Working capital financing and small business financing in Canada is about assessing your current and future business finance solution needs for commercial loans and funding.
We hear a lot about 'stress testing' these days, which seems a great analogy for our theme of ensuring entrepreneurs that their businesses can withstand the right funding challenges. Let's dig in.
Breaking Through Canada's Business Funding Maze
Canadian entrepreneurs struggle to identify reliable business funding companies amid countless options promising quick approvals.
Traditional banks often reject applications, alternative lenders charge higher rates, and business owners waste precious time navigating confusing requirements.
7 Park Avenue Financial simplifies this process by connecting you with vetted funding partners who understand Canadian business challenges and deliver results.
INTRODUCTION
In the business world, having enough cash and working capital is similar to the fuel that keeps your venture running and growing. Whether you're steering a big, established company or at the helm of a small start-up just finding its feet, choosing the right funding strategy is super important.
Picking a financial plan that fits your business like a glove can be the game-changer that nudges you toward success rather than an early exit.
So what about that oft-used term 'working capital'? It's used a lot and means different things to different people in the industry via your financial statements—more often than not, simply 'operating liquidity.'
WHAT IS WORKING CAPITAL?
Textbooks clearly define working capital: going to your balance sheet and subtracting current liabilities from current assets. That's a great textbook definition, but let's visit the real world together on what that means regarding financial resources.
In looking at different 'stress tests' for your business, it's all about your daily operating needs and, of course, your ability to reduce the long-term obligations you might have in leases or loans.
The absolute number of dollars in your net working capital, as defined by our definition above, does not matter. (Although positive working capital is better than negative working capital!)
FINANCING CURRENT ASSETS
So how do you 'stress test' your business for cash flow needs? It's all about the turnover and management of your working capital accounts. Those accounts are:
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Inventory
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Receivables
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Accounts Payable
Simple business logic tells us that if your inventory and receivables are turning over properly, and you're managing your payables (by delaying them to the maximum amount possible per your terms with suppliers), you will be achieving working capital management success and well on your way to 'stress test' success for a commercial loan.
FINANCING WORKING CAPITAL AS YOUR BUSINESS GROWS
When your business is in the category of startup businesses or just growing and building up receivables and inventory, the liquidity pressures always increase as operating expenses grow. A business owner's personal investment power is limited. That's when the stress comes in!
ALTERNATIVE FINANCING SOLUTIONS IN CANADA
Alternative financing strategies to increase cash flow availability are another positive solution and a good funding source. Your fixes are potentially various—a permanent working capital term loan (larger companies and the big boys call these loans 'sub debt' or mezzanine financing via financial institutions and lenders such as our Canadian banks).
Most businesses are unaware of funding opportunities in the alternative finance area, which often come with higher costs but bring significant funding to the company. They include:
ALTERNATIVE FINANCE SOLUTIONS FOR WORKING CAPITAL BUSINESS FUNDING
A/R Financing / Factoring / Confidential Receivable Finance - Well-paying customers eliminate some of the financing support required for accounts receivable and inventory investment. High growth companies will always require more risk capital, and how much funding you need in this area depends on your DSO and inventory turns.
Inventory loans
SR&ED Tax Credit Financing - funding your research and development
Sale leasebacks on owned assets
Bank Credit lines / Non-bank asset-based lines of credit ('ABL Loans')
Many alternative finance solutions, in most cases, do not bring more debt to the balance sheet.
GOVERNMENT LOANS FOR SMALL BUSINESSES / GOVERNMENT PROGRAMS
Canada Small Business Financing Program federally guaranteed government loans offer another debt financing solution for small businesses unable to access full traditional financing from financial institutions. This assists in SME economic development initiatives. The government partners with select banks and credit unions to provide government-backed loans. These can be a beneficial choice for businesses that find it hard to get traditional loans based on criteria and eligibility requirements from banks.
Similar to the Small Business Administration in the states, the government of Canada offers the Canada Small Business Financing Program, which finances equipment, leasehold improvements, and even real estate for thousands of businesses every year, including startups.
