What are some tips for successfully securing business financing?

To access debt financing: Develop a comprehensive business plan highlighting your industry knowledge, market understanding, and growth potential. Cultivate connections with financiers by networking and fostering relationships in the financial sector. Boost your credit score by making regular bill payments, minimizing outstanding debts, and correcting credit report errors. Be ready for due diligence by maintaining well-organized financial, business, and legal documents. Engage financial professionals such as advisors, accountants, or attorneys who are experts in business financing for invaluable advice. Visit: https://www.7parkavenuefinancial.com

Business Finance Sources: Funding Options for Growth

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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, it is important to understand these costs and alternatives. We think so! Let's dig in.

Traditional lenders reject 70% of applications, leaving owners scrambling for alternatives. Meanwhile, opportunities slip away as competitors secure funding faster. The solution? Understanding diverse business finance sources beyond conventional banking. Smart business owners leverage multiple financing channels to fuel growth and maintain competitive advantage.

Introduction

Securing adequate financing is essential to a business's effective operation and expansion, enabling vital functions such as investment, daily operations, and growth.

This article intends to compare traditional financing—largely facilitated by banking institutions—with alternative financing models, including receivable financing and asset-based lending.

By examining 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 and financing managers want to know that they can access cash and loans on an ongoing basis, 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 their 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 expenses, etc.

We can go to the textbook definition also (not our favorite 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 big fans 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!

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 days sales outstanding and inventory turns.

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 that can happen to your business.

So now you have a better handle on working capital—what's 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 are the 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 favorable 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.

You achieve external financing through 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% per 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.

Ninety-nine percent 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 sub debt capital or mezzanine loan. Mezzanine capital comes with a higher interest rate as it is viewed as high risk compared to financing backed by collateral. It's known as a half way between equity funding and funding from debt capital companies.

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 versus using more personal savings.

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.

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 user of factoring solutions. Cash generated via invoice financing / 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 Development (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 from borrowing money.

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 an SR&ED 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 with 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 as sales and company assets grow.

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 and business 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.

Case Study: The Benefits of Multiple Business Finance Sources

Background: Canadian mfr, a Toronto-based company, struggled with seasonal cash flow gaps that prevented it from accepting large contracts.

Challenge: Traditional bank loans required lengthy approval processes that didn't align with urgent contract deadlines. Their seasonal revenue patterns made banks hesitant to extend credit.

Solution: Management diversified business finance sources by establishing relationships with an invoice factoring company, an equipment financing provider, and a business credit line.

Key Takeaway: Diversifying business finance sources provided the company with the flexibility to grow its business strategically rather than reactively.

KEY TAKEAWAYS

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 securing 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

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.

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 assets that remain idle.

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.

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.

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 firms 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.

Citations

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR: Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Business Finance Sources: Complete Guide for Canadian Businesses | 7 Park Avenue Financial

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Unlocking Business Growth: Traditional Financing vs. Alternative Solutions in Canada