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What if the key to unlocking your business's full potential was not in a bank's vault, but in the innovative realm of alternative financing?
Alternative Funding Sources for Non-Bank Lending in Canada / The Rise of Bank Financing Alternatives
Alternative solutions to bank financing are increasingly becoming the norm. Canadian business owners and financial managers are actively seeking non-bank lending options for starting and growing their businesses. Traditional bank loans are becoming more challenging to secure, not just during pandemic times.
While Canadian banks are known for their strength, accessing business capital through them can be challenging. Non-bank alternatives offer viable solutions for SMEs in need of funding.
The New Norm in Canadian Business Financing
Have you ever wondered how your business could thrive if it wasn't shackled by the limitations of traditional bank financing?
Bank Financing alternative solutions are, in many ways, the new normal. Canadian business owners and financial managers are constantly seeking bank alternatives as they start and grow their businesses. Traditional bank loans seem more difficult to achieve for thousands of business owners and their financial managers in Canada, and we're not talking about just pandemic time.
Understanding Bank Financing Criteria
Key Point - It's interesting to note that all alternative finance mechanisms we discuss are available from Canadian chartered banks. But it will always come back to the criteria in place as to your ability to access the above solutions at low bank rates. The traditional prerequisites for accessing bank credit are the length of time in business, balance sheets that reference positive equity, profit history, cash flow coverage, and the owner's personal credit history and collateral.
Exploring Alternative Finance Solutions
Alternative finance solutions when sourced and used properly take the uncertainty out of financing your business and that's what business owners are looking for. While not widely regulated by the government many of the industries are self-regulated by their trade associations and are governed by Canadian borrowing laws. Short-term working capital loans and online lending 'p2p' solutions are known as commercial merchant advances.
Who Are the Alternative Lenders?
Generally, these are what are known as non-bank lenders that serve SME commercial finance needs.
They are usually not banks and typically are not deposit takers. Many of the new clients we meet at 7 Park Avenue Financial find their bank arrangements have been rescinded and in more severe cases find themselves in special loans and workout categories at their bank. The good news is there are independent lenders/commercial finance companies that are very able to provide business financing to the SME sector in Canada.
Niche Solutions by Alternative Lenders
Alternative lenders focus predominantly on sales and assets and can provide niche solutions ranging to full-scale business lines of credit. These facilities support both growth and daily
Notably, many alternative finance mechanisms are available from Canadian chartered banks. However, the traditional prerequisites for bank credit such as business tenure, positive equity balance sheets, profit history, cash flow coverage, and personal credit history play a significant role in loan approvals.
Exploring Non-Bank Lending Options
Alternative finance solutions offer a way to navigate the uncertainty of financing your business. These solutions, though not widely regulated by the government, adhere to Canadian borrowing laws and are often self-regulated by trade associations.
Non-bank lenders cater to SME commercial finance needs, providing services that banks might not offer. These include independent lenders and commercial finance companies.
Factoring and Short-Term Working Capital Loans
Factoring is a key financing source for many Canadian businesses. It offers a new alternative to traditional bank loans. Other solutions include short-term working capital loans and online lending 'p2p' solutions like commercial merchant advances.
Diverse Financing Solutions for SMEs
SMEs have access to various financing solutions, from equipment leasing and sale-leasebacks to loan advances based on future sales projections.
Popular Alternative Funding Sources in Canada
Accounts Receivable Financing
Inventory Finance
Short Term Working Capital Loans
Equipment Financing
Tax Credit Financing
Online Business Loans - MCA's
Asset-Based Lines Of Credit
Purchase Order Financing
CASE STUDY - ASSET-BASED LENDING
Background: XYZ Manufacturing, a mid-sized industrial equipment manufacturer, had been relying on a traditional bank loan to finance its operations for several years. The company had a solid track record and had maintained a strong relationship with its bank. However, due to unforeseen circumstances, the bank decided to recall the loan earlier than expected, leaving XYZ Manufacturing in a precarious financial position.
Challenges: The bank's loan recall put XYZ Manufacturing in a challenging situation. The firm needed a substantial infusion of capital to continue its day-to-day operations, cover payroll, and fulfill customer orders. Losing access to the bank loan threatened to disrupt production and damage customer relationships.
Solution: Recognizing the urgency of the situation, XYZ Manufacturing's management team began exploring alternative financing options. After conducting thorough research and consulting with financial advisors, they identified asset-based lending as a viable solution.
Asset-Based Lending Implementation:
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Collateral Assessment: XYZ Manufacturing had a considerable amount of valuable assets, including accounts receivable, inventory, and machinery. An asset-based lending provider conducted a thorough evaluation of these assets to determine their borrowing capacity.
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Customized Financing: The asset-based lending provider structured a revolving line of credit based on the value of XYZ Manufacturing's assets. This solution allowed the company to access capital as needed, providing the flexibility required to manage its fluctuating working capital needs.
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Quick Approval: Compared to the lengthy approval process of traditional bank loans, the asset-based lending provider was able to expedite the approval and funding process, ensuring that XYZ Manufacturing received the much-needed capital promptly.