In 2022, the government substantially upgraded the program, adding new types of financing and increasing the loan limit to 1.1 million dollars. Talk to the 7 Park Avenue Financial team to determine if you qualify for SBL loans.
The program is modeled on a traditional business loan with a term loan monthly payment structure—and it does not require that you pledge personal assets as collateral security. There are no hidden fees under the program, but there is a 2% registration fee due on approval, with that amount being potentially blended into the loan payment terms. The interest rate under the program is competitive with other types of traditional financing.
Many new businesses and startup companies, as well as franchises, are financed via these government loans. A new business will always have a daunting financing challenge. Any business with actual or projected revenue of less than 10 million dollars can apply.
More established businesses can focus on bank loans or alternative finance solutions. Every new business owner should investigate the program. BDC loans are also available as a working capital loan option for Canadian businesses. The business loan rate of interest for any government or government-related loan will always be competitive based on overall credit quality.
Business loan requirements for a bank loan will always demand a good credit score and the owner's personal credit history.
It is important to note these loans are not 'business grants/government grants' but lump sum cash term loans repayable typically over 2 years to a 5-year term at the borrower's option, with no prepayment penalty! For a new company, applications for grants require time and expense, and due diligence takes time for approvals.
DEBT FINANCING
Debt financing is a common way to fund a business. It entails borrowing from banks or other lenders and paying interest over a period. Companies must go through a detailed application process, possibly including personal credit checks with the requirement of a personal guarantee.
While it allows you to keep full control over your business and offers tax benefits, the commitment to monthly repayments and potential difficulties securing a loan during financial slumps are potential drawbacks.
THE 'STARTING A BUSINESS' CHALLENGE
Those solutions mentioned above are gaining more traction in Canadian business finance daily! On occasion, you may be asked for a business plan or cash flow projection, and these are always recommended as part of a quicker approval process.
Many clients tell us they address some of their working capital needs through Business Visa credit cards. This adds additional capital. You are paying for what you use, but in our opinion, it does a poor job of separating the owner's personal credit from the business, as these cards are closely tied to the owners' personal net worth and credit scores.
The other solution in a more traditional sense is to ensure you are using lease financing or sale-leaseback financing to minimize cash flow out when considering asset purchases.
Solutions such as this save the business owner from committing additional funds into the business via owner equity which he may not be able to or not want to do.
It certainly isn't unusual in Canada to see business owners, via their financial resources, 'lend' their company money in times of need to fund their business, often with no fixed repayment schedules. However, as we noted, the better solution is an effective turnover of receivables and inventory or accessing the alternative working capital solutions we've mentioned.
Case Study: Benefits of Business Funding Companies
Company: Canadian Manufacturer (Toronto)
Challenge: Needed $75,000 for equipment upgrade but bank required 90-day approval process
Solution: 7 Park Avenue Financial connected them with specialized equipment funding company Timeline: Approved in 3 days, funded in 5 days
Results:
- Increased production capacity by 40%
- Reduced manufacturing costs by 15%
- Generated additional $200,000 revenue in first year
- Established ongoing relationship for future equipment needs
The key benefit was speed – traditional bank approval would have caused them to miss peak season demand, costing approximately $85,000 in lost sales opportunities.
Key Takeaways
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Cash flow analysis determines approval likelihood - Funding companies prioritize monthly revenue patterns over credit scores
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Industry risk affects funding availability - Certain sectors receive preferential treatment while others face restrictions
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Documentation completeness accelerates approvals - Organized financial records for items such as business income, proper financial statements, etc, thereby dramatically reduce processing timeframes
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Personal guarantees increase approval odds - Most funding companies require owner liability to mitigate default risks
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Repayment structure impacts business operations - Daily vs monthly payments affect cash flow management differently
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Interest rate calculations vary significantly - Factor rates, APR, and fees create vastly different total costs
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Funding amount correlates with business revenue - Most companies offer 10-20% of annual revenue as maximum funding
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Broker relationships provide better terms - Established intermediaries often negotiate superior rates and conditions
CONCLUSION
Funding a business comes with various options for small business owners, each carrying unique benefits and possible challenges.
