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Financing & Cash flow are the biggest issues facing business today
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The best business loans and Canadian business financing options for business owners and financial managers aren't always the obvious ones for achieving capital needs for your company.
If there is any good news in today's highly competitive business environment, it is that funding options and a commercial loan and commercial lending alternative are available for everything from startups, growing businesses, as well as financially challenged firms.
WHY IS THE USE OF ALTERNATIVE FINANCE GROWING IN CANADA
THREE REASONS WHY ALTERNATIVE LENDING IS BOOMING IN CANADA
1.Credit Restrictions from Canadian Chartered Banks under restrictions around bank loans for small businesses due to regulation, etc., where direct lending for small businesses has been somewhat curtailed
2.Demand for Funding That Is More quickly Accessible and attuned to industry needs
3.Increased Knowledge Around Benefits of Alternative Finance
Studies show that Canadian business borrowing in the past was somewhat skeptical about dealing with non ' bricks and mortar ' financial institutions, but that is changing quickly. In fact, industry statistics from organizations such as the IVEY SCHOOL OF BUSINESS/UNIVERSITY OF WESTERN ONTARIO advise that 867 Million dollars of alternative capital were borrowed via non-bank lenders from figures available just a few years ago.
CAN CANADIAN BANKS SERVICE YOUR FINANCING NEEDS
Constant changes in the economy ( pandemics included !) make it difficult for companies to access the business capital they need. Mainstream financing via Canadian banks etc. is not always available when you need it. Alternative financing methods and the ability to get a commercial loan in Canada have almost become imperative for business owners and their financial managers to inspect. It is no secret that many industries have unique financing requirements, and even within industries, no company might have the same needs - hence our focus on ... options!
WHAT DRIVES THE NEED FOR BUSINESS FUNDING
So what, in fact, drives the need for financing? It typically comes down to your company's longer-term goals, the size of your business, and the overall 'risk rating' that both traditional and alternative lenders use to provide their capital to your company.
SEPARATING YOUR BUSINESS AND PERSONAL CREDIT LIFE IS IMPORTANT - BUT CHALLENGING!
KEY POINT - When it comes to SME COMMERCIAL FINANCE options at 7 Park Avenue Financial e strongly recommend that business owners separate their business and personal credit. Although traditional banking does, in fact, focus on the reflection of your personal credit history as a measure of how you will handle business affairs, it is still appropriate to have commercial lenders draw on credit info from business credit bureaus such as Dun and Bradstreet - building business credit and being able to demonstrate proper financials and a business plan and cash flow projections goes a long way to business financing success.
TERM LOANS VERSUS SHORT TERM WORKING CAPITAL LOANS
Business owners typically gravitate to term loans - it's a common form of loan that at its basics requires you to make monthly payments over a pre-determined period - typically 2-5 years. These days many clients we speak to are looking for short-term working capital loans, typically covering temporary shortfalls or unique situations.
HOW DO SHORT TERM BUSINESS LOANS WORK AND WHY ARE THEY POPULAR
These loans are prevalent, readily available, and even more good news, quick to close, often in a matter of a week or two. Those short-term working capital loans and financing loans compete directly these days with traditional banks, which of course, have better rates but harder approval criteria. Often no hard collateral is required, just the 'promise' of the business and business owner to pay. Typically these loans are for 10-20 percent of your annual sales volume, as a guideline to keep in mind.
GOVERNMENT GUARANTEED LOANS VIA THE CANADA SMALL BUSINESS FINANCING PROGRAM
Government guaranteed start-up loans are also popular. The government is committed to billions of dollars in these loans every year in Canada. Repayment is long and covers 3 assets you can finance - equipment, leaseholds, and even real estate! The downside - those great rates and terms and flexibility come with an application process that can be cumbersome if you don't have the expertise of an experienced Canadian business financing advisor.
THE BUSINESS LINES OF CREDIT
Businesses run day to day on credit lines, typically secured by receivables and inventory. Asset-based lenders provide non-bank lines that offer generous borrowing margins. Other Alternative business financings and immediate sources of business funding include: Short Term Working Capital Loan ( Also called 'MCA's or Merchant Advances ) These loans are usually very quickly available with the main criteria for approval focusing on your years in business and loan amounts geared to your annual sales, typically in the 15-20% range.
The personal credit history of the owner/owners is also a data point considered for funding. Loan repayments are typically spread out over a year and are often customized to your cash flow receipts from cash and business receivables. Interest rates are higher, but flexibility and quick access to capital is the key benefit. Those are often the key benefits of any alternative lending solution.
RECEIVABLE FINANCING AKA ' FACTORING '
A/R financing is a mainstay of alternative business financing. Financing is based on a high percentage of your receivables, typically 90%, which is significantly higher than Canadian bank receivable margining policies. Rather than an ' interest rate ' per see, commercial receivable finance funders charge a fee, typically in the 1.5- 2% range. Firms with good gross margins who can easily absorb a 1-2% reduction in their profit margins can find themselves virtually becoming an automatic cash machine as they generate cash while creating and growing sales revenues.
