Our blog highlights Canadian Business Financing solutions via receivable finance , equipment finance, working capital financing, asset based lending, business acquisition financing,franchise finance, and tax credit monetization via SRED and Film Tax Credits.
Our goal is to educate and assist Canadian businesses with their financing needs.
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In 2004 I founded 7 PARK AVENUE FINANCIAL. At that time I had spent all my working life, at that time - Over 30 years in Commercial credit and lending and Canadian business financing. I believe the commercial lending landscape has drastically changed in Canada. I believe a void exists for business owners and finance managers for companies, large and small who want service, creativity, and alternatives.
Every day we strive to consistently deliver business financing that you feel meets the needs of your business. If you believe as we do that financing solutions and alternatives exist for your firm we want to talk to you. Our purpose is simple: we want to deliver the best business finance solutions for your company.
Decoding the Growth Capital Financing Puzzle for Business Success
Staying on top of any aspect of your business is important, including ensuring you understand some of your alternatives when considering growth financing and working capital solutions versus debt financing solutions. We're talking about everything from standard solutions such as working capital term loans out to the end of the spectrum, the new kid on the block: purchase order financing for your business growth and business financing needs.
INTRODUCTION
Growth financing, a term often thrown around in boardrooms and investor meetings, refers to the capital sourced to fuel the expansion of an organization, either through the launch of new products, market diversification, acquisition of smaller entities, or the enhancement of production capacities. Businesses seek the financial backing when they are ready to spread their wings and soar higher.
WHY IS GROWTH FINANCING IMPORTANT?
The importance of growth financing can't be overstated. But scaling a business isn't a trivial matter; it requires capital - capital for research and development, marketing and sales, acquiring new equipment or personnel, and so on. That's where growth financing steps in, bridging the gap between your aspirations and substantial growth.
THE FINANCING CHALLENGE FOR SMALL AND MEDIUM-SIZED BUSINESSES ( SME'S ) IN CANADA
When the SME sector (small and medium-sized businesses in Canada) can't meet the requirements of a Canadian chartered banking solution, then what are some of the alternatives? The last couple of years have been somewhat brutal on manufacturing companies, balance sheets have been hit, and breakeven, let alone profits, have been tough for many.
ASSET-BASED LENDING - A VIABLE SOLUTION FOR BUSINESS FINANCING IN CANADA
A solution for many firms is to utilize a Canadian asset-based lender to address numerous challenges simultaneously. Let's examine a typical situation many clients have encountered over the last couple of years. They might have secured debt via a bank revolver or term loan, coupled with challenges around CRA arrears and accounts payable, which have ballooned due to an overall working capital shortage.
As profiled above, the growth financing comes from an all-encompassing working capital facility to replace the banking solution in this type of case. This type of financing margins receivables to 90%, providing a healthy margining of previously unavailable inventory (anywhere from 30-70%). In rare cases, a straight cash flow loan might be added to the facility to enhance the working capital. further
THE ASSET-BASED LENDING SOLUTION - A VIABLE FUNDING SOLUTION
The asset-based lending approach empowers businesses to utilize their current assets to access the funding they require. In this context, assets can span a wide spectrum, including accounts receivable, inventory, and even tangible physical assets such as machinery and equipment.
Financing business assets offers a powerful tool for businesses to unlock the necessary financial resources to initiate or maintain rapid growth.
HOW DOES ASSET-BASED LENDING WORK?
But how does this function in a practical scenario? Let's delve into the mechanics of asset-based lending to understand better.
In asset-based lending, the business assets serve as collateral for the loan. The process begins with the lender thoroughly evaluating the company's assets. These can include accounts receivable, which are the unpaid invoices or money owed by customers to the business; inventory, which constitutes the raw materials, work-in-progress, or finished goods; and tangible assets, such as machinery and equipment owned by the company.
Once the lender has determined the value of these assets, a business line of credit or, in some cases a term loan is extended to the business, typically a percentage of the appraised value. The loan terms are generally flexible, with the credit line's size fluctuating based on the value of the collateral and the company's financial needs.
This method of financing is especially beneficial to businesses that have significant assets tied up but are facing cash flow issues. By leveraging their existing assets, they can unlock liquidity without resorting to equity financing or incurring substantial debt.
