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Beyond the Banks: Exploring Alternative Sources of Financing for Canadian SMEs
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Unlock your business's hidden potential with a strategic commercial loan
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Business Commercial Loans and working capital solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Financing Your Canadian Operations & Expansion: Commercial Loans / Business Loan Solutions
Business Commercial Loan
Commercial loan availability for Canadian business owners and financial managers often involves terminology that confuses a business loan benefit with its actual availability.
We’ll demystify some of that jargon when accessing funds. Let’s dig in.
INTRODUCTION
No secret that small and medium-sized businesses in Canada are the backbone of the Canadian economy -
Even less of a secret is that accessing business financing and capital for business owners remains a huge challenge as traditional financial institutions such as our banks tighten credit availability in an already tough economic environment.
DID YOU KNOW?
Statistics on business commercial loans:
- In 2022, the average small business loan amount in Canada was approximately $350,000.
- About 25% of small businesses in Canada rely on commercial loans for financing.
- The approval rate for small business loans from alternative lenders is around 70%, compared to 40% for traditional banks.
- The average interest rate for business commercial loans in Canada ranges from 4% to 12%, depending on various factors.
- Approximately 60% of Canadian small businesses that apply for financing are approved for the full amount requested.
The good news is that new sources of alternative funding in Canada have stepped in to fill the financing gap. Business owners must understand those business and commercial loan options to navigate the Canadian business financing landscape successfully.
Programs like the RBC Black Entrepreneur Program are designed to support black entrepreneurs by creating opportunities, fostering growth, and promoting equity.
UNDERSTANDING THE REQUIREMENTS FOR BUSINESS FINANCING
WHAT IS A COMMERCIAL LOAN?
A commercial loan is financing provided by a financial institution to a business or organization to support its operations, expansion, or other business-related activities.
These loans can be utilized for various purposes, such as purchasing equipment, financing working capital, or acquiring commercial real estate.
Commercial loans, offered by banks, credit unions, and other financial institutions, are designed to help businesses achieve their goals and grow their operations.
Whether you need to manage cash flow, invest in new technology, or expand your physical footprint, a commercial loan can provide the necessary capital to drive your business forward.
HOW COMMERCIAL LOANS WORK
Commercial loans provide businesses with access to funds to support their operations or finance specific projects.
Typically, a commercial loan is repaid over a set period with interest and may require collateral or other forms of security. The interest rate on a commercial loan can vary depending on the lender, the borrower’s creditworthiness, and the loan terms.
These loans can be structured in various ways, including term loans, lines of credit, or revolving credit facilities. By understanding the mechanics of commercial loans, businesses can better navigate their financing options and choose the best solution for their needs.
WHAT ARE THE 5 KEY TYPES OF BUSINESS LOANS?
Several types of business loans are available, each with unique characteristics and benefits. Here are five key types of business loans:
Term Loans: A term loan provides a lump sum of funds to a business, which is then repaid over a set period, typically with interest. These loans can be used for various purposes, such as financing equipment purchases or expanding operations.
Lines of Credit: A line of credit offers a business access to a revolving credit facility, which can be drawn upon as needed. This type of loan is often used to finance working capital or cover unexpected expenses.
Operating Loans: An Operating loan will provide businesses with funds to support day-to-day operations. These loans are often used to finance working capital specific needs such as to cover payroll expenses, or purchase inventory and other things
Commercial Mortgages: A commercial mortgage is used to finance the purchase or refinance of commercial real estate. These loans can be used to acquire office buildings, retail spaces, or other commercial property types.
Export Development Loans: Export Development Canada supports businesses that export goods or services. These loans can finance export-related activities, such as purchasing equipment or hiring staff.
Hopefully, every business manager knows some basics about rates, collateral, personal guarantees, secured vs. unsecured, etc.
These are the essence of the majority of Canadian business financing. Not knowing how to finance your firm often has the business viewed as ‘ unstable. ‘
WHAT ARE THE 5 KEY TYPES OF BUSINESS LOANS?
We can say that 5 types of common business loans dominate the commercial lending landscape in Canada. They are:
Business Term Loans
Lines of Credit - Business credit lines are available from banks - As well asset-based lenders offer a higher loan-to-value ratio borrowing margin on key business assets incorporated into a line of credit -
These ' ABL ' lines combine inventories, accounts receivables, and fixed assets into one borrowing facility, focusing on the business's assets.
On the other hand, banks emphasize personal guarantees, outside collateral, ratios, and covenants when approving loan amounts.
A/R Financing- accounts receivable solutions including Confidential Receivable Financing - businesses use these facilities to borrow money against outstanding invoices
Inventory Finance
Equipment Leasing / Commercial Property Mortgage:
Purchase new or used equipment to enhance the value of your company for larger asset purchases for your operation's needs, allowing you to maintain a competitive edge in technology/assets at competitive lease and loan terms.