It is generally improper to compare this type of financing to a bank business loan as the interest rates and fees are not a 'apples ' comparison. Receivable financing facilities can be stand-alone or combined with other financing, such as an asset-based credit line that allows you to borrow under one facility based solely on your assets and sales.
WHAT DOES 7 PARK AVENUE FINANCIAL RECOMMEND AS THE BEST TYPE OF FACTORING SERVICE
At 7 Park Avenue Financial, we recommend a sole stand-alone facility called a Confidential Receivable Financing solution, allowing you to bill and collect your own receivables while reaping all the benefits of a/r financing/factoring. It's a receivables loan that allows you to use the facility as a credit line.
THE ASSET BASED LINE OF CREDIT - INNOVATIVE FUNDING 101!
This financing is not a working capital loan that brings debt to the balance sheets; it's simply a monetization of your current assets. Note that you can even finance a business purchase with an asset-based loan. Purchase Order funding / ABL Asset Based Lines Of Credit / Inventory Financing. These credit line and sales financing solutions are focused on business sales revenues and current and fixed assets and are offered by asset-based lenders.
Much less reliance is placed on balance sheet ratios, covenants, outside collateral, personal guarantees, etc., often demanded by more traditional lending institutions. You can view ' ABL ' financing from the alternative lending industry as a bridge loan on the road back to more traditional financing.
UTILIZE EQUIPMENT FINANCING FOR ASSET ACQUISITIONS FOR BUSINESS NEEDS SUCH AS BUSINESS EQUIPMENT AND TECHNOLOGY
Equipment Leasing / Equipment Loans / Sale leasebacks Equipment loans and lease financing solutions are utilized by most North American businesses to acquire new and used assets. Business owners are sometimes surprised that used assets can also be financed, as long as they are acquired from another business or distributor, not via a ' private sale. According to industry experts, ' Financing for equipment or technology needs is used by over 80% of North American companies.
Business borrowing via Sale leasebacks can generate working capital for assets your firm owns outright, including real estate. Equipment lease approvals are based on your ability to meet the monthly payment concerning your cash flow and demonstrate the asset financed benefits your business. The asset/equipment is, of course, the main collateral for the lease. It is often recommended that you discuss the lease vs. buy and the lease vs. loan business financing decision with your accountant.
Government Of Canada Small Business Loan Program - Small Business Loans Canada Although a mainstay of traditional banking, many business borrowers are not familiar with the program and challenge locating a banker who will work with government-guaranteed loans. The formal name for the program is the Canada Small Business Financing Program. It allows small businesses, including startups, to get 'traditional bank loans ' based on a guarantee the federal government, via INDUSTRY CANADA, provides to the banks.
Loans are up to $1,000,000.00, which is hardly ' small, 'and over 60,000 loans have been made under the program over the last decade. Any new or established businesses under 10 Million in revenue can apply. The business loan rate of interest in the program is attractive and competitive. At 7 Park Avenue Financial, we work with clients to ensure a speedy approval without missteps typically associated with bank borrowing. So we work with clients on a business plan, cash flow, company history, management overview, etc. Franchise financing and restaurant finance are other major uses of the program. These loans are not business grants but amortized term loans over a typical 2-5 year period.
That business plan and other info help assure a speedy response and approval. 7 Park Avenue Financial business plans meet and exceed bank and commercial lender requirements. Business owners borrowing under the program must have a decent credit score in the 650 range per Canadian credit bureaus such as Equifax. It is essential to note that these ' SBL ' loans ' can only be used for equipment and leasehold interests, and real estate. Terms and conditions for the program are very flexible, including no prepayment penalty. A start-up business loan comes with various requirements and your ability to produce a proper loan package.
Unlike the U.S. counterpart in the U.S., it is only focused on those 3 asset categories and can't be used for cash flow, working capital, r&d, inventory, etc. Loans to buy a business in Canada are often utilized under the Govt SBL program. Many franchise financing needs work very well in this small business loan program. The rates are comparable with Canadian bank interest rates, and terms vary from 2-5 years. A business start-up loan is often the best way to utilize the program. The business loan personal guarantee is always an issue, and in the government loan, it is a limited guarantee.
Statistics show that more and more Canadian business owners understand the various business finance options available to them. As opposed to numerous commercial lenders, it makes more sense to talk to a proper business advisor about types of financing, costs, and conditions. Canadian business has been somewhat slow to adopt alternative financing compared to ur U.S. counterparts. Still, there are numerous opportunities to finance your growth and operating needs for those willing to investigate options.
Similar to bank loans for businesses and other mainstream financings, alternative funding sources all have their benefits and potential drawbacks if not accessed properly, and for the right reasons - so investigate the options that are best suited to your firm's immediate needs. Seek out and speak to 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor with a track record of success to help you grow revenues in your products or services via sources of funding that make sense for your firm.
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