Asset-based financing, therefore, serves a dual role - it allows companies to leverage their assets while providing them with the financial fuel to navigate the growth path. This method of growth financing is an effective way for businesses to capitalize on their existing assets and convert the potential value into real, tangible growth.
The bottom line is that the asset-based growth financing solution solves several problems around collateral, the size of the facility, and the general health of your firm. Most importantly, it addresses your company's ability to grow again and fund that growth simultaneously. In effect, we've achieved a hybrid-type solution that many small and medium-sized firms sorely require.
THE PURCHASE ORDER FINANCING SOLUTION
And what about that purchase order financing concept? It’s not a concept; it’s a viable solution that gains more daily traction.
The P.O. finance solutions bridge the gap between fulfilling your contract or purchase orders from the time you receive them to your ability to get the final payment from your end-user customer. In some cases, purchase order financing involves a foreign supplier in the U.S., Europe or Asia.
Your P.O. financier pays your vendors on your behalf, taking the products, inventory and receivables from that transaction as security. It is a more expensive form of financing but provides a valuable bridge to sales growth success.
The advantages of leveraging growth financing for business expansion are manifold:
Capital Infusion: Growth financing endows businesses with the necessary funds to allocate towards critical sectors such as research and development, marketing, recruitment, and infrastructure enhancement. This capital injection allows businesses to magnify their operations, penetrate fresh markets, and boost their competitive edge.
Talent Acquisition: Growth financing aids businesses in drawing in exceptional talent. With healthy financial backing, companies can propose competitive remuneration and benefits, luring and retaining top-tier employees. This amplifies the business's overall competence and cultivates a positive workspace promoting innovation and growth.
Credibility and Validation: Growth financing can also bestow businesses with recognition and confirmation of their potential. By securing funding from respected investors or financial entities, companies emit a strong message to the market - that they hold promise and are a worthy investment. This can pave the way for beneficial partnerships, collaborations, and other growth prospects that might not have been accessible previously.
CONCLUSION
Business expansion calls for balancing daily operations and strategic investments for long-term profitability.
Growth financing is instrumental in maintaining this balance and avoiding cash flow issues that could hamper crucial investments. It serves as an essential resource for businesses aiming to grow, enabling them to unlock new growth avenues, add value for stakeholders, and enhance their industry presence.
With careful planning and strategic foresight, businesses can successfully leverage growth financing to drive their expansion journey despite its complexity and potential challenges.
The 7 Park Avenue Financial teamis committed to offering tailored growth financing solutions to aid businesses in reaching their goals.
So, is staying on top worth it? We think so. Therefore, you will want to investigate all solutions available for growth financing in Canada thoroughly. Speak to 7 Park Avenue Financial, a trusted, credible and experienced working capital financing advisor who can assist you in identifying solutions and financing options that make sense... for your business!
FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is growth financing?
Growth financing is a strategy that involves raising capital for a small business or medium-sized firm via various financial tools to fund the growth and expansion of a business. This might include launching new products, entering new markets, hiring more staff, or making acquisitions. Sometimes, it can fund strategic acquisitions a company may wish to make to increase sales and profits.
Why might relying solely on equity for growth financing be a disadvantage?
While equity financing can provide significant funds for growth, it can come at a high cost, as it often means giving up a portion of ownership in the company. This dilution of ownership can reduce control over business decisions. It can also drain necessary working capital, the necessary funds for day-to-day operations and short-term obligations.Mezzanine financing is a hybrid debt that ranks lower than senior debt in repayment if there is a default..
How does asset-based financing work?
Asset-based financing is a method where a business uses its existing assets like receivables, inventory, machinery, and equipment as collateral to secure loans or lines of credit. This strategy allows companies to access capital based on the value of their assets, providing a flexible source of funds to drive or sustain rapid growth.
How can growth financing contribute to a competitive advantage?
Growth financing can provide a competitive advantage by enabling businesses to seize opportunities more swiftly and effectively. For example, with the right funding, a company can invest in new technology, hire skilled employees, expand its product range, or enter new markets, thereby gaining an edge over competitors.
What role does working capital play in growth financing?
