Business Financing In Canada: Alternative Business Funding Is Preventive Medicine!

Alternative Business Financing in Canada

In Canada, owners and financial managers seek alternative financing and business loan alternatives at once (or constantly!). If loan options are nott understood, chaos can reign supreme. Let’s dig in.

Securing traditional business financing can be daunting for many entrepreneurs, but alternative business loans offer a viable solution.  

Alternative non-bank finance options provide flexible and accessible funding, helping businesses thrive without the requirements of conventional loans from traditional financial institutions such as Canadian banks. Understanding the various types of alternative business loans can empower business owners to make informed decisions, ensuring they have the necessary capital to grow and succeed.

CASH FLOW & WORKING CAPITAL AND SHORT TERM WORKING CAPITAL  OPTIONS FOR YOUR BUSINESS

Cash flow, working capital, and alternative lending options should be considered unless you're solely in the retail business, which is a ' cash only  ' business.

We’re constantly amazed at how much time new clients have spent chasing down financing in areas they will never qualify for - these might include VC equity, Private Equity, etc.

WHO WAS THE FIRST VENTURE CAPITALIST? YOU'LL BE SURPRISED

Not knowing how to obtain loan financing and, more importantly, knowing what finance sources you qualify for are key points to consider.  There's a great analogy: Queen Isabella was the first VC, having financed   Chris Columbus - and probably without a business plan!

Essential requirements are that some equity is in place and with future cash flow potential with products and services.

AVOIDING EQUITY DILUTION

On the other hand, private equity groups are looking for no early development firms and typically favour niches in specific industries they are familiar with. Whether it’s a VC or a Private Equity Group, prepare for DILUTION OF OWNERSHIP!

FINANCING THE STARTUP THROUGH TRADITIONAL FINANCIAL INSTITUTIONS

Early-stage businesses, including startups, should take advantage of or at least investigate the Government Small business loan option.  Getting someone to cover and guarantee your loan is always tricky, so if the Canadian government is willing to do that, check it out.

4 KEY BUSINESS FUNDING ALTERNATIVES THROUGH ALTERNATIVE FINANCING

Business owners can be forgiven for not breaking down their financing needs into different loan types - that might be:

Lines of Credit - bank revolving credit facilities / non-bank asset-based lines of credit (typically finance receivables and inventory)—A line of credit is necessary for all businesses that are not self-financing and sell on business credit terms. With business lines of credit, you will only pay interest on the amount you borrow, making it helpful in covering unexpected, short-term expenses.

Business credit cards are another funding alternative that can be easier to obtain than traditional lending options. They offer benefits such as rewards, point systems, and the ability to cover day-to-day operating expenses. It's essential to pay off the balance each month to build a good credit history for the business.

Term loans—secured / unsecured cash flow loans—rates and fees depend on the loan amount, overall credit quality, and whether a traditional or alternative funding solution is available. Repayment terms are heavily focused on business cash flows.

Invoice factoring is a method of financing in which a business sells its invoices to a third party at a discounted rate in exchange for quickly accessing funds. This form of alternative lending can benefit companies with steady incoming invoices that need quick access to working capital.

LET 7 PARK AVENUE FINANCIAL ENSURE YOU FIT INTO THE RIGHT  ' CREDIT BOX '

In every case, the owner/manager must understand if they fit into the ‘ credit box ‘ that defines any particular loan or asset monetization.

Those ‘ fit factors’ include the length of amortization/ amount borrowed/collateral/personal guarantee requirements/ down payments. That ‘ credit box ‘ we have mentioned drives interest rates in Canadian business financing.

Business owners in the SME sector are always focused on an interest rate commensurate with their overall credit quality. Small business financing relies heavily on owners' credit scores and personal credit histories. Business credit and personal finances are highly intertwined in the SME/SMB sector.

UNDERSTANDING KEY ASPECTS OF ' ALL-SEASON ' BUSINESS LOANS

So, can we summarize key aspects of ' all seasons' financing? Key areas to focus on are:

1. Understanding lender specialization

 2. Ensuring proper documentation is immediately available - i.e. business plans, cash flow forecasts, and owner information.

7 Park Avenue Financial business plans meet and exceed Canadian bank and commercial lender requirements. A business plan will almost always assist in financing approval and speed up the application process for a small business loan.

A proper loan submission package is essential whether you are applying to banks, credit unions or online lenders.

Businesses in Canada should ensure they have proper and up-to-date financial statements- a key element in lender due diligence.

KEY TAKEAWAYS

1. Peer-to-Peer Lending: This method connects businesses  / small business owners directly with individual investors, bypassing traditional financial institutions, and often offers more favourable terms.
2. Invoice Financing: Businesses sell their unpaid invoices to a lender to get immediate cash flow, making it an effective solution for managing cash flow gaps.
3. Merchant Cash Advances are term loans, not a traditional line of credit or bank loan, and they involve receiving a lump sum in exchange for a percentage of future sales. They provide quick access to funds with flexible repayment options.
4. Business Lines of Credit: Similar to a credit card, it allows businesses to draw funds as needed up to a specific limit, offering flexibility for ongoing expenses.
5. Working Capital Loans: Short-term loans designed to finance daily operations, helping businesses manage operational costs without long-term commitments.

CONCLUSION

The bottom line? Small business loans and access to capital are constant challenges  - Being prepared and knowing finance alternatives is, in fact, the ' best preventive medicine ' for your financing needs. 

Call  7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can help you avoid ' tire kicking' in Canadian finance and ensure proper funding is accessible.

FAQ

What is an alternative business loan?

An alternative business loan is a financing option provided outside traditional banks, offering flexible terms and quicker access to funds

How does peer-to-peer lending work for businesses?

Businesses connect directly with individual investors through online platforms, often securing funds at more favourable terms than traditional banks.

Can invoice financing help with cash flow issues?

By selling unpaid invoices, businesses can receive immediate funds to manage cash flow gaps effectively.

What is the difference between a business line of credit and a loan?

A business line of credit allows you to draw funds as needed up to a limit, whereas a loan provides a lump sum with a fixed repayment schedule.

Is crowdfunding a viable option for business financing?

Crowdfunding can be a great way to raise capital, especially for startups and innovative projects, by appealing directly to potential customers and investors.

What should I consider before choosing a merchant cash advance?

Consider the cost, repayment terms, and your business's sales consistency to ensure a merchant cash advance is a viable solution.

How do alternative business loans differ from traditional loans?

Alternative business loans for small businesses in Canada typically have more flexible terms and faster approval processes. They can also be accessed by companies with lower credit scores than traditional loans.

What are the main risks associated with alternative business loans?

Some risks associated with alternative business loans include higher interest rates, shorter repayment terms, and the potential for higher overall costs versus traditional lenders such as banks.

Why might a business choose an alternative business loan over a traditional one?

Businesses often choose alternative loans via alternative lenders for flexibility, quicker access to funds, and less stringent approval criteria, which can be crucial for those needing immediate financing.