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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
BUSINESS COMMERCIAL LOANS
Understanding Commercial Credit
Commercial loans and SME business loan finance are viewed through two different lenses: the owner/financial manager’s eyes and the bank or commercial finance company's.
No surprise to many that these two views often differ! Let’s examine some best and worst strategies for achieving Canadian business finance success.
Breaking Through Business Financing Barriers: Your Path to Growth
Many Canadian businesses struggle to secure adequate financing, watching opportunities slip away while competitors forge ahead. The complexity of loan applications, stringent requirements, and lengthy approval processes can feel overwhelming.
Let 7 Park Avenue Financial show you how, by understanding the right approach to a business capital solution, you can access the capital you need to fuel your growth and seize market opportunities.
3 Uncommon Takes on Business Credit Facilities:
- "The hidden advantage of rejected loan applications - they often reveal crucial business insights that strengthen your overall financial strategy."
- "Why the rise of alternative lenders has made traditional commercial loans more accessible."
- "The counterintuitive benefit of higher interest rates in commercial lending - they can lead to more thorough business planning and better ROI."
How Commercial Loans Work
Commercial loans are a critical tool for business growth.
Borrowing capacity, influenced by net income and existing debt repayments, determines how much a business can borrow. Understanding this capacity is crucial for companies to avoid common misconceptions about their ability to handle additional loans.
Types of Commercial Loans
Different loans are tailored to specific business needs. Some are designed for starting a business, acquiring equipment, or expanding operations.
Understanding these different loans helps prioritize needs and effectively communicate with lenders.
How Commercial Loans Work
Commercial loans are granted to various business entities to assist with short-term funding needs for operational costs or equipment purchases.
These loans can help businesses meet essential operational needs, such as funding payroll or purchasing supplies.
Typically, commercial loans require collateral, such as property, plant, or equipment, which the bank can confiscate in the event of default or bankruptcy.
Additionally, cash flows generated from future accounts receivable can be used as collateral for a loan, allowing businesses to leverage their expected income to secure necessary funding.
Types of Commercial Loans
Commercial loans come in various forms, each tailored to meet specific business needs. Some common types include:
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Term Loans are lump sum loans with a fixed interest rate and repayment term, ideal for significant one-time investments.
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Lines of Credit: A revolving credit facility that allows businesses to borrow and repay funds as needed, providing flexibility for managing cash flow.
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Commercial Mortgages: Loans used to purchase, renovate, or refinance commercial properties, helping businesses secure physical locations.
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Equipment Leasing: A loan that allows businesses to acquire equipment while preserving cash, often with favourable terms.
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Invoice Financing: Loans that use outstanding invoices as collateral enable businesses to access funds in accounts receivable.
SME Business Loan Criteria vs. Large Corporation Lending
The lending criteria for firms in the SME (small to medium enterprise) sector are, in some ways, different from those for larger private and public corporations.
One key factor in that area is owner equity, which is often much less prominent on SME firms' balance sheets.
The Importance of Fixed Asset and Equipment Financing
At the same time, these firms need to purchase or replace key fixed assets or new technologies. This is often best addressed by looking at lease financing options, as equipment finance allows companies to minimize cash outlays.
The even better news about leasing assets is that almost every type of credit profile can still access asset financing in this manner.
Companies with weaker balance sheets may be asked to increase down payment or shorten the lease term, but they can still be approved.
Business Financing Options Beyond Traditional Equity
Because SME firms rarely can or want to access additional equity, they are relegated to only two other options - taking on debt or monetizing their existing assets.
Various partners and programs focus on financing to support businesses, including women-led enterprises.
In rare cases, a ‘ hybrid ‘third solution might be a solution that provides debt and has an equity component—for example, a convertible loan or warrant scenario.
Financing Options for SMEs
What financing options are available? Part of the solution is understanding your firm's stage of start-up or growth.
Businesses can borrow money for various purposes, including commercial real estate financing. Typical scenarios include sales starting to grow, but profits are not fully being achieved, if at all!
The reality is that it’s at this time that business funding is often needed the most but is least accessible in the eyes of the business owner. The lender, typically ‘the bank,’ has already criticized your balance sheet or lack of profits and positive cash flows.
Key Business Financing Solutions
Why Traditional Banks Limit Business Lending
Because banks in Canada are both highly regulated public companies, they can rarely provide all the financing you need. This is because they are unable to fully secure loans to your firm.
Various financial institutions offer options like renewable loans to help businesses meet their ongoing operational needs. That’s their story, and they are sticking to it.
Even for firms that are profitable and achieve some measure of return on equity, banks will rarely lend to firms offside the total debt/equity issue. Although it can sometimes be frustrating, business owners need to know how banks look at your financials - if only for a reason you can understand the arithmetic and decline yourself!
Key Bank Lending Criteria for Business Loans
Banks focus significantly on cash flow collateral security and debt-to-equity relationships on your balance sheet.
Banks are very focused on identifying any risk - it's as simple as that. Therefore, if you're in the start-up or growth stages, you must manage your working capital and asset turnover to the utmost.
That's all about inventory turns, collecting your receivables promptly, and managing payables and supplier relationships.
Collateral and Credit Requirements
Commercial loans often require collateral, such as property, plant, or equipment, to secure the loan.