Working capital, which is essentially the funds available for the day-to-day running of a business, is crucial in growth financing. A well-managed working capital structure allows companies to seize growth opportunities while ensuring smooth operations. Growth financing methods like asset-based financing help to preserve and optimize working capital, thus ensuring the business is well-positioned for sustainable growth.
What are some Tips for preparing a strong growth financing proposal?
To increase the chances of securing growth financing, businesses should consider the following tips when preparing their financing proposal:
1. Thoroughly research potential investors or lenders**: Understand the investment criteria, preferences, and track record of potential investors or lenders. Tailor your proposal to align with their interests and showcase how your business fits their investment thesis.
2. Demonstrate a compelling value proposition**: Clearly articulate your business's unique value to the market. Highlight your competitive advantage, market opportunity, and growth potential to capture the attention of potential investors or lenders.
3. Provide a comprehensive business plan**: Develop a detailed business plan that outlines your growth strategy, financial projections, and key milestones. Show how the growth financing will achieve your expansion goals and generate returns for investors or lenders.
4. Prepare a solid financial forecast**: Present a realistic and well-supported financial forecast demonstrating your business's revenue and profitability potential. Use market research, industry benchmarks, and historical data to validate your projections.
5. Build a strong management team**: Investors and lenders often emphasize the management team. Showcase your team member's skills, experience, and track record to instill confidence in potential investors or lenders.
Click here for the business finance track record of 7 Park Avenue Financial
Acquisition financing is the method of financing in how a company funds a merger or acquisition when financing a purchase with debt.
In Business Acquisition finance it's the capital required to buy another company, as simple as that. The purchase of a business will require external money when buying another business. All cash transactions are rare in acquiring small and medium-sized private companies.
INTRODUCTION
Acquisition financing is a strategic tool for growth that business buyers employ to make significant leaps toward their objectives. This can include :
Buying out a rival competitor
Branching out into new territories,
Investing in new or state-of-the-art technologies.
Buying a business is a way for companies to harness external funding sources and mobilize necessary capital to capitalize on strategic opportunities, propelling them to a whole new level of operational capacity.
Purchasing a business can result in an expanded market share. Moreover, it leads to economies of scale, allowing a company to increase efficiency and reduce costs when its operations expand.
With an effective financing plan, businesses can source the necessary resources to withstand financial challenges and continue sailing toward their goals.
Acquisition financing isn't a one-size-fits-all solution. Each company's situation is unique, and the optimal financing strategy will vary. Depending on the company's value, creditworthiness, and market conditions, it may involve borrowing (debt), selling shares (equity), or a combination of both. The key is to tailor the financing and capital structures to suit the company's needs and provide enough flexibility to adapt to varying scenarios.
UNDERSTANDING THE TYPES OF ACQUISITION FINANCE
Acquisition financing can take several forms, each uniquely crafted to cater to the specific needs of businesses aiming to scale through acquisitions.
The main types are debt financing, equity financing, and hybrid financing.
Debt Financing: This is your traditional loan structure—it's about borrowing money from external sources like banks or other financial institutions and commercial finance companies to fund an acquisition which may include assuming the target company's debt.
BUSINESS ACQUISITION FINANCING CANADA
That is the challenge of financing a takeover in a merger or acquisition. These days more and more Acquisition opportunities are available and ongoing in every industry. Successful acquisition financing provides financial resources to complete the transaction - given there are different types of acquisition.
In some cases, you might be considering a management buyout, or, alternately, a merger of equals and perhaps a bolt-on, aka ' tuck in ' acquisition to broaden your firm's market scope further and accentuate accretive value in an acquired business.
VALUATION IN A COMPANY ACQUISITION - SHARE PURCHASE VERSUS ASSET PURCHASE
Acquisition financing in Canada almost always involves validating the price you'll pay to purchase a small/medium enterprise when acquiring companies.
DUE DILIGENCE ON THE VALUATION IS KEY
One reason is that companies in the SME sector don't always have the same talent available to price real value. Business people should rely on their trusted advisors for professional help in that area, focusing on a strong balance sheet structure, understanding the net asset value of the business, steady cash flow generation, profit margins and other key insights and advice.
