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Canadian SMEs: Thriving with Alternative Financing Strategies
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?
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
CONTACT US : Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
Exploring alternative financing options opens a new horizon for Canadian businesses seeking growth beyond traditional banking constraints.
Unlock your business's potential with financing options that go beyond the bank.
INTRODUCTION
Business credit line solutions can come from a method of asset-based financing called the ' ABL loan '.
We might know why business owners/financial mgrs haven’t considered this form revolving business credit line facility. The reason? They haven't even heard of it, much less considered it an alternative. That's why we're ' pounding the table' for more understanding of this method of financing. Let's dig in.
WHAT IS ASSET BASED LENDING?
‘ABL ' (‘asset-based loan’) is essentially a form of ' secured loan'. The simplest way to look at it is that it relates directly to the amount of borrowing power you have in all your assets. That borrowing power translates into a revolving credit facility. The best way to understand this type of business financing is that it is a loan secured by some or all of the collateral in your business.
Regarding access to more working capital and cash flow availability for small and medium-sized businesses in Canada, there is often no better solution than asset-based lending. At 7 Park Avenue Financial, many firms considering this financing option find themselves in a transitional phase, sometimes critical or sometimes just growing too quickly to be fully financed in the Canadian regulated banking system.
Although some banks do have ABL divisions, many businesses in the SME sector cannot meet some of the bank ABL costs and policies around deal size, etc ( Many bank asset-based credit facilities tend to begin in the 5M dollar range and upwards)
Over time asset finance has proven to be a solid financing strategy in some other areas such as recapitalizing a business, addressing high growth issues, or being part of a turnaround or restructuring, Also, some companies contemplating m&a opportunities look to ABL to leverage assets in a target company.
The leveraging of assets allows your company to deliver on your growth plans. In many cases, even company-owned real estate can be a part of the leveraged asset-based for your financing needs.
ASSET BASED COLLATERAL CATEGORIES
The typical asset security in ABL line of credit finance is :
Accounts Receivable
Inventory
Fixed Assets
Generally speaking, asset loans are ' covenant light ' and have little or no emphasis on ratios, outside collateral, etc. Most Canadian ABL borrowers can access much more cash than a traditional Canadian chartered bank financing business loan arrangement. It's all about financing the balance sheet!
Most assets that fit into the ABL credit line are your current assets - which typically include your receivables and inventory. Over time, the assets you generate in your receivables and inventory functions will fluctuate, as will the credit line supporting these two assets.
Naturally, the % that you can borrow against these two asset categories is critical. Here's where the good news comes from: lines of credit from asset-based lenders, as typically you can borrow up to 90% of all accounts receivable and a negotiated percentage of your inventory.
WHAT ASSETS ARE NOT LEVERAGED
Safe to say that some items will not always be leveraged in that line of credit - for example, receivables over 90 days as they are deemed potentially uncollectible.
When it comes to inventory, it’s a question of a careful understanding of the liquidity in the inventory - as it might be in various forms of raw materials, work in process, or finished goods. Generally, it's relatively easy for your asset-based lender to determine those values based on information such as inventory turns, aged receivables listings, etc.
FACTORING AND PO FINANCING
Many firms in Canada utilize A/R factoring, which in some ways could be called a ' subset ' of asset-based abl lending. However, a true ABL facility is more desirable - it leverages more assets and allows you to bill and collect your own receivables. Typically, Purchase Orders are not financed under a true ABL - a separate form of specialized finance, though, and sometimes worth consideration.
True asset-based financing ABLs can also easily include your fixed assets and/or real estate in your financing mix. More sophisticated transactions can potentially contain a term loan as financing.
ASSET BASED CREDIT LINES VERSUS BANK FINANCING
Asset-based business line of credit options competes with Canadian chartered bank finance. While often more costly, they can provide all the financing and working capital a company needs to grow - thereby solving the Canadian business financing conundrum - Access to Capital.
KEY TAKEAWAYS
Types of Alternative Financing: Understanding the various forms of financing, such as crowdfunding, venture capital, and government grants, is crucial.