The business owner must understand each financing approach and match it with business needs, requirements, and growth path.
So, when those long shots of business incubators, angel investors/venture capital and venture capitalists seem impossible, every business in Canada always returns to business capital working capital challenges.
Individual and outside investors will also demand a portion of ownership that is undesirable as a company grows.
Venture capital funding/crowdfunding is for Canada's smallest percentage of successful businesses. In the early stages, the proverbial 'friends and family' is one option—although rarely the best one as investors for the company.
Those challenges are diminished, and your business is more successful when you focus on the proper turnover of current assets and the financing of those assets.
If you want to ensure your company is 'stress tested' for proper Canadian business funding needs, speak to 7 Park Avenue Financial.
We are a trusted, credible, and experienced Canadian business financing advisor who can assist you with your funding options and other sources of funding and capital needs via a bank loan or commercial alternative finance solution to find funding for your start-ups or an established Canadian business to take your firm to the next level!
Get the financial return you are looking for by talking to our 7 Park Avenue Financial team when it's a challenge to fund your business.
More funding and proper financing will enhance your long-term growth ability!
FAQ: FREQUENTLY ASKED QUESTIONS
What is the Canada Small Business Financing Program?
The CSBF program uses a secured loan from banking institutions through sharing the risk with lenders. Loans can be used to cover costs such as leasehold improvements and leasing equipment as well as real estate/property.
What are angel investors?
Angels invest their own time and money into helping small companies get off the ground. For funding what they have decided to invest in, they get potential wealth from royalties or equity on successful products that made it past stage one!
Sometimes they might be leaders in a field and contribute experience and network of contacts to a company's success. Angels typically invest between $25,000-$100,000 into the early phases of business start-ups that may not have access to other types of funding.
What is the difference between debt financing and equity financing?
Debt financing involves borrowing money that must be repaid over time with interest. It's like getting a mortgage or car loan for your business. On the other hand, equity financing involves raising money by selling company shares. You don't have to pay back the money, but investors gain ownership of your company.
How can working capital funding benefit a small business?
Working capital funding is a financing arrangement that can help a small business cover its short-term operational costs, such as payroll, rent, and inventory purchases. This type of financing from a traditional lending institution or commercial finance company can bridge the gap between payables and receivables, ensuring continuous operation even when revenue is inconsistent.
What is mezzanine capital?
Mezzanine capital combines the features of debt and equity financing. It's often a loan that can be converted into equity interest if the borrower fails to repay on time or in full. This provides the lender with a safety net, making it a viable option for businesses showing growth but lacking extensive financial history.
What are 8 Sources of Business Finance to Start a Business?
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Personal Investment: Investing your funds demonstrates a commitment to your project. You can use cash or assets as collateral.
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Love Money: Loans from spouse, parents, family, or friends. This is considered "patient capital" to be repaid as business profits increase. Be mindful of potential issues like limited capital and maintaining good relationships.
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Venture Capital: Typically for high-growth potential sectors like IT, biotech, and communication. Venture capitalists provide funding in exchange for equity and expect a healthy return, usually via public shares.
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Angels: Wealthy individuals or retired executives investing in small firms. They offer experience, a network of contacts, and finance early stages of the business, usually between $25,000 and $100,000. They may want a seat on the board in return.
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Crowdfunding: A public fundraising strategy where many people contribute small amounts, often in exchange for equity or rewards. There are multiple forms including equity crowdfunding, debt crowdfunding, and donation/rewards-based crowdfunding.
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Business Incubators: Focus on high-tech businesses and offer shared resources during the early stages of development. They can provide premises, administrative, logistical, and technical resources.
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Grants and Subsidies: Government funding to cover expenses such as R&D, marketing, and salaries. Conditions for grant funding apply to ensure the funds are used as specified for business growth.Non profit organizations can apply for the Governmentt SBL loan.
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Informal Financing: Funding from family and friends can offer more flexibility than formal methods. It's vital to maintain professionalism to avoid strained relationships.