There are several reasons why a smaller company might purchase another firm; it could be to get 'scale' instead of current organic growth in the company. Bank loans and alternative financing sources for term debt and lines of credit are the common way to buy a business and finance it successfully.
CONSIDER GOVERNMENT-GUARANTEED LOANS FOR SMALLER TRANSACTIONS
Government loans and seller financing are other methods to complete and finance a business purchase.
A successful acquisition loan will facilitate the purchase of another business. The type of financing you require will depend on whether the company is a start-up or a more well-established firm.
HOW DOES ACQUISITION FINANCING WORK? WHAT ARE THE WAYS TO FINANCE A MERGER OR ACQUISITION?
The good news is there are numerous ways to finance the purchase of a business when financing an acquisition with debt and your owner equity injection. In the new economy, traditional and alternative financing sources are available via the right acquisition financing lenders.
The ability to procure reasonable rates based on the transaction's overall credit quality is important when putting your financial strategy in place. Flexible terms and reasonable financing costs will help propel the purchase toward higher sales and profits.
HOW DO YOU FINANCE A COMPANY ACQUISITION
Many transactions do not meet the lending criteria of traditional Canadian chartered bank financing in the current environment. Alternative funders, particularly acquisition financing lenders, may provide the solution you are looking for - the challenge is ensuring rates and flexibility match your business goals.
Banks in Canada look for key metrics such as growing revenues, profits, and a clean balance sheet. Alternative lenders often focus on hard assets, accounts receivable, etc., versus the bank underwriters' traditional cash flow. Bank acquisition financing is a solution for a term acquisition loan if bank lending criteria can be met.
THE CANADA SMALL BUSINESS FINANCING PROGRAM
Government of Canada Small Business Loans should not be overlooked as a potential source of financing. The government-guaranteed business loan perfectly matches many acquisition targets in the SME enterprise area and the booming franchise sector.
The government-guaranteed loans typically are not larger than 1.1M dollars, limiting the size of many acquisitions done in this manner. Franchise financing is often complete with these ' SBL LOANS ', and requires a lower personal capital investment for the purchase of the target company.
The program focuses on three asset categories, equipment, real estate, and leasehold improvements. Down payments are minimal, and the program has rates and loan flexibility repayment that rival larger corporations. Entrepreneurs applying for this loan should ensure they have good personal credit and net worth, which are key lending criteria for the program and their ' down payment' represents the equity financing portion of the transaction.
KEY POINT - In 2022, the government of Canada substantially increased the program, including a new loan cap of 1.1M dollars, and added several new financing structures, including credit lines, working capital, goodwill financing, and intellectual property as a part of the financing package in this offering.
SELLER FINANCING / VENDOR TAKEBACK FINANCING
One method of business acquisition financing that brings substantial creativity to the process is the 'seller finance' strategy. Financing is often greatly enhanced if there is a seller finance/vendor takeback type component to your transaction and a potential earn-out payment to the owner/seller.
This financing method has the seller/sellers of the business providing a payment contribution to the total purchase price. Purchasers then make installment payments or, in some cases, 'balloon payments' on the seller financing portion, typically with favourable rates and flexibility. This finance strategy can sometimes be the missing piece that takes your transaction over the goal line!
The terms involved in financing a business you are buying can themselves be overwhelming to those who don't regularly work with
EBITDA, intangible assets, capitalization and discount rates, LBO financing mbo financing
CONSIDER THESE LONG-TERM ISSUES
We would point out that as technically overwhelming as some of those issues might be, there is even a whole additional layer of complexity around longer-term issues down the road. These would include:
- Owner and management compensation
- Insurance planning
- Estate planning
- Exit strategy
Regarding our last point on 'exit strategy,' imagine the look on some purchasers' faces when they have not even completed the deal and are encouraged to talk about an 'exit strategy'!
ADDRESSING THE PURCHASE PRICE AND FINANCIAL DUE DILIGENCE WHEN FINANCING THE PURCHASE OF AN EXISTING BUSINESS
At the heart of the matter around the final price paid for a business is the concept that both parties feel they have reached a fair deal for a smooth ownership transition.
As we all know, the buyers' and business owners'/sellers' perceptions of the same deal might vary greatly. Ultimately all the technical jargon around buying a business comes down to a term such as 'reasonable market value.'