Eligibility and Requirements: Knowing what each financing option requires can help businesses align their strategies to meet specific criteria.
Benefits and Limitations: Assessing the advantages and drawbacks of each option enables businesses to make informed decisions.
Application Process: Familiarity with the application processes for different financing sources can streamline efforts.
Impact on Business Growth: Recognizing how each financing option can influence a company's growth trajectory allows for strategic planning.
CONCLUSION
Here is an article by MNP that covers the role of alternative finance in Canada. To learn more about these financing solutions and determine if they fit your firm, call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What are alternative financing options for Canadian businesses?
Alternative financing refers to non-traditional sources outside conventional bank loans, including crowdfunding, venture capital, and government grants. Most SME firms are not eligible for equity financing to raise funds. Angel investors and Venture capital firms invest typically in technology-type businesses with established revenues and exit strategies via public markets. They can generate substantial business profits via hyper-growth in revenues as they become established businesses.
How does invoice financing work?
Invoice financing allows businesses to borrow money against the amounts due from customers, providing immediate cash flow based on outstanding invoices. It suits many firms that can't access financing from traditional lenders and seek alternative funding when bank loan financing is unavailable from traditional financial institutions. Factoring is one of the most popular funding options for SME's in Canada.
How does trade credit benefit a business in terms of financing?
Trade credit allows businesses to buy now and pay later, improving cash flow by delaying outlays of cash for inventory or services.
What are the risks associated with merchant cash advances?
Merchant cash advances provide quick funds compared to the approval timing of traditional bank loans but often come with high costs and percentages of daily sales, impacting long-term profitability for the business owner.
What are the different types of business credit lines available?
Several business credit lines are available, including secured, unsecured, revolving, and non-revolving. Secured credit lines require collateral, such as real estate or inventory, whereas unsecured credit lines do not. Revolving credit lines allow you to borrow, repay, and borrow again up to a specific limit, while non-revolving lines provide a one-time lump sum you pay down over time.
What are the typical interest rates and fees associated with business credit lines?
Interest rates for business credit lines vary widely based on the lender, the creditworthiness of the business, and whether the credit line is secured or unsecured. Rates can range from as low as the prime rate plus 1-2% for the most qualified applicants with secured lines to 10% or higher for unsecured lines. Fees may include application, origination, annual, and draw fees. Some lenders may also charge a prepayment penalty.
What documents do I need to apply for a business credit line?
To apply for a business credit line, you must typically provide financial documents demonstrating your business's creditworthiness. These may include personal and business tax returns, balance sheets, income statements, cash flow statements, and business plans. Lenders may also require your business license, articles of incorporation, and personal and business bank statements. The specific requirements can vary by lender and the type of credit line you're applying for.
How does one apply for government grants in Canada?
Applying for government grants in Canada involves researching available grants, meeting specific eligibility criteria, and submitting a detailed application proposal.
What are the main advantages of using invoice financing?
The main advantages of invoice financing include immediate improvement in cash flow, no need for collateral, and the ability to secure funds based on clients' creditworthiness rather than the business's financial history.
What government loans and grants are available for Canadian businesses?
Canada Small Business Financing Program (CSBFP): This program makes it easier for small businesses to get loans from financial institutions such as traditional banks by sharing the risk with lenders. A nominal amount of the owners' own money is required under the program, which was significantly updated in 2022.
The business development bank also provides specialized financing programs and financial support as Canada's non-bricks and mortar business bank. It provides not only funding but also financial advice.
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The Canadian government offers a wide range of loans and grants to support businesses at various stages of growth and development. Here are some of the most notable ones:
For Startups and Early-Stage Businesses:
Canada Starter Company Program: This program provides funding of up to $150,000 to new and innovative businesses with high-growth potential.
Strategic Innovation Fund (SIF): This program provides up to $15 million to support large-scale research and development projects that can potentially create significant economic benefits for Canada.
Additionally, there are numerous provincial and territorial government programs available to businesses.
While loans must be repaid, government grants are typically non-repayable funds awarded based on specific criteria or projects.