Naturally, depending on your flexible financing needs, one or all of these might apply.
Term Loans
Business Term Loans are suited for longer-term financing needs, such as commercial real estate finance. While interest rates might be variable more often than not, they are fixed rates and have 3-7 year terms, which is optimal for long-term financing.
This method of financing your business is more difficult to access. Online lenders offer short-term working capital loans and merchant advance funding solutions.
APPLYING FOR A COMMERCIAL LOAN
Applying for a commercial loan typically involves providing a lender with detailed financial information and documentation about the business. Here are some of the key documents that may be required:
DOCUMENTS REQUIRED
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Business Plan: A comprehensive plan outlining the business’s goals, strategies, and financial projections.
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Financial Statements: The balance sheet, income, and cash flow statement.
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Tax Returns: Both business and personal tax returns to provide a complete financial picture.
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Bank Statements: Recent bank statements to demonstrate cash flow and financial stability.
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Collateral Documentation: Property deeds or equipment titles if the loan is secured.
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Personal Credit Reports: For business owners to assess personal creditworthiness.
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Business Credit Reports: To evaluate the business’s credit history.
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Other Documentation: As required by the lender, which may include contracts, licenses, or other relevant documents.
It’s important to note that the specific documents required may vary depending on the lender and the type of loan being applied for.
Consulting with a financial advisor or business banker can help determine the specific requirements for your business and streamline the application process.
BANK FINANCING IN CANADA / BUSINESS LOAN REQUIREMENTS
Banks probably provide most term loans in Canada and, rightfully, insist on clean balance sheets, profits, and cash flows.
A healthy dose of outside additional collateral on other parts of the business or the owner’s assets might also be required under loan agreement terms.
If you qualify, a line of credit and any accompanying interest rate from Canadian banks will always be the low-cost solution for funding your business.
Whether a mortgage for commercial real estate loans for company-owned premises or a commercial loan, companies should strive to achieve traditional bank financing based on various business solutions and access to unlimited capital.
Whether you need short-term business loans, an ' LOC,' or funding for a business acquisition, the bank can satisfy all your business needs at the best rates and loan terms.
THE GOVERNMENT OF CANADA SMALL BUSINESS FINANCING PROGRAM
The term loan that is a lot more accessible to entrepreneurs is the Government Canada Small Business loan -
These are government-guaranteed small business loans that finance up to 1.1 million dollars of equipment, property, and funding to renovate property for leasehold improvements. They are corporate loans with attractive rates, terms, and flexibility for the business owner/entrepreneur.
Similar to a traditional banking loan for small businesses, thousands of new and existing businesses are accessed yearly for money not otherwise traditionally available. The government loan program funds billions of dollars annually for every industry in Canada. A commercial real estate loan is also available under the program.
A good personal credit score is required under program requirements from the participating financial institution that is underwriting the loan for the federal government. A one-time fee for closing costs is 2% and can be bundled into the financing.
The program is similar to the U.S. SBA program under the Small Business Administration.
ESSENTIAL BUSINESS CREDIT LINES
Operating Lines of Credit - Corporate credit lines revolve daily around your business's current assets, typically receivables and inventory.
The solid alternative for bank credit revolving facilities is the ABL Asset-based credit line - it is easier to obtain, provides more liquidity almost 99% of the time, and allows you to include all your business assets as borrowing power.
FINANCING SALES VIA ACCOUNTS RECEIVABLE FINANCE SOLUTIONS
A/R & Inventory - These two ' current assets’ are often the most critical parts of your capital structure.
These assets are financed outside the bank environment under working capital credit facilities. Your ability to turn in receivables as they become due and manage inventory turns is key to the financeability of these two assets.
When it comes to receivables financing, our recommended solution is CONFIDENTIAL RECEIVABLE FINANCING. This allows you to bill and collect your receivables and borrow up to 90% of outstanding A/R at any time. It's a solid alternative when financing via a traditional bank loan isn't available or enough.
EQUIPMENT LEASING FOR YOUR BUSINESS ASSET AND TECHNOLOGY REQUIREMENTS
Equipment Loans/ Mortgages—Billions of dollars of capital assets are financed in Canada through equipment lease finance solutions, quick credit approval, and competitive interest rates for small business owners.
Using independent commercial lease firms allows you to access capital outside the bank and are a strong source of additional credit for any business. There is no upper or lower limit for asset financing via the equipment lease.
Technology needs are well suited to lease financing and provide business owners with a fair amount of asset acquisition and replacement flexibility.
WHAT FUNDING SOLUTION WORKS FOR YOUR BUSINESS?
It’s critical to pick the right debt or asset monetization strategy in business, carefully assessing how long you need the financing. Considerations should include your firm's overall credit quality, the amount of liquidity you have, and restrictions demanded by lenders under different loan scenarios.