As common sense as this may sound, it also has its challenges since it is only a hypothetical value based on all the different financial elements related to a business's purchase.
The most commonly used business valuation is the 'value of future earnings..., one type of valuation multiplier. Accountants and financial advisors often project earnings out as far as ten years and try and then place some value and normalcy around those future profits. Our advice in this area is that owners should not focus solely on future earnings potential; other factors should be considered.
VALUING ASSETS OF BUSINESS ACQUISITIONS
Of course, some other factors include the true value of the current business assets, such as equipment, real estate, fixtures and leaseholds, etc. We can only say that as critical as those assets are, they must be supported by the company's ability to generate the cash flow to support those assets and grow the business.
COVENANTS AND RATIOS
The business must meet any financial covenants imposed or required by lenders, typically in the areas of debt to equity, etc. These financial covenants are usually associated with traditional bank loan / senior debt financing.
Buyers and sellers frequently disagree on the total purchase price, with all sorts of psychology kicking in around prices being set artificially high for negotiation purposes, the buyer's focus on a low-ball offer, etc.
We would also point out that the buy/sell challenge is accentuated when it relates to a ' service' firm instead of a product firm. Many experts agree that the business's valuation was so far out of whack that this clouded any possible attempts to negotiate a fair price for buyer and seller.
WILL THIRD-PARTY EXPERTISE HELP YOUR TRANSACTION
The bottom line: buying or selling a small to medium enterprise has its challenges. If owners know the key basics around the technical aspects of the matter, they can successfully utilize third-party assistance (accountant, lawyer, trusted financial advisor) to consummate a successful transaction.
Buyers and sellers must focus on tangible issues and all the intangibles that come into play to assist in a proper (and successful) buy or sell. Methods to finance a purchase depending on the business's overall size and credit quality and the post-acquisition integration plan.
LOANS TO BUY A BUSINESS IN CANADA / BUYOUT ACQUISITION FUNDING SOLUTIONS
Various types of financing are available to complete a buyout. Commonly used financing techniques in acquisitions and mergers and successful acquisition finance structures include:
Asset-Based Loans (The target company's assets can often help finance the purchase via leveraging a company's assets ) These facilities work well with a leveraged buyout.
Non-bank asset-based lines of credit / asset-backed financing via asset-based finance companies
Government Small Business Term Loan / Small business acquisition financing
Cash flow Financing loans / Mezzanine Financing
Traditional bank financing
Accounts Receivable Finance & Inventory Finance - financing working capital through A/R financing provides valuable cash flow for day-to-day operations, and the ability to finance inventories helps accelerate the cash conversion cycle of the business.
Sale-leaseback strategies
Mezzanine Finance / Mezzanine Loans
Vendor takebacks - They are often the final component that brings a transaction together to buy a business - often reducing the need for additional debt from Canadian financing companies - The acquiring company will often benefit from the expertise of the seller for a defined period of time in an owner financing scenario
In some cases, business owners/entrepreneurs may wish to partner with a third-party investor or a strategic partner who then assumes partial ownership in a combined company
CASE STUDY
Company Y, a business rooted in manufacturing, had a vision. It aspired to branch out its product portfolio and venture into uncharted markets. To fulfill this objective, it needed a plan, a strategy to equip it with the necessary resources and capabilities. That's where acquisition financing came into play.
With a well-thought-out combination of debt and equity financing, Company Y set its sights on a complementary business operating in a different industry. Why this business? It had three key attributes that Company Y found compelling: new distribution channels, additional manufacturing capabilities, and an enlarged customer base.
The transaction was about strategically leveraging acquisition financing to unlock synergies and drive growth. By acquiring the new business, Company Y gained access to a broader network of distribution channels. This meant that Company Y could now reach more customers and penetrate new markets more effectively, increasing sales and revenue.. and profits!
Next, the additional manufacturing capabilities acquired in the deal were like adding more engines to Company Y's production vehicle. This led to increased productivity and, importantly, allowed Company Y to create a wider variety of products. This diversity in product offerings, in turn, catered to a larger segment of customers, thereby further expanding Company Y's market share.
