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Small Business Financing Options
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Financing & Cash flow are the biggest issues facing businesses today
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BUSINESS FINANCING OPTIONS
According to recent statistics, small businesses are the backbone of the economy, accounting for over 50% of employment and GDP.
However, they face significant challenges in accessing financing, with over 70% of small businesses being rejected for loans by traditional financial institutions. Understanding these trends and statistics can help business owners navigate the complex world of business financing more effectively.
It's not as bad as you think. No really, we're serious. We're talking about business finance options in Canada - all the way through from start-up to Corporate credit commercial loan facilities.
Business Finance Options: Small Business Loan Funding in Canada
It’s common for clients to know what or how much they need for their Canadian business financing needs.
Their challenge usually concerns knowing their business financing options, the various benefits, and, most importantly, how to secure that financing. Let’s review!
What Is Business Financing?
Business financing is securing funds to support a business's operations, growth, and development. I
It involves exploring various financing options, such as debt, equity, and mezzanine, to meet the business's financial needs.
Understanding your financing options is crucial whether you want to expand your operations, purchase new equipment, or acquire a business.
Equity financing, for instance, involves selling a portion of your business in exchange for capital, while debt financing requires borrowing funds that must be repaid over time.
Each option has its own set of advantages and considerations, making it essential for business owners to evaluate their needs and financial projections carefully.
MOST COMMON WAYS FOR EQUITY FINANCING YOUR BUSINESS
When you consider it, we are talking essentially about sources of funds for small businesses, and that comes from either borrowing facilities or personal or corporate equity.
Starting your own business involves significant challenges and considerations, particularly regarding the investment and time needed for success.
We’re not going to focus too much today on personal resources—typically, those are collateral home mortgages, business credit cards, and the proverbial friends and family. We’ll let you address those yourselves. Instead, let’s focus on corporate borrowing, whether you are a start-up or an established business.
BANK LOANS AND SMALL BUSINESS LENDING THROUGH FINANCIAL INSTITUTION
So, what are the key essentials in corporate credit facilities?
They are supplier credit (most business owners don’t, unfortunately, consider that as a source of financing, but it is working capital financing and loans from banks and the government.
(The Canadian SBL loan program goes to 350k and we firmly believe the govt small business loan is one of the best facilities available to small and medium-sized businesses in Canada).
These term loans are the equivalent of U.S. SBA loans. They are a form of debt financing funded on a term loan structure.
A good credit score related to personal finances is required for the business owner/owners. A traditional financial institution typically needs good personal credit to provide financing solutions.
Interest repayment terms around the monthly payment are flexible and can be tailored to your needs. If government loans are used effectively, entrepreneurs must deplete their retirement savings accounts.
When you consider it, no financing solution will rarely cover everything you need. A combination of borrowing structures will allow you to achieve all the working or long-term corporate credit and capital you need.
For example, the majority of equipment in Canada is financed via equipment leasing and financing,
EQUIPMENT FINANCING / LEASING
However, lease equipment financing is long-term capital matched against the asset's useful life—in many cases, you are instead looking for operating capital, the ever-required 'cash flow' that is your company's lifeblood.
That capital is sourced via a bank operating line of credit, a working capital facility via a non-bank lender, or an asset-based lending facility that comprises receivables, inventory and fixed assets.
FUNDING SALES VIA ACCOUNTS RECEIVABLES FINANCE
One of the most popular and growing methods of financing today is factoring. Other names it goes by are receivable finance, invoice financing/invoice discounting, and our favourite, C I D, which stands for confidential invoice discounting.
This type of financing gives you all the working capital and cash flow you need, hence its popularity. Still, it is more expensive than traditional corporate credit facilities via a bank. It’s a misunderstood form of finance; essentially, it’s the sale of your receivables as you generate revenue and fund your outstanding invoices.
In mezzanine financing, lenders may receive equity interest as a potential outcome, allowing them to convert loans into equity stakes if certain conditions are unmet.
There is no actual credit limit per se, and you receive funding automatically as sales grow! Owners' credit scores do not significantly emphasize this type of financing. Firms can take on large orders and new contracts without the risk of being able to fund these sales.
Our aforementioned Confidential Receivable Finance facility is a factoring or invoice discounting facility that doesn’t force you to tell your customers that you are financing your firm through this type of arrangement when financing invoices.
In summary, the type of capital and the amount of business finance you require depends on which stage or cycle your business is in, either start-up or advanced and mature.
Small business owners understand the type of financing they need by ensuring they have a solid handle on their operating expenses and capital cost requirements. Cash flow projections and a list of potential other collateral are always helpful… allowing you to feel confident that you can approach external financing successfully for business loans.
KEY TAKEAWAYS
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Understanding debt vs. equity financing fundamentals provides clarity on funding structures.
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Grasping cash flow management principles ensures optimal use of financial resources.