The business's and its owners' creditworthiness is also a significant factor in the loan approval process. Businesses applying for a loan must present documentation, such as balance sheets and financial statements, to prove a favourable and consistent cash flow.
This documentation assures the lender that the loan can and will be repaid according to its terms. By demonstrating strong financial health and providing valuable collateral, businesses can increase their chances of securing the necessary funding.
Documents Needed to Apply
To apply for a commercial loan, businesses typically need to provide the following documents:
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Business Plan: A detailed plan outlining the business’s goals, objectives, and financial projections, demonstrating the viability and potential for success.
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Financial Statements: Balance sheets, income statements, and cash flow statements that provide a snapshot of the business’s economic health, showing profitability and stability.
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Accounts Receivable: A list of outstanding invoices and their corresponding payment terms, indicating expected future cash flows.
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Collateral Documentation: Proof of ownership and value of the collateral being offered to secure the loan, ensuring the lender has recourse in case of default.
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Credit Reports: Personal and business credit reports that demonstrate the business's and its owners' creditworthiness, influencing the loan terms and interest rates.
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Amortization Schedule: A schedule outlining the loan repayment terms, including the interest rate, loan amount, and repayment period, providing a clear repayment plan.
By providing these documents, businesses can demonstrate their creditworthiness and increase their chances of securing a commercial loan that meets their unique business needs.
Exploring Alternative Business Financing Solutions
At these times, the owner/manager should explore commercial finance company solutions that are both traditional and alternative in nature.
Other financial institutions provide renewable loans, offering flexible funding solutions for businesses. While pricing will always be higher, it will give you the necessary capital.
Government Business Loan Programs
Have we forgotten anyone?
Oh yes, the government! In addition to the aforementioned SR&ED program, which provides billions in refundable tax credits (which can be financed), the Small Business Govt Guaranteed Loan program provides financing up to $350K for assets and leasehold improvements.
CASE STUDY:
A family owned manufacturer owned in Ontario with 25 years of operation, faced a critical turning point in 2023.
Their aging equipment was causing:
- Frequent production delays and maintenance costs
- Quality control issues leading to a 15% customer attrition rate
- Inability to compete with more technologically advanced competitors
- Loss of market share to overseas manufacturers
- Rising energy costs from inefficient machinery
The Solution: After careful analysis, the company secured a $500,000 business commercial loan structured as follows:
- 5-year term with competitive interest rates
- Quarterly payment schedule aligned with cash flow
- Equipment as collateral, preserving other business assets
- Interest-only payments for the first 3 months during installation
Implementation: The loan enabled the company to:
- Install state-of-the-art automated production lines
- Implement energy-efficient systems
- Upgrade quality control processes
- Train staff on new technology
- Modernize facility layout for optimal workflow
Immediate Results (First 12 Months):
- 40% increase in production capacity
- 25% reduction in operating costs
- 60% decrease in maintenance expenses
- 30% reduction in energy consumption
- 90% reduction in production defects
Market Position:
- Regained lost market share and expanded into new markets
- Attracted higher-value clients
- Established a reputation as an industry innovator
- Successfully competed against international manufacturers
Key Takeaways
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Understanding credit requirements saves countless application rejections
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Proper documentation preparation accelerates approval processes
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Relationship building with lenders creates long-term financing opportunities
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Cash flow analysis determines suitable loan amounts
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Strategic timing of applications improves success rates
Conclusion: Securing the Right Business Financing Strategy
Are you focused on acquiring the best financing strategies for commercial loan financing success?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your SME business loan finance needs.
FAQ
How does commercial business financing boost company growth?
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Enables rapid market expansion
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Provides capital for new opportunities
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Supports equipment modernization
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Improves competitive positioning
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Strengthens supplier relationships
What makes commercial loans better than personal financing?
When is the best time to apply for a commercial loan?
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During the strong financial performance
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Before peak business seasons
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When expansion opportunities arise
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Before equipment obsolescence
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During favourable market conditions
What advantages do Canadian commercial loans offer?
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Government backing options
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Competitive interest rates
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Specialized industry programs
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Local market understanding
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Strong regulatory protection
How can commercial loans improve cash flow?
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Smooths seasonal fluctuations
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Supports inventory management
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Enables bulk purchase discounts
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Facilitates payroll management
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Provides working capital buffer
Are startup businesses eligible?
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Minimum 2 years preferred
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Special startup programs exist
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Additional requirements apply
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Higher interest rates likely
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A strong business plan is essential
How long does approval take?
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Traditional banks: 4-6 weeks
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Alternative lenders: 1-2 weeks
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Online lenders: 2-3 days
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Pre-approval often faster
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Documentation affects timeline
What are typical interest rates?
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Prime + 2-5% common
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Varies by loan type
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Credit score impacts rates
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Term length affects pricing
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Market conditions influence rates
Is collateral always required?
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Depends on loan size
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Various assets accepted
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Unsecured options available
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Personal guarantee common
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Risk level determines requirements
What factors affect commercial loan approval?
How do different commercial loans compare?
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Term loan structures
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Line of credit flexibility
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Equipment financing specifics
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Commercial mortgage features
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Working capital options
What are common application mistakes?
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Incomplete documentation
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Unrealistic projections
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Poor preparation
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Timing errors
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Communication gaps