Let's not forget about the expanded customer base, either. The acquired company came with its own set of loyal customers. So, Company Y retained its existing customer base and inherited a new one. This amplified customer base was a powerful tool for Company Y to increase its market presence and enhance its competitiveness.
BENEFITS OF ACQUISITION FINANCING
Market Share Boost: Acquisition financing can supercharge your market presence. How? By enabling the purchase of competitors or businesses that complement your own. This opens doors to a larger customer base, potentially leading to increased sales and a stronger standing in the market.
Diversification and Growth: It allows businesses to branch out and explore new territories. Acquisition financing can help buy companies in different industries or geographical areas, reducing reliance on one market or product, and unveiling new avenues for growth.
Knowledge and Resource Acquisition: When you buy a business, you're getting the company and gaining access to its talent and resources. This can be a game-changer, especially to break into new sectors or amplify capabilities.
Cost Savings and Synergies: Two businesses coming together can mean duplicate roles being eliminated, operations streamlined, and shared resources optimally utilized, all leading to potential cost savings, increased efficiency, and improved profit margins.
Competitive Edge: Keeping up with the competition is key in the business world. Acquisition financing can help you stay ahead of the curve, respond swiftly to market trends, adopt cutting-edge technologies, or access new distribution channels.
Acquisition financing is not just a trending practice—it's a proven growth strategy. It provides immediate funding to acquire resources, expand market presence, and secure a competitive edge. It paves the way for the exploration of new markets by acquiring new resources and capabilities. It often leads to financial growth, enabling companies to fulfill shareholder expectations for expansion and returns.
CONCLUSION - LOANS TO BUY A BUSINESS / METHODS OF ACQUISITION
In the dynamic business world, acquisition financing is a robust tool that can supercharge growth, bolster market share, and sharpen competitive edge. It offers businesses a ticket to tap into external funds via debt, equity, or a blend of both, opening the gates to strategic opportunities, a wider product range, and exploration of fresh markets.
However, remember that acquisition financing isn't a decision to be made on a whim—it calls for meticulous planning, strategic alignment, and exhaustive due diligence.
It's imperative to assess your business's financial readiness, foster relationships with prospective lenders or investors, and navigate the maze of legal and regulatory mandates.
The choice of acquisition financing method is just one piece of the puzzle. Picking a credible and fitting lender is equally crucial.
You'll want to partner with a business financing partner who's accessible, open in communication, and offers a straightforward application process. The prime contenders are those that showcase efficiency and flexibility, especially those offering diverse acquisition finance structures.
Financing an acquisition/financing a takeover requires specific expertise in an acquisition deal if you're looking to successfully explore the key aspects of buying and selling a business for acquisition finance solutions.
Whether you are buying a business in Ontario or any other part of Canada let our team make your transaction successful with term sheet and business purchase loans tailored to your specific needs. We'll help you complete that 'buying an existing business checklist'!
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is acquisition financing?
Acquisition finance refers to the method buyers use to obtain financing in the acquisition of target companies. A small business can increase revenues and benefit from the economy of scale in purchasing another business.
Larger transactions might involve private equity firms where a strategic partner of the private equity firm might assist in financing a business purchase. Larger public firms might consider a stock swap/share swap.
What are Key Considerations Before Pursuing Acquisition Financing
Strategic Alignment: First and foremost, check that the target acquisition gels with your strategic objectives. This involves conducting comprehensive due diligence and evaluating the fit of cultures, operations, and goals. This careful planning helps to lessen potential risks and boost acquisition success probability.
Financial Health: Lenders and investors will peel back the layers of your business's financial standing. So, a healthy economic history, robust cash flow, and a believable growth strategy are crucial. Demonstrating these traits can build confidence among potential lenders and investors.
Valuation and Deal-making: Accurate valuation of the target acquisition and skillful negotiation are pivotal in acquiring financing. It can be helpful to bring in professionals like valuation experts or M&A advisors to ensure a fair price tag and enhance negotiation success chances.
Legal and Regulatory Compliance: Navigating the often intricate web of legal and regulatory requirements is a must. Seek legal advice and make sure you comply with all applicable laws, regulations, and sector-specific demands. Ignoring these could result in costly hold-ups or even a halted acquisition process.
