SME Alternative Financing Strategies : Beyond Traditional Loans

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Unlock Your Business's Potential: Discover How Alternative Financing Can Propel Your SME to New Heights

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ALTERNATIVE FINANCING solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities

SME Financing Revolution: Alternatives to Conventional Loans

INTRODUCTION

An asset-based lending bank alternative financing solution has traditionally been thought of as a 'non-traditional' form of Canadian business financing. The truth is that these forms of alternative funding (sometimes dubbed ' fintech ‘) are becoming more mainstream every day.

If you're looking to 'redesign' your business finance capital solutions, we think we've got some solid solutions for different types of asset-based financing. Let's dig in!

Small and Medium Enterprises (SMEs) increasingly turn to alternative financing strategies as a lifeline for growth, working capital, and cash flow funding. They are the alternative to traditional bank loans and those stringent requirements.

Alternative financing options offer flexibility, accessibility, and tailored solutions to meet the unique needs of SMEs. From cash flow financing, a/r finance, tax credit financing, inventory finance, and alternative business credit lines, these solutions reshape how businesses secure capital, ensuring they remain competitive in a dynamic market environment for a long term sustainable financing strategy for business.

WHAT IS ASSET BASED LENDING?

Asset-based lending, also known as ' ABL ', is financing a company's assets as collateral for term loans or lines of credit. This type of financing maximizes liquidity and supports the day-to-day running of a business. Lenders determine the value of assets such as receivables, inventory, equipment, and real estate, the ' loan collateral ' to support the financing. In many cases, asset-based funding can relieve a company that has been placed in 'non-performing loans' status by banks in Canada.

THE GOAL OF THE BUSINESS OWNER

Owners' and financial managers' goal is always to increase their cash flow and working capital to run and grow their businesses. There's no bigger fan of Canadian banks than us. Still, there is a general feeling from many companies looking for SME commercial finance solutions that the bank alternative isn't always available when needed. In contrast, collateral finance is always available for business assets.

Canada's Globe & Mail business newspaper highlighted insights from many entrepreneurs in a past article. Many of them maintained that Canadian bank solutions were either unavailable or irrelevant. Another article on the same day accused the Royal Bank of Scotland of forcing small businesses to improve capital ratios for the bank's purposes!

THE RISE OF ALTERNATIVE FINANCING IN CANADA

Asset-based lending in Canada is a previously non-traditional (but becoming more traditional every year!) form of financing that significantly increases cash flow and working capital for Canadian businesses.

The two main drivers of an asset-based loan/line of credit facility in Canada represent the majority of every firm's current assets or working capital assets - they are:

Accounts Receivable

Inventory ( ABL is one of the best ways to resolve the inventory financing challenge, including retail financing )

Financing commercial real estate is also an everyday use of asset based loans, with a bridge loan being a typical structure.

Asset-based Lending for Canadian firms differs from traditional chartered bank-type financing in that lines of credit are made available against inventory and receivables on their merit. What do we mean by that?

These types of facilities are very non-covenant-based. Unlike bank operating facilities with a lower cost of financing, asset-based lines of credit do not have covenants, rations, and significant external collateral attached to them. In certain cases, parts or all transactions can be structured as term loans versus revolving facilities.

This type of business financing is very formula-driven, so the Canadian business owner or financial manager always knows his or her working capital availability, which is subject to current and projected sales growth.

In the case of the receivables component, 90% of available A/R is financing, and depending on the overall quality and liquidation value of your inventory, margins on the inventory component tend to be between 40% and 75%, in our experience.

This type of financing works best because asset-based lenders are experts in the quality of receivables and inventory value. In an asset based lending facility, you are not taking on debt. You are simply liquidating receivables and inventory quickly, and as you grow, your working capital and cash grow commensurately with your sales and revenue growth!

Security for the facility is simply a charge on the assets being financed. As stated, those assets include A/R and inventory, but equipment and real estate can also be added on in many cases. A general security agreement, commonly known to financiers as a 'GSA, 'is taken as collateral for the facility in the same manner as a Canadian bank might take. This collateral is, in effect, the 'underpinning' of the facility.

A simple way to understand this new type of financing from asset-based lending companies in Canada is to consider the collateral assets, not your overall balance sheet, financial strength, and operating metrics.

THE REQUIREMENT FOR REPORTING AND REGULAR UPDATES ON FINANCIAL STATEMENTS AND RECEIVABLE AND PAYABLE AGINGS

More reporting is required because asset-based lending offers a higher margin or borrowing base. As a business owner, you can view that as a bad thing or a good thing—many clients have told us that the additional monthly reporting they do for their asset-based lines of credit helps them understand their business better.

Numerous 'subsets' of asset-based finance can deliver on short-term structured credit and intermediate-term finance needs. The owner/mgr should also understand these and the certain borrowing constraints that might come with them. They include:

CONCLUSION

If you're focused on growing your business with additional external funding, eliminating finance anxiety, and redesigning how you fund your business with a new type of structured finance.

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK /MORE INFORMATION

Invoice financing allows businesses to borrow against their outstanding invoices, improving their cash flow immediately without waiting for payment terms to conclude. A/R financing does not come with the borrowing constraints imposed by banks. Two alternative models are available - traditional notification factoring and non-notification factoring.

Merchant cash advances offer quick access to capital based on future sales. They are ideal for businesses with strong credit card sales but might have higher costs compared to other financing options.

Utilizing alternative financing strategies can impact a business's credit score, depending on the method chosen and how repayments are managed.

The speed of access to funds varies by financing type, with some options like merchant cash advances and peer-to-peer lending offering quick disbursements, sometimes within a few days. A solid business plan is always suitable for a financing request.

Yes, some alternative financing options are tailored to specific industries, offering customized solutions that understand those sectors' unique challenges and cash flow patterns. Equity funding is rarely available for the majority of SME's in Canada.

What makes alternative financing appealing to SMEs compared to traditional bank loans?

Alternative financing offers more flexible eligibility criteria, quicker access to funds, and often requires less paperwork than traditional bank loans, making it an attractive option for SMEs seeking capital for their business processes.

How do alternative financing options manage risk without traditional collateral and default risks?

Many alternative financiers use innovative risk assessment methods for sustainable financing strategies, such as analyzing daily credit card receipts or online sales history, to evaluate a business's creditworthiness beyond just credit scores for small and medium sized enterprises.

What are the typical interest rates for alternative financing options in SME FINANCE?

Interest rates for alternative financing can vary widely based on the business's risk profile, the type of financing, and the lender. They often range from more competitive to significantly higher than traditional loans from financial institutions, such as bank loan financing. The Canada small business financing loan program is a type of government subsidized loan fund that provides competitive rates and flexible repayment terms with limited personal savings equity in transactions for SME's unsecured and secured loans.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

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