cost of financing.
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