Results: By transitioning to asset-based lending, XYZ Manufacturing was able to address its immediate financial needs and stabilize its operations. The flexible line of credit allowed the company to meet payroll, fulfill customer orders, and continue production without disruptions. Moreover, it provided the firm with room for growth and expansion as they could access additional capital as their assets grew.
Conclusion: XYZ Manufacturing's successful transition to asset-based lending not only resolved their immediate financial crisis but also positioned them for future growth and financial stability.
This case demonstrates how businesses facing a bank loan recall can find viable solutions through asset-based lending, leveraging their existing assets to secure the financing they need to thrive.
The Advantages of Alternative Financing
Alternative financing is becoming mainstream, offering improvements over traditional business financing. The rise of fintech and internet marketing has opened up new avenues for accessing business capital. Technological advancements have enabled Canadian businesses to access a wide variety of financing solutions, making capital more accessible than ever before.
Canadian business borrowers are encouraged to view alternative lenders as specialists in their respective fields, offering unique financial solutions that banks might not provide.
Key Takeaways
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Non-Bank Lenders are financial entities that provide loans and financing solutions outside of traditional banking institutions. They cater primarily to small and medium-sized enterprises (SMEs), offering more flexible criteria and diverse funding options. Understanding their role is crucial, as they represent a significant portion of the alternative lending landscape.
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Factoring (Accounts Receivable Financing): This involves selling your accounts receivable at a discount to a financier. It's a fast way to get cash, bypassing the usual delays in payment processing. This method is essential in the alternative financing sphere for its immediacy and accessibility to businesses with strong sales but delayed payment cycles.
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Asset-Based Lending: This concept revolves around using your company's assets (like inventory or receivables) as collateral for loans. It's a cornerstone of alternative funding, offering liquidity based on the value of tangible assets rather than just credit history or profitability.
Conclusion
Don't let bank rejections hold you back – explore 7 Park Avenue Financial's innovative financing solutions tailored to your success - Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can help you with financing solutions for growth.
Instead of focusing on the limitations of traditional banking, Canadian business owners and financial managers should explore real-world solutions through alternative funding sources.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What are non-bank lending alternatives?
Non-bank lending alternatives and private lending options are financial solutions provided by entities other than traditional banks, offering more flexible terms and diverse funding options, including peer-to-peer lending, factoring, and asset-based loans.
Equity solutions include venture capital financing and angel investment funding.
How do non-bank loans differ from traditional bank loans?
Non-bank loans via alternative funding sources often have more flexible qualification criteria, faster processing times, and can provide more tailored solutions for specific business needs compared to traditional bank loans.
What businesses can benefit from non-bank lending?
Small and medium-sized enterprises, particularly those with unique financial needs or those unable to secure traditional bank financing, can greatly benefit from non-bank lending options.
Are non-bank lending options safe and regulated?
Yes, non-bank lenders are typically regulated and must adhere to financial industry standards, similar to traditional lenders such as banks, though the level of regulation may vary. It's important to choose reputable lenders with a solid track record.
What factors should I consider when choosing a non-bank lender?
Evaluate the lender's credibility, the terms and rates offered, the flexibility of the loan options, and any additional fees. It's crucial to understand the agreement fully before committing.
What types of collateral are required for non-bank loans?
Non-bank loans can use various types of collateral, including accounts receivable, inventory, or even future sales, depending on the lender and the specific loan product.
How quickly can I access funds through non-bank lending?
Access to funds for the business owner varies but can be significantly quicker than traditional banks, as alternative funding options can be available sometimes within days, particularly with options like merchant cash advances or factoring.
Can startups access non-bank lending options?
Yes, startups can access business loan solutions via non-bank lending, though the options may be more limited compared to established businesses, with a focus on future sales or potential growth. In some cases, angel investors might consider funding solutions for startups and small businesses. Larger businesses, often technology related might consider venture capitalists. The business owners' own money is often part of the bootstrapping process of a startup.
Often trade credit financing can help with business cash flows, as can credit union business loans.
Government loans, similar to the U.S. SBA loan from the Small Business Administration are also available - for example, the Canada Small Business Financing Program - providing financial assistance at competitive rates. Some Canadian businesses can qualify for small business grants and revenue-based capital solutions.
Are interest rates higher for non-bank loans?
Interest rates for non-bank loans can be higher than traditional banks, reflecting the higher risk and increased flexibility, but they vary widely between lenders and products.
What is the typical repayment period for non-bank loans?
Repayment periods for non-bank loans can range from short-term (a few months) to several years, depending on the loan type and agreement terms.
Why is non-bank lending growing in popularity?
Non-bank lending for small business owners / SME's is growing due to its flexibility, quicker approval processes, and the ability to cater to a wider range of business needs and credit profiles, making it an attractive option for many businesses.
What is the main advantage of factoring as a non-bank lending option?
The main advantage of factoring versus solutions from traditional financial institutions is immediate cash flow improvement, as it allows businesses to convert receivables into cash quickly, without waiting for the usual payment cycle.
