Harness Strategic Financing Methods for Financing A Business & Working Capital Funding | 7 Park Avenue Financial

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BUSINESS LOANS AND FINANCING SOLUTIONS THAT WORK!

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        Financing & Cash flow are the biggest issues facing businesses today

     ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

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Mastering Business Growth: Funding Options for Your Established Business

INTRODUCTION

Canadian businesses play a major role in bolstering economic growth in Canada, yet these enterprises frequently encounter hurdles in procuring standard business loans from banks and credit unions and other traditional financial institutions.

This is where non-traditional business funding and alternative financing options can come into play. These innovative solutions empower entrepreneurs with the essential working capital needed to expand and prosper. .

THE CHALLENGES OF TRADITIONAL FINANCING OPTIONS FOR A BUSINESS

 WHEN IS A WORKING CAPITAL LOAN RIGHT FOR YOUR COMPANY  -  ACHIEVING FINANCING FOR YOUR CASH FLOW NEEDS   

Many business owners turn to work capital loans whenever they need to get their hands on quick cash. The truth is that this type of loan is better used when you need to stay afloat, cover general operating expenses, and pay bills with invoice financing. These products essentially buy you some time so you can develop new ways to generate revenue based on your existing assets and resources. So, how to secure financing for a business .. let's dig in!

Financing a business always seems to come back to that tried and true (cliché?) term of cash inflows to finance your short-term business needs. So when it comes to business loans in Canada, it is no surprise that cash flow is often called the lifeblood of your company's day-to-day operations surrounding line of credit issues.

TRADITIONAL BANK AND FINANCING SOLUTIONS   

Established companies that demonstrate a  strong performance history and strong business credit score can access conventional business loans offered by banks. These loans are unlimited in availability and are repaid over a pre-determined period along with interest. But traditional financial support often necessitates collateral, imposes strict qualifying conditions around financial covenants and balance sheet rations, and will often involve a more prolonged processing period than alternative working capital funding methods.

 WHAT IS A WORKING CAPITAL BUSINESS LOAN USED FOR?  

It's all about your day-to-day operations, not long-term financial commitments such as leases for equipment financing, term debt, etc. The most common day-to-day cash needs include accounts payable, accounts receivable financing, salaries, and fixed costs such as rent, utilities, etc.

THE BALANCE SHEET WILL HELP REVIEW YOUR FINANCING NEEDS

No matter how overused the term might be, most owners of small businesses and their financial managers would not dispute the need for the right amount and type of business funding. That involves taking a hard look at your balance sheet and reviewing the relationship of the current ratio items, namely your short-term assets such as A/R and inventory, as well as obligations, such as payables, loan payments, etc. That current ratio drives your working capital and cash flow loan needs.

The downside of not having or being able to arrange cash flow and working capital financing is simply that you have a lesser ability to grow sales, maximize profits and take advantage of new opportunities.

So what, in fact, are the working capital and financing issues that are raised on an ongoing basis for your business?

FACTORS TO CONSIDER WHEN FINANCING A BUSINESS 

The key is understanding how your  Accounts receivable, inventory, and other assets combine to drive working capital and cash flow. And, to our point, how do you finance those assets and those needs? Sometimes, you might be looking for financing to buy a business in Canada or focusing on financing for business expansion.

WHAT ARE YOUR BUSINESS GROWTH DRIVERS?

What are the real drivers in funding need - typically, it's growing revenues, expanding, and in some cases buying or merging with another business.

Although most business owners/financial managers can't imagine having too much capital for their business or too many financing options for business loans -  that overabundance would actually mean you are not using capital properly! As experienced by most business folks, the bottom line is that financing a business is actually a balancing act when business capital is sought.

FOCUSING ON CURRENT OBLIGATIONS   

One of the main things you should focus on is your ability to pay your current debt - On the balance sheet, your accountant shows that as a 'current portion of long-term debt' - You always want to be in a position to meet these obligations as failure to do that means you are bordering on insolvency. All of that snowballs into major issues with your bank, your suppliers, and other creditors such as leasing or finance firms.

Equipment and asset financing needs should address long-term assets. Click here for more info on funding your asset needs. Current obligations under 12 months must be funded by internal cash flows and short term borrowing to cover business expenses.