Integration Planning: A thought-out integration plan is a key part of acquisition financing. Create a detailed blueprint that covers cultural merging, organizational structure, and operational synergies. This can pave the way for a smooth transition and successful post-acquisition integration.
What are the Steps to Secure Acquisition Financing
Evaluate Financing Needs: Start by gauging the financial needs of the acquisition, covering purchase price, working capital requirements, and potential integration expenses. This assessment will help decide the financing amount needed and the most suitable structure.
Discover Funding Sources: Investigate various funding avenues like banks, private equity firms, venture capitalists, or government-supported financing programs. Aim to identify potential lenders or investors with a background in your sector or your type of acquisition.
Craft a Detailed Business Plan: An all-encompassing business plan is a must when hunting for acquisition financing. The plan should spell out the strategic logic behind the acquisition, the financial forecasts, and the anticipated ROI. It should also address possible risks and risk-mitigation tactics.
Foster Relationships: Nurture relationships with prospective lenders or investors. Participate in industry events, network actively, and engage in conversations to foster connections and spotlight your business's unique selling proposition. Solid relationships can improve the odds of securing financing and getting favourable terms.
File Financing Applications: After pinpointing potential funding sources, submit thorough financing applications. Include all required documents, like financial statements, tax returns, legal contracts, and business plans. Be ready to furnish extra details and answer queries from prospective lenders or investors.
Negotiate Terms and Finalize the Deal: If your financing applications get the green light, scrutinize the terms and conditions of the financing offers. Bargain for favourable terms, including interest rates, repayment plans, and any covenants or conditions. Once the terms are finalized, move ahead with deal closure, ensuring all legal and regulatory requirements are fulfilled.
What are Common Challenges in Acquisition Financing and How Does the Business Buyer Overcome Them
Financing Accessibility: Acquisition financing can be tough to secure, especially for smaller or younger businesses. Counter this by exploring alternative financings like government grants, crowdfunding, or strategic partnerships to pursue debt financing. Also, bolstering your business's financial health and demonstrating growth prospects can enhance your financing chances for an optimal financing structure for types of acquisition financing.
Valuation Disagreements: Valuing the target acquisition can be subjective and lead to disputes between buyer and seller. Enlist professional valuation experts to help determine a fair valuation reflecting industry norms and market conditions. Effective negotiation skills are also key to arriving at a mutually satisfactory valuation.
Integration Obstacles: Merging two businesses post-acquisition can throw up significant challenges. Craft a detailed integration plan to tame integration risks and involve key stakeholders from both organizations. Delineating roles and responsibilities, effective communication, and early addressing of cultural differences can facilitate a seamless integration process.
Regulatory Roadblocks: Acquisitions can be subject to varying regulatory approvals, depending on industry and location. Conducting in-depth due diligence and understanding the regulatory landscape before launching into an acquisition is vital. Engage legal counsel to ensure you align with all relevant laws and regulations.
Economic Volatility: Economic downturns or market instability can influence financing availability and acquisition success. To sail through difficult economic conditions, nurture strong relationships with lenders or investors, and consider contingency plans or alternative financing options. A solid business strategy and financial robustness can help withstand economic turbulence.
How Does The Busines Buyer Work With Acquisition Financing Professionals
While deciding on the right acquisition financing method is crucial, selecting a reputable and suitable lender is equally critical. Look for a lender known for its accessibility, communicative nature, and simple application process. Key attributes include efficiency and flexibility—those lenders who offer variable acquisition finance structures are often advantageous. Don't forget the due diligence in the lender selection process to ensure you secure a lender that suits your needs and avoids potential failure.
Regarding company growth strategies in business acquisition financing, acquisition finance is a solid option for a business owner . With its numerous benefits, including access to new resources, entry to different markets, financial growth opportunities, acquisition financing
How does a business choose the right lender for acquisition financing?
Choosing the right lender for financing acquisitions involves researching and considering factors such as the lender's reputation, accessibility, communicativeness, efficiency, and flexibility in offering variable acquisition finance structures. A thorough due diligence process ensures that the chosen lender aligns with the business's needs and goals.
Click here for the business finance track record of 7 Park Avenue Financial
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:
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.
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.
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.
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:
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.
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.
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.
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 andbusiness 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.
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
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.
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.
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.
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.
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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