Introduction: Understanding Business Finance Sources
Securing adequate business financing is the lifeblood of any business, and understanding the diverse sources of business financing can be the key to thriving in a competitive market."
A Thought-Provoking Question? : "Are traditional bank loans still the go-to choice, or is it time for businesses to explore alternative sources of financing in a rapidly changing financial landscape?"
Sources of business finance are all about options and having business owners identify the need and importance of a solution to funding their company in challenging times. Certain times are more challenging than others.
The Challenge for SME COMMERCIAL FINANCE
Although it's not necessarily 'easy' for larger corporations or public companies to raise capital, SME COMMERCIAL FINANCE is increasingly challenged for funding.
Assessing Cash Flow, Debt Financing, and Working Capital Options
What Are Cash Flow / Debt / Working Capital Options For Your Company? Canadian business financing options come with a combination of benefits and risks. Part of the challenge is being able to determine whether your company needs operating capital or long-term capital in the context of asset financing or permanent working capital.
Operating Capital Needs
When it comes to 'operating capital,' a company might still be in somewhat of a 'start-up' mode, so there are the typical expenses for starting a company - these might include product development, marketing, legal and accounting, leasehold improvements, etc.
Unique Financing Solutions
Two critical areas in that early stage that we have mentioned have some unique financing solutions available. The Canadian Government SRED program funds a significant portion of R&D capital. Also, these claims can be financed, accelerating the cash flow, via a short-term SR&ED FINANCING LOAN that has no payments during the term of the loan.
Maximizing SR&ED Claims
Your SR&ED claim for refundable tax credits is most successful when it is prepared by a qualified SRED consultant who can maximize the benefits of the program.
We cringe when business owners or financial managers tell us that the program is 'just too much paperwork' because they are clearly forsaking a true capital injection into their business. Many of those consultants will actually prepare your claim at their own time and expense risk, offering you a contingency agreement on those funds. The bottom line: check out this program.
Financing Leasehold Improvements
Leasehold improvements are always difficult to finance, especially for start up businesses, and Industry Canada helps finance thousands of businesses under the Canadian Government Small Business Financing Loan program.
The features and the benefits of the program, which include a government guarantee to your bank are numerous, and the overall rates, terms, and structures it provides have even larger companies envious of the Canadian Small Business Financing Loan. By the way, we call them 'SBL's! A personal investment in the 15-25% range is required in government loans.
Government of Canada business loans are one the the best financing options for Canadian entrepreneurs.
Considerations for 'Love Money'
Many clients of 7 PARK AVENUE FINANCIAL advise us they have turned to what is known as 'love money' or 'friends and family' loans and investments.
We're not big fans of utilizing so-called 'love money,' and are even less enamoured by clients who are actually prepared to collapse personal registered savings or mortgage their homes to start a business. While it's important to have some 'skin in the game' as the expression goes it's our recommendation that you incorporate your business and strongly seek out traditional and alternative financing to fund your business.
Exploring Unique Financing Options
Leveraging Supplier Financing
Your business has 2 types of financing available that not all business owners and their financial managers recognize. These two types of financing include supplier financing via extended terms, as well as offering cash discounts to the client for prompt payment.
Receivable Financing
Receivable Financing is one of the most popular 'alternative finance' solutions used in Canada. Also called 'factoring' or 'invoice discounting,' it turns your sales revenues into an automatic cash flow machine. At 7 Park Avenue Financial, we recommend our clients utilize 'Confidential Receivable Financing,' allowing your firm to bill, collect, and automatically cash flow your sales/receivables.
Short-Term Working Capital Loans
Other forms of both traditional and alternative financing include short-term working capital loans, more commonly known in the past as MCAs or merchant cash advances. These loans provide short term (typically 12 months) loans geared to your sales levels, and will often be in the range of 10-20 percent of your annual sales.
Lease Financing for Equipment
Businesses requiring equipment should always consider utilizing lease financing for their new and used equipment needs. We tell clients at 7 Park Avenue Financial that over 80% of North American businesses utilize lease finance.
Exploring 'Royalty Finance'
A relatively newer form of financing known as 'royalty finance' is a hybrid of debt and equity finance.
Venture Capital and Private Equity
In Canada funding via an equity stake from venture capitalists and private equity are generally very difficult to secure financing for most start-up ventures - we caution clients to not dwell too long on these equity funding options unless you're committed to a long haul in the effort and prepared to give up ownership through equity capital.
Community Investment Funds
In certain Canadian communities, community investment funds are gaining popularity as a source of financing for debt capital via local economic development for an established or new business.