What are the criteria for private and government grants?
Securing grants for small and medium enterprises can be challenging due to intense competition and strict award criteria. Often, you'll need to match the grant funds, with the amount depending on the grantor. For instance, a research grant might require you to cover 40% of the total cost.
You'll typically need to provide the following:
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A comprehensive project description, including location.
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An explanation of your project's benefits.
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A detailed work plan with total costs.
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Relevant experience and background information on key managers.
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Completed application forms when needed.
Your proposal is likely to be evaluated based on:
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Significance.
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Approach.
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Innovation.
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Expertise assessment.
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The need for the grant.
Common reasons for grant rejections include:
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The research or work is not relevant.
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The geographic location is ineligible.
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The proposal fails to communicate how ideas will be addressed effectively.
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The proposal lacks a strong rationale.
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The research plan lacks focus.
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The amount of work is unrealistic.
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The grant funds are not matched.
The Government of Canada's Business Benefits Finder is a resource for finding funding options, including government grants and subsidies.
What is equity financing?
Equity financing is another method of funding a business where investors, often venture capitalists or angel investors, buy a piece of your business. Venture capital firms prefer large investments, whereas angel investors are typically individuals who invest smaller amounts in particular projects. While this approach removes the burden of loan repayments, it requires sharing some of your profits and decision-making power with the investors.
What is Mezzanine Capital?
Mezzanine Capital offers a hybrid financing option that blends debt and equity financing features. This funding type is often suitable for rapidly growing new companies that may not meet the stringent requirements for bank loans. Mezzanine capital can enhance a company's balance sheet appearance and be procured quickly. However, the costs can be higher due to increased risk to the lender and the risk of losing a significant portion of the company.
How quickly can business funding companies provide capital?
Business funding companies can provide capital within 24 hours to several weeks, depending on the funding type and company processes. Alternative lenders often approve applications within 1-3 business days, while traditional institutions may require 2-6 weeks for comprehensive reviews and documentation verification.
What documents do business funding companies require?
Business funding companies typically require financial statements, tax returns, bank statements, and business registration documents. More specialized companies may request industry-specific documentation, cash flow projections, and collateral valuations depending on the funding product and risk assessment requirements.
What interest rates do business funding companies charge?
Business funding companies charge interest rates ranging from 6% to 50% annually, depending on risk factors, funding type, and company policies. Traditional bank-affiliated companies typically offer lower rates (6-15%), while alternative funding companies may charge higher rates (15-50%) but provide faster approvals and more flexible requirements.
Who are the most reliable business funding companies in Canada?
Reliable business funding companies in Canada include established institutions like BDC, alternative lenders such as Paymi and OnDeck, and specialized firms focusing on specific industries or funding types.
What services do business funding companies provide beyond loans?
Business funding companies provide merchant cash advances, equipment financing, invoice factoring, lines of credit, SBL loans, and business consulting services to help companies optimize their financial strategies.
When should businesses approach funding companies for capital?
Businesses should approach funding companies when experiencing growth opportunities, cash flow challenges, equipment needs, or seasonal fluctuations that require additional working capital to maintain operations.
Where can Canadian businesses find reputable funding companies?
Canadian businesses can find reputable funding companies through industry associations, referrals from accountants and lawyers, online directories, and organizations like 7 Park Avenue Financial that specialize in connecting businesses with appropriate lenders.
Why do business funding companies reject applications?
Business funding companies reject applications due to insufficient revenue, poor credit history, inadequate documentation, high debt-to-income ratios, or business models that don't align with their risk tolerance and approval criteria.
How do business funding companies evaluate applications?
Business funding companies evaluate applications by analyzing credit scores, financial statements, cash flow patterns, industry risk factors, collateral value, and business experience to determine approval likelihood and appropriate terms.
Which business funding companies offer the fastest approvals?
Business funding companies offering fastest approvals include online alternative lenders, merchant cash advance providers, and fintech companies that use automated underwriting systems to process applications within 24-48 hours.
How much funding can business funding companies provide?