So as we have said, you need to calculate or measure working capital and then address how you will satisfy the need for those numbers.  There are some easy calculations you can perform in measuring your overall cash flow - it's simply understanding your inventory, and A/R turns, as well as having a handle on your accounts payable days outstanding.

WHY IS DAYS SALES OUTSTANDING AND ASSET TURNOVER SO CRITICAL  

If it was a perfect world, you could raise all the working capital you need internally. How would that work?! Well, using an extreme example, if you collected your receivables in 45 days, turned in your inventory in 45 days, and were able to pay your payables every 90 days, you would be very self-financing.

Sounds great, except you can hear your suppliers and creditors now, we would imagine -   Also, the profits that you generate out of your business obviously become a new additional part of the working capital component and would even further benefit your overall position.

But let's get back to the real world, which states that if you have more current assets than current liabilities, you need external working capital 99% of the time.

Canadian business owners achieve that additional working capital in several ways. For example, the most beneficial is bank lines of credit, or in some cases, if your firm meets the criteria, a cash flow working capital loan. Suppose you cannot meet  Canadian business bank criteria and are still in a challenged or growing position. In that case, we advise clients to consider a non-bank working capital or asset-based lending facility.

HOW TO GET A WORKING CAPITAL LOAN

Numerous new solutions in small business loans for financing a business have emerged in Canada. That includes cash advance merchant lenders and common subsets of what is known as alternative financing. Those subsets, actual real-world solutions, include A/R financing, working capital term loans, tax credit financing, inventory finance and mezzanine cash flow loans for more established firms.

Regarding the merchant cash advance lenders, the focus is on typical business credit optics such as how long your company has been in business, your annual revenues, and the overall turnover of current asset categories such as receivables and inventory. A personal credit score is usually required to meet a business lender's needs; credit scores in the 600+ range are advisable. Small businesses will often resort to business credit cards for a source of capital via monthly payments under such cards.

Depending on the transaction's size, the personal credit history of the owner/owners is also a subject point in the overall decision. As far as 'working capital loan repayment' works, the formula is quite simple - a short-term loan based on approximately 10-20% of your annual sales that is repaid monthly, or sometimes weekly based on a review of your cash inflows.

If those receivables we discussed tend to be your main current asset, then a factoring or invoice discounting facility makes the most sense.  Most Canadian business owners don't fully understand how factoring in Canada works and are often confused by the costs and process. At 7 Park Avenue Financial, our recommended funding solution in this area is Confidential Receivable Financing. This is not a receivables loan but a true sales-based cash flow financing facility.

It is critical to ensure that you match your Canadian business financing needs against a long-term or short-term solution. When your company needs new equipment, real estate, etc., the business owner and financial manager must explore equipment loans or commercial mortgages where payments are fixed and amortized over longer terms.

When it comes to an 'operating loan' solution for your company, include a traditional bank revolving credit facility or, in some cases, an alternative lending solution such as a non-bank asset-based lending facility.

DOES THE CANADA SMALL BUSINESS FINANCING PROGRAM ADDRESS WORKING CAPITAL?

The Canada Small Business Loan financing program in the past did not cover working capital needs.

But recent changes in 2022 to the program allow business owners to access working capital and lines of credit needs - In addition, the loan cap is now 1.1 Million dollars.

The government's crown corporation, a non-bricks and mortar entity ( bdc ) offers long-term working capital loans with prerequisites of profits and a reasonable balance sheet. The SBL program in Canada is similar to sba loans in the U.S. via the Small Business Administration.

The government small business loan and the sr&ed program are two of the most utilized government funding programs in Canada.

Export Development Canada (EDC Direct Lending) and the somewhat related financing of refundable tax credits are solutions, but these facilities take significant time to set up. When exploring government loans or related financing, you strongly recommend using a business financing consultant's expertise in this area.

Alternative lending Canada-based solutions continue to dominate Canadian business financing needs and regularly compete with Canadian chartered banks' traditional business offerings and are truly an advanced alternative lending solution when traditional financing doesn't solve your business capital needs. Interest rates will always be higher in alternative lending, but we're fond of reminding business owners that it's a balance between access to capital and the cost of capital.

