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Business Financing Solutions: Types of Loans Explained
You've arrived at the right address! Welcome to 7 Park Avenue Financial
Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
KEY TAKEAWAYS
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Business Line of Credit: Provides flexible access to funds for various operational needs, ensuring cash flow stability during sales fluctuations. Traditional financial institutions and commercial finance firms offer business lines of credit.
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Invoice Financing: Allows businesses to leverage their outstanding accounts receivable invoices for immediate cash, improving liquidity without waiting for customer payments.
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Equipment Financing: Helps businesses acquire necessary equipment without a large upfront cost, spreading the expense over time.
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SBL Loans: Government-backed loans offer favourable terms and conditions, which are especially beneficial for small businesses with limited access to traditional financing. These facilities are structured as business-term loans
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Asset-Based Lending: This type of lending secures loans with business assets, providing higher borrowing limits and flexible terms than unsecured loans.
Different Types of Business Loans In Canada
Business finance options in Canada often involve focus and the need to increase sales revenues. There is a limited number of 'Operating financing' options, but the selective use of one or a combination of these creates a 'win-win' strategy for sales and profits. Let’s dig in.
Understanding the various types of loans available for businesses is essential for business owners who want to understand the sometimes complex world of business financing.
With the right knowledge, business owners can leverage business financing to fund day-to-day operations and growth opportunities while managing cash flow.
The Challenge of Inconsistent Sales Growth
More often than not it's the inconsistency of sales growth that drives financing needs. These 'spikes' in revenues often place demands on other parts of the business such as asset acquisition requirements, payrolls, etc.
Business Line of Credit
The full blown solution to this challenge is a business line of credit that covers operating financing needs. The ability to borrow against existing receivables and inventory in times of sales growth is critical; inability to finance your working capital needs leads to the proverbial business 'cash flow crunch'.
Financing Receivables and Inventory
Financing receivables and inventory is accomplished via bank credit lines, invoice financing, and a combo of these via an asset-based non-bank business line of credit.
Asset Based Lending (ABL)
This latter solution is called an 'ABL'—the industry's acronym for asset-based lending. In fact, the true asset working capital facility can include your equipment/fixed assets as borrowing collateral. In the last few years, this type of lending in Canada has seen at least double-digit growth and has become a very competitive niche lending business. A commercial real estate loan can also be structured separately or within the ABL facility.
Borrowing Power
In terms of borrowing power, Canadian banks typically use a 75% borrowing margin - asset based lenders more often than not are comfortable with 90% borrowing. Simply speaking, using the ABL solution as an example, a $10,000 invoice for example allows borrowers to access $9,000 in cash flow/borrowing power as soon as the invoice is created and the sale is made. Banks offer the most competitive interest rates for SME small business owners
Differences in Pricing
While Canadian banks take a floating charge over all the assets of your business, asset based lenders price these transactions differently. While pricing is a key issue in asset-based credit vs. the bank (bank pricing is much less), often the key factor in choosing such a non-bank facility is the access to capital, given stringent bank requirements and borrowing caps. Businesses pay interest only on funds drawn down under the facility
Unlimited Asset Credit Lines
(Note that asset credit lines are generally unlimited in size - capped only by your sales levels, given those sales create ongoing receivables borrowing power). Banks have credit limits on operating facilities, but asset-based financiers don't.
Traditional Non-Bank A/R Financing
Traditional non-bank A/R financing, typically called 'factoring,' often requires that your clients be notified about the financing. A way around this is to consider a CONFIDENTIAL RECEIVABLE FINANCE solution, which empowers your firm to bill, collect (and borrow!) against all or some of your receivables generated by sales. Accessing the right facility and not getting 'locked in' is also important. Here, advisory expertise is recommended.
Industry Suitability
While certainly industries are touted as being the perfect candidates for A/R finance, the reality is that every type of business and industry that generates commercial (“B2B") sales qualify for financing.
CONCLUSION
If you're looking for the most sensible option to increase operating financing requirements, seek out and speak to a trusted, credible, and experienced Canadian business financing advisor who can assist you with your cash flow needs.
FAQ
What are the primary types of business loans available?
Business loans include options such as lines of credit, invoice financing, equipment financing /Equipment loans, SBL loans, and asset-based lending.
How does a business line of credit work?
A business line of credit provides flexible access to funds that can be used for various operational needs. It allows businesses to borrow as needed and repay over time.
What is invoice financing?
Invoice financing allows businesses to leverage their outstanding invoices for immediate cash, improving liquidity without waiting for customer payments.
Why should businesses consider equipment financing?
Equipment financing helps businesses acquire necessary equipment without a large upfront cost, spreading the expense over time via monthly payments, and preserving cash flow.
What are the benefits of government SBL loans for small businesses?
The Canada Small Business Financing Program offers favourable terms and conditions, including lower interest rates and longer repayment periods, making them an excellent option for small businesses with limited access to traditional financing.
How can I improve my chances of getting approved for a business loan?
To improve your chances, maintain a strong personal credit score, prepare a solid business plan, and ensure your financial statements are accurate and up-to-date.
What is the difference between secured and unsecured business loans?
Secured loans require collateral, such as business assets, while unsecured loans do not. However, they typically have higher interest rates and stricter eligibility requirements. Commercial real estate loans are secured mortgage transactions.
Can startups qualify for business loans?
Yes, startups can qualify for business loans, primarily through micro-loans and other short-term business loans, Government Small business loans, aka "SBLloans," and certain types of asset-based lending. Commercial real estate loans are also available under the small business loan program. Interest payments can be deferred in some cases.
How do merchant cash advances work?
A Merchant cash advance company provides upfront funds based on future credit card sales, repaid through a percentage of daily sales. It offers quick access to cash but often with higher costs, similar to business credit cards. An Owner's good credit score and personal guarantee, similar to personal loans, are required.
What is a working capital loan?
A working capital loan is a short-term loan designed to cover a business's day-to-day operational expenses, such as payroll, rent, and inventory.
What are the advantages of asset-based lending for businesses?
Asset-based lending offers higher borrowing limits and flexible terms by securing loans with business assets. It is a solution for businesses with valuable collateral but limited credit history.
How does a traditional term loan differ from other business loans?
A traditional term loan to borrow money provides a lump sum with a fixed repayment schedule and interest rate, making it predictable and straightforward compared to more flexible options like lines of credit.
Why might a business choose invoice financing over other types of loans?
Invoice financing is ideal for businesses needing immediate cash flow improvement without additional debt, as it leverages outstanding invoices rather than borrowing against future revenue.