These funds are typically locally managed and funded by community members who want to support local businesses. They offer low-interest loans or equity investments to businesses with strong ties to the community. This approach not only provides capital but also fosters a sense of community involvement and support. Borrowers should be prepared to provide the loan officer with a solid business plan for borrowing money and to raise funds for these types of loans.
Key Takeaways
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Capital Structure: Analyzing the balance between debt and equity financing is crucial for sustainable growth and retained earnings and the ability to access a bank loan and traditional funding
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Government Programs: Exploring available programs, like the SRED program, can unlock funding opportunities for research and development.
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Alternative Financing: Delving into options beyond traditional bank loans, such as receivable financing, can ensure a diverse funding mix.
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Supplier Financing: Extending terms with sppliers and offering cash discounts for prompt payments can enhance cash flow.
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Lease Financing: Understanding the advantages of leasing for equipment needs can optimize financial resources.
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Venture Capital: Assessing the challenges of obtaining venture capital and finding angel investors in Canada can guide strategic decisions.
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Credit Quality: Evaluating your company's credit quality and debt repayment is essential in determining suitable financing sources from debt capital companies
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Royalty Finance: Exploring the hybrid financing model of royalty finance to secure funding without giving up an ownership stake and one that can provide unique capital solutions when businesses raise money in alternative finance
Conclusion
The overall combination of your company size and credit quality will tend to drive the top picks applicable to your firm regarding numerous sources of financing available in Canadian business funding options, either traditional or alternative.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success for the sources of business financing and options available to your company to give you a competitive advantage when it comes to commercial financing in Canada!
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO / ASK / MORE INFORMATION
What are the benefits of government programs like the SRED program for financing?
Government programs like SRED offer funding and tax incentives to support research and development, providing a financial boost to innovative businesses.
How does receivable financing improve cash flow for my business?
Receivable financing turns your sales into cash flow, helping your business meet immediate financial needs while waiting for customer payments.
Can supplier financing really enhance my company's financial stability?
Extending supplier terms and offering cash discounts can significantly improve cash flow, making your business more financially robust.
What advantages does lease financing offer for acquiring equipment?
Lease financing allows you to acquire necessary equipment without a large upfront cost, preserving your capital for other business needs.
How can I determine the right financing option for my company's size and credit quality?
Consulting with an experienced business financing advisor can help tailor the financing solutions to match your specific needs and circumstances.
How do I qualify for government grants and incentives in Canada?
Qualifying for Canadian government grants for business typically depends on factors such as the nature of your business, its activities, and adherence to program criteria.
What's the difference between factoring and invoice discounting in receivable financing?
Factoring involves selling your invoices to a third party, while invoice discounting uses invoices as collateral for a loan. Both can improve cash flow.
Are there industry-specific supplier financing options available?
Some industries may have specialized supplier financing arrangements, so it's worth exploring options tailored to your sector.
What types of businesses benefit most from royalty finance?
Royalty finance is often suitable for businesses with proven revenue streams, as it involves sharing a portion of future revenues in exchange for capital.
Can I use multiple financing sources simultaneously for my business?
Yes, combining different financing sources can optimize your financial strategy. However, it's essential to manage them effectively to avoid over-leveraging in your financial statements. Export financing in Canada can be accessed via EDC and purchase order financing options.
How can I assess the risk associated with each financing option for my business?
To assess the risk associated with financing options, consider factors like interest rates, repayment terms, and collateral requirements. Evaluate the impact on your cash flow and financial stability. Additionally, consult with financial advisors and conduct thorough due diligence on lenders or programs to understand their track record and reliability. Assessing risk involves weighing the benefits against potential drawbacks to make informed decisions aligned with your business goals.
What role does credit history play in determining eligibility for financing in Canada?
Credit history plays a crucial role in determining eligibility for financing in Canada. Lenders assess your creditworthiness to gauge the risk of lending to you. A positive credit history demonstrates your ability to manage debt responsibly, making you a more attractive borrower. Conversely, a poor credit history may limit your financing options or result in higher interest rates. It's essential to maintain good credit by managing debts, paying bills on time, and resolving any credit issues to improve your eligibility for financing.
Are there tax implications I should consider when choosing a financing source for my business in Canada?
Yes, there are tax implications to consider when selecting a financing source for your business in Canada. Different financing options can have varying tax consequences. For instance, interest payments on loans are typically tax-deductible expenses, reducing your taxable income. However, equity financing may not offer the same tax benefits. Consulting with a tax advisor or accountant is crucial to understanding the specific tax implications associated with your chosen financing source and ensuring compliance with Canadian tax laws.