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Recognizing various loan types helps match financing to specific business needs.
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Comprehending interest rate calculations allows for accurate cost comparisons.
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Evaluating collateral requirements aids in assessing risk and securing better terms.
Alternative Financing Options
Alternative financing options refer to non-traditional funding sources available to businesses.
These options include crowdfunding, peer-to-peer lending, invoice financing, and factoring. Crowdfunding allows businesses to raise small amounts of money from many people, typically via online platforms. Peer-to-peer lending connects businesses directly with individual lenders, often resulting in more favourable terms.
Invoice financing and factoring involve selling outstanding accounts receivable to a third party to access cash quickly.
These alternative financing options can give businesses access to capital when traditional financial institutions are not an option. They often offer more flexible repayment terms and can sometimes come with lower interest rates, making them an attractive choice for many small businesses.
Managing Business Expenses
Managing business expenses is crucial for maintaining a healthy financial position. Businesses can manage their expenses by creating a detailed budget, diligently tracking expenses, and reducing unnecessary costs.
Utilizing financial statements, such as income statements and balance sheets, helps monitor financial performance and make informed decisions. Financial institutions, such as banks and credit unions, offer various tools and services to help manage finances and access different financing options.
By monitoring business expenses and leveraging financial institution resources, business owners can ensure they are making the most of their financial resources and maintaining a stable financial footing.
CONCLUSION - BUSINESS LOAN SOLUTIONS FOR CANADIAN BUSINESS
Angel investors and equity financing/venture capital not working - it rarely is for Canadian firms in the SME sector of Canada looking for small business financing -
Those venture capital firms also demand significant ownership via their potential equity investment in your company -
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor, about business funding you need today and for the future for various financial and business capital needs.
FAQ: FREQUENTLY ASKED QUESTIONS
What are the advantages of diversifying my business finance options?
Diversifying your business finance options provides flexibility, reduces dependence on a single funding source, and allows you to tailor financing to specific needs, ultimately improving your company's financial resilience and growth potential.
How can the right financing option improve my business's cash flow?
The right financing option can provide timely access to capital, smooth out income fluctuations, and allow for strategic investments, ultimately enhancing your business's ability to both raise capital and manage expenses and capitalize on growth opportunities.
Are there tax benefits associated with certain business finance options?
Yes, some financing options offer tax advantages. For example, interest on business loans is often tax-deductible, while specific government grants may provide tax credits or deferrals, potentially reducing your overall tax burden as you pay interest.
Can business finance options help me expand into new markets via debt and equity options?
Absolutely. The right financing can provide the capital to fund market research, product development, and marketing efforts required to enter new markets and expand your customer base successfully.
How do business finance options impact my company's valuation?
Strategic use of business finance options can positively impact your company's valuation by demonstrating financial acumen, supporting growth initiatives, and improving key financial metrics that investors and potential buyers consider valuable.
What role does credit history play in accessing business finance options?
Your personal and business credit history significantly influences your ability to secure financing. Lenders use credit scores to assess risk, determine interest rates, and set loan terms. Maintaining a strong credit profile opens up more favourable financing options. Many small business owners investigate the merchant cash advance / short-term working capital loan.
How do seasonal business cycles affect financing choices?
Seasonal fluctuations in revenue can impact your financing needs and repayment abilities. Options like lines of credit or invoice factoring may be more suitable for businesses with cyclical cash flows, providing flexibility during slower periods.
How does the age of my business affect available finance options?
Due to limited credit history and financial track records, newer businesses often face more challenges in securing either equity finance, an unsecured business loan, or debt finance via traditional financing. Alternative options like angel investors, crowdfunding, or startup-focused lenders may be more accessible for these enterprises.
What role does financial forecasting play in securing business finance?
Accurate financial forecasting is crucial when applying for business financing. It demonstrates your understanding of your business's financial health, growth potential, and ability to repay loans, increasing your credibility with lenders and investors.
How do interest rates and fees compare across different business finance options?
Interest rates and fees vary widely depending on the type of financing, lender, and your business's risk profile. Traditional bank loans often offer lower rates but have stricter requirements. Alternative lenders may have higher rates but more flexible terms. It's crucial to compare the annual percentage rate (APR) and all associated fees to understand the true cost of each option.
What types of collateral are typically required for secured business financing?
Typical forms of collateral include real estate, equipment, inventory, accounts receivable, and personal assets. The type and amount of collateral required depends on the loan amount, purpose, and lender's policies. Some options, like unsecured lines of credit or revenue-based financing, may not need traditional collateral but often come with higher interest rates.
How long does the application and approval process take for various business finance options?
The timeline varies significantly across different financing options. For approval, traditional bank loans may take several weeks to months, while online lenders can sometimes provide decisions within hours or days. Factors affecting the timeline include the complexity of your business, the amount of financing requested, and the completeness of your application package.