KEY TAKEAWAYS
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Loan Types: Understanding secured vs. unsecured loans and their implications for your business
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Creditworthiness: Recognizing the importance of personal and business credit scores in loan approval
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Repayment Terms: Grasping the impact of interest rates, loan duration, and payment schedules on your finances
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Collateral: Identifying suitable assets to secure your loan and mitigate lender risk
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Cash Flow Analysis: Demonstrating your ability to repay the loan through consistent revenue streams
CONCLUSION
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor relationship, to achieve the ' survive and thrive ' commercial loans tailored to your business financing needs with financing solutions tailored to your business.
Small businesses that know the basics of our 5 focus areas allow the owner/manager to access the right amount of capital for business growth at the right time and not feel vulnerable in both tough and good times.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How can a business commercial loan help my company grow?
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Provides capital for expansion projects
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Enables purchase of new equipment or technology
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Allows hiring of additional staff to increase productivity
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Facilitates inventory purchases to meet growing demand
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Supports marketing initiatives to reach new customers
What advantages do business commercial loans offer over other financing options?
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Often provide larger loan amounts than personal loans
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May offer lower interest rates compared to credit cards
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Can be tailored to specific business needs and cash flow
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Help build a business credit history
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May offer tax benefits (consult with a tax professional)
Are there flexible repayment options available for business commercial loans?
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Many lenders offer customizable repayment schedules
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Options may include interest-only periods
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Seasonal businesses can benefit from cyclical repayment plans
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Some loans offer longer terms for lower monthly payments
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Early repayment options may be available without penalties
How quickly can I access funds from a business commercial loan?
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Traditional bank loans may take several weeks to process
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Online lenders often offer faster approval and funding
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Some lenders provide same-day or next-day funding options
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Pre-approval can expedite the process for future borrowing needs
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Lines of credit offer immediate access to funds once established
What types of business expenses can be covered with a commercial loan?
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Working capital for day-to-day operations
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Real estate purchases or leasehold improvements
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Equipment acquisition or upgrades
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Inventory management and bulk purchases
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Refinancing existing business debt at better terms
What is a business commercial loan?
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A financial product designed for business use
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Provides capital for various business purposes
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Offered by banks, credit unions, and alternative lenders
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Can be secured (requiring collateral) or unsecured
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Typically involves larger amounts than personal loans
How do lenders evaluate business loan applications?
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Review of business and personal credit scores
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Assessment of business financials and cash flow
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Evaluation of business plan and growth projections
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Consideration of industry trends and risks
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Analysis of collateral value (for secured loans)
What documents are typically required for a business commercial loan application?
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Business financial statements (balance sheet, income statement)
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Tax returns (business and personal)
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Bank statements
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Business plan or profit projections
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Collateral documentation (if applicable)
How long does it take to repay a business commercial loan?
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Short-term loans: 3-18 months
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Medium-term loans: 1-5 years
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Long-term loans: 5-25 years
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Repayment terms vary based on loan type and lender
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Some loans offer early repayment options
What are the potential risks of taking out a business commercial loan?
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Obligation to repay regardless of business performance
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Potential loss of collateral if unable to repay
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Impact on credit score if payments are missed
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May limit future borrowing capacity
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Interest costs can affect overall profitability
What factors influence the interest rates on business commercial loans?
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Creditworthiness of the business and owner
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Overall economic conditions and market rates
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Loan term and amount requested
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Type of loan (secured vs. unsecured)
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Lender's risk assessment and policies
How do business commercial loans differ from lines of credit?
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Loans provide a lump sum, while lines of credit offer revolving funds
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Lines of credit often have more flexible usage and repayment terms
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Loans typically have fixed interest rates, while lines of credit may have variable rates
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Loans are better for specific, one-time expenses
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Lines of credit are ideal for ongoing or fluctuating capital needs
What role does collateral play in business commercial loans?
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Reduces lender risk, potentially leading to better terms
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This can include business assets, real estate, or personal property
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This may allow businesses with limited credit history to qualify
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Secured loans often offer lower interest rates
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Unsecured loans may be available but typically have stricter requirements
What is the advantage of a commercial bank loan?
The main advantage of a commercial bank loan is the ability for a business to access reliable and predictable funding without having to consider additional equity investment into the business - commercial bank loans can be funded on fixed or variable rates and allow for companies to manage cash flow more predictably,
Commercial loans from banks can be utilized for operating costs via business lines of credit, purchasing assets and technology, or expanding operations via growth or acquisitions,
What is the most common commercial loan?
The most common commercial loan is a commercial real estate loan, used to fund, via commercial mortgages, the purchase of company-owned facilities for a growing business that might include offices, warehouses, factories, etc. Small business loans are another commonly used loan by SMBs, and these loans can be secured or unsecured.