  BENEFITS OF ALTERNATIVE FINANCING OPTIONS FOR BUSINESS    

Moreover, non-traditional business funding routes can finance unique ventures or nascent business concepts. Conventional lenders generally show a bias towards well-settled businesses with a history of profitability, which can pose hurdles for start-ups and smaller firms seeking to launch. In contrast, alternative business financing options can exhibit a greater openness towards bankrolling novel or yet-to-be-proven ideas.

CONCLUSION - HOW TO GET FINANCING FOR YOUR BUSINESS

The bottom line recap - it’s simple!

Unconventional business funding options can serve as a substantial resource for smaller firms grappling with obtaining conventional financing. These alternatives provide rapid fund access, adaptable repayment plans, and the capacity to back off distinct projects or new business concepts. Nevertheless, they can also be accompanied by elevated interest rates and fees, rendering them not the best fit for all business types. It's crucial to meticulously weigh the pros and cons of each non-traditional funding option prior to reaching a decision.

Enough pathways exist for well-established enterprises to finance their operational capital requirements and other vital expenses.

The best approach will hinge on various factors, including the specific nature of your business, its financial standing, the intended application of the funds, and the prevailing economic conditions. Businesses can tactically address their financing needs by comprehending the wide spectrum of available funding options, laying a solid foundation for ongoing success.

Understand how much small business financing you need - that means 'measuring' your needs and what type of funding suits those needs.

Seek out and speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor with a financing track record of success. We've got the financing solutions you need to know about, whether it's financing a business start-up, or expansion, and we will make sure the right solution is tailored to your needs. We will ensure you understand the sources for financing a business via small business financing options.

FAQ FREQUENTLY ASKED QUESTIONS  PEOPLE ALSO ASK MORE INFORMATION  

 WHAT ARE THE DRAWBACKS OF ALTERNATIVE FINANCING OPTIONS?

Alternative financing options come with higher interest rates and fees than traditional ones. They also come with a higher risk of default, as they are often extended to businesses with less established credit histories.

In addition, some alternative financing options, such as merchant cash advances, can be difficult to repay if your business experiences a downturn in revenue. It's important to consider the risks and drawbacks of each alternative financing option before deciding.

WHAT  IS SELF-FINANCING? 

Self-financing or bootstrapping is when businesses use their profits to reinvest in their growth. It offers the advantage of maintaining full control of your business without worrying about loan repayments or interest. However, self-financing can run the risk of depleting all cash reserves, leaving the business vulnerable in case of unforeseen circumstances.

WHAT IS A BUSINESS LINE OF CREDIT  

A business line of credit is a flexible loan that allows businesses to borrow only what they need and pay interest on the used portion of the loan. It serves as an insurance policy against cash flow crunches and can be used and repaid repeatedly as long as the terms of the agreement are met.

WHAT IS ASSET-BASED LENDING? 

Asset-based lending involves businesses using their own assets, like inventory or accounts receivable, as collateral for a loan. This can be a viable option for businesses that need cash quickly but also involves the risk of losing assets if the loan cannot be repaid.

 HOW CAN A BUSINESS BENEFIT FROM TRADE CREDIT  FINANCING?

Trade credit involves businesses negotiating favourable terms with suppliers to manage their cash flow better. This might involve extended payment terms or bulk discounts. While this doesn't provide extra cash, it allows businesses to reduce their outgoing expenses and manage their cash flow more effectively. Supplier credit can help supplement traditional business bank loans.

WHAT IS INVOICE FACTORING / INVOICE DISCOUNTING  

Invoice factoring or discounting is a method where businesses sell their outstanding invoices to a third party for immediate cash, albeit at a discount. This can be a handy tool for businesses with cash flow difficulties but can lead to businesses receiving less than the total value of their invoices. Receivable financing is a strong alternative to firms that can't access a traditional bank loan.

 WHAT ARE CROWDFUNDING AND PEER TO PEER LENDING? 

Crowdfunding and peer-to-peer lending are digital-age methods of raising funds in an equity financing manner - not debt financing. Crowdfunding involves raising small amounts of money from many people, usually through an online platform. Peer-to-peer lending, on the other hand, involves borrowing money from multiple investors online. While these methods can be more accessible than traditional financing, they also come with risks and challenges.

Larger firms will often focus on angel investors and  venture capital firms for financing via venture capital equity that comes with ownership dilution.