Business funding companies can provide anywhere from $5,000 to several million dollars, depending on business qualifications, funding type, and company lending limits established by their capital sources and risk management policies.
What industries do business funding companies prefer?
Business funding companies prefer industries with stable cash flows, low seasonal volatility, and established market demand, though many specialize in specific sectors like healthcare, construction, retail, or professional services.
Why should businesses use brokers when selecting funding companies?
Businesses should use brokers when selecting funding companies because brokers understand multiple lenders' requirements, can match businesses with appropriate funding sources, and often negotiate better terms than businesses can achieve independently.
How do business funding companies help businesses grow faster?
Business funding companies help businesses grow faster by providing immediate access to capital for inventory purchases, equipment upgrades, marketing campaigns, and expansion opportunities that would otherwise require years of savings to finance internally.
What advantages do specialized funding companies offer over banks?
Specialized funding companies offer faster approval processes, more flexible qualification requirements, industry-specific expertise, and willingness to work with businesses that banks typically reject due to credit or documentation limitations.
How can business funding companies improve cash flow management?
Business funding companies improve cash flow management by providing working capital loans, invoice factoring services, and lines of credit that smooth out seasonal fluctuations and ensure businesses can meet operational expenses during slow periods.
What risk mitigation benefits do funding companies provide?
Funding companies provide risk mitigation benefits through diversified capital sources, professional financial advice, and funding structures that protect businesses from over-leveraging while maintaining growth opportunities and operational flexibility.
How do business funding companies support long-term business success?
Business funding companies support long-term success by building ongoing relationships, providing graduated funding increases as businesses grow, offering financial mentoring, and connecting entrepreneurs with industry networks and additional resources.
What exactly are business funding companies?
Business funding companies are financial institutions or private organizations that provide capital to businesses through various products like term business loans, advances, and credit lines, serving as alternatives to traditional bank financing.
Are business funding companies safe to work with?
Business funding companies are generally safe when properly researched and regulated, though businesses should verify licensing, read reviews, understand terms completely, and work with reputable organizations to avoid predatory lending practices.
How much does it cost to work with business funding companies?
Working with business funding companies costs vary widely, including interest rates, origination fees, processing charges, and ongoing maintenance fees that depend on funding type, risk factors, and company policies.
Can startups get funding from business funding companies? Startups can get funding from business funding companies, though options may be limited to specialized lenders, higher-rate products, or funding that requires personal guarantees and collateral due to limited business history.
What happens if you cannot repay business funding companies?
Failure to repay business funding companies can result in additional fees, damaged credit ratings, legal action, asset seizure, and personal liability if guarantees were signed during the application process.
What criteria should businesses use when evaluating funding companies?
Businesses should evaluate funding companies based on interest rates, approval requirements, funding speed, repayment terms, company reputation, customer service quality, and alignment with specific industry needs and business goals.
How do business funding companies differ from traditional banks?
Business funding companies differ from traditional banks by offering more flexible approval criteria, faster processing times, specialized industry knowledge, and alternative funding products, though often at higher interest rates.
What red flags should businesses watch for with funding companies?
Businesses should watch for red flags including upfront fees, guaranteed approval claims, pressure tactics, unclear terms, unlicensed operations, and companies that request payment before providing services or funding.
Citations / More Information
- Industry Canada. "Small Business Financing in Canada: 2024 Report." https://www.ic.gc.ca
- Canadian Federation of Independent Business. "Access to Capital Survey Results." https://www.cfib-fcei.ca
- Bank of Canada. "Business Credit Conditions Survey." https://www.bankofcanada.ca
- Statistics Canada. "Survey on Financing and Growth of Small and Medium Enterprises." https://www.statcan.gc.ca
- Business Development Bank of Canada. "Financing Landscape Report." https://www.bdc.ca
- Canadian Bankers Association. "SME Lending Trends and Analysis." https://www.cba.ca
- 7 Park Avenue Financial." Funding for Business". https://www.7parkavenuefinancial.com/working-capital-finance-funding-for-business.html
