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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.
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