The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
Alternate Ways to Finance a Business
Loans Canada: The Country's Best Loan Comparison Platform
Today’s economy coupled with the competitiveness of the credit market, being approved for a business loan can sometimes seem impossible. Banks and other traditional lenders aren’t so willing to approve just anyone anymore, the application process is rigorous and approval rates low. But if you find yourself continually being rejected for a business loan what you really need you’re not out of luck just yet. There are lots of other options for funding your business you just need to look in the right places.
We’ve put together a list of some of the best alternate ways to finance your business, including the pros and cons of each option. This way you’ll have all the information you need in one place to make the best choice possible for both you and your company.
Accounts receivable financing (factoring) is when a company receives an order for their product and instead of fulfilling it, sells the order (accounts receivable) to another company who will then fill the order. The company that purchases the accounts receivable is often referred to as the third party or factor. The factor usually purchases the order for 80% of its value upfront and then pays the original company the other 30% when the order is complete, the factor will also collect a fee of 2 to 6%.
- Fast access to the cash you need.
- No waiting for banks or lenders to approve your loan application.
- Your credit score won’t be taken into account.
- Factors are generally more concerned about the client and not your company.
- Not an alternative for a long term business loan, factoring is best used for short term financial needs.
- The profit margin for the product you’re selling needs to be high, around 25%.
If your business has most of its money tied up in its accounts receivables, if you run a wholesale or distribution company or are part of the import industry then factoring is a great option for you. There are lots of accounts receivable financing options for you to choose from so just like with any financial decision make sure you do your research.
Merchant Cash Advance
A merchant cash advance provider gives a company a cash advance based on the size of their monthly credit card transactions. Every cash advance provider is different so the terms will vary from provider to provider. Typically a merchant cash advance provider takes an agreed upon percentage of the company’s credit card sales every day until the advance is paid off. The interest for a merchant cash advance is often called a premium and depends on both the provider and the company.
- Merchant cash advances provide quick and easy to get financing for companies in need.
- Merchant cash advances aren’t regulated under the same laws and regulations as banks.
- There is no need to fill out long, time consuming applications.
- Providers of cash advances aren’t as worried about credit scores as banks and other traditional lenders.
- Because the cash advance provider is paid back through a percentage of your daily credit card sales, if your business is having a slow month your payments will reflect that.
- The interest or premium can be quite high, depending on the provider.
- If your customers don’t often pay with credit cards then you’re not a good candidate for a merchant cash advance.
A merchant cash advance is a great choice for a business that needs a small amount of cash quickly and for a short amount of time. Because the interest is often so high it’s best if your business’s credit cards sales are high so that the advance can be paid back within a year or sooner. Make sure you do your math and calculate the interest you’ll be paying, a merchant cash advance might seem like a good idea but it also might not be the best option for your company.
Business Credit Cards
Business credit cards are very similar to personal credit cards and therefore are a great option for companies that need a little extra cash each month to buy office supplies, inventory or pay for small equipment updates or repairs. Therefore, a business credit card is not a good alternative option for a company that can’t get approved for a business loan but still needs a large sum of capital.
- Having a business credit card will help build your businesses credit score which will in return help in the future if you want to apply for a bank loan.
- Some business credit cards offer 60 day grace periods (personal credit cards have 30 day grace periods)
- They can act as a way for business owner to keep track of their expense or tax purposes.
- Credit cards can become very expensive if they aren’t used responsibly.
- Business credit cards don’t fall under the same laws and regulations as personal credit cards.
- The fine print can be misleading and needs to be read carefully.
If your choose to apply for a business credit card make sure that you understand all of the restrictions and that you only use it for short term expenses, a business credit card is not an alternative for a long term bank loan.
Commercial Real Estate Loan
Commercial real estate loans are used specifically to help companies purchase the real estate they need to run their business. This includes, retail space, office buildings and warehouses. Commercial real estate loans are not mortgages but they are similar in that they are both long term loans, unlike most alternative financing options which are typically short term.
Any commercial real estate that a company already owns can be used to leverage another general purpose loan. Therefore, if you’re having trouble getting a business loan from a bank you should consider using any commercial real estate you own to improve your chances of being approved.
- Commercial real estate loans typically have lower down payments.
- The best option for any business that requires a location to run.
- Commercial real estate loans are not technically an alternative to traditional loans; therefore they have many of the same requirements as traditional business loans.
- Can only be used to purchase real estate.
If you own a company that requires any kind of real restate to run then this is definitely the type of loan you should look into. Because it’s more specific than a general purpose business loan there isn’t as much competition, but the application process will be similar to that of a bank loan.
Most banks and private lenders offer loans to businesses that need to purchase equipment. This is a very specific type of loan and should be used to purchase items like machinery, computers and other technical equipment. Obviously this will all depend on what kind of business you run.
On the other hand, businesses that have already purchased equipment can use it as an asset against another general purpose loan.
- Equipment loans are quite easy to get as the equipment you purchase will be used as collateral and can be seized if you fail to make your payments on time.
- Equipment loans do not usually require large down payments and thus will allow a business to use the available cash they have on other expenses.
- The biggest and one of the only drawbacks of an equipment loan is that it can only be used to purchase equipment.
- Depending on the terms of your loan, it can also be hard to back out of an equipment loan even if you purchase equipment you never use.
Any business that requires any kind of equipment should look into applying for an equipment loans instead of a general business loan. Less people apply for equipment loans and because the equipment you purchase will be used as collateral it’s relatively easy to get approve.
Business Acquisition Loans
Business acquisition loans are for individuals or companies looking to purchase or acquire another already existing business. Most business acquisition loans are approved based on the assets an individual or company has or on the assets that the business being purchased has. The amount of money that will be loaned is based on these assets.
- Extremely cost effective. If the business you want to purchase is already successful it will most likely pay for itself and the money you get from the loan can be used for other things, like growing and developing the business.
- Being approved to purchase an already successful business is much easier than being approved to start a new business.
- The major risk comes with purchasing an already existing business that might fail.
Because you’re planning on purchasing an existing business that you did not build from the ground up it’s of the utmost importance that you do your research and analyze the business before making any decisions. And make sure the lender you’re planning on working with has experience with business acquisition loans.
Peer-to-peer lending has, in the past several years, been made popular by the Internet. Simply put, it’s when one person loans money to another person without going through the formality of a bank or traditional financial institution. Peer-to-peer lending usually happens through an online network, here’s what happens.
- Business owners fill out form online and then investors can choose which businesses they want to invest in.
- The borrower then receives the money they need and the investor can create a portfolio of their investments so other borrowers to see.
- Based on the terms of the loan the borrower will repay their loan to their investor, who earns interest just like a traditional lender.
- Interest rates on peer-to-peer networks are typically less expensive than other alternative financing options.
- Credit scores and credit history are not as important in peer-to-peer lending.
- Loans are approved and money is transferred much quicker than bank loans.
- Peer-to-peer networks are not regulated by the government. This means you need to be extra careful about the investor that you choose to work with.
- While most interest rates are low average there are some investors who charge significantly higher interest rates, it’s best to double check and make sure you’re not being scammed before you sign any contract.
This type of loan is most useful for a company who needs a lot of cash to run their business. Again it’s up to you to do the research as there are many peer-to-peer network sites and not all of them will be trustworthy.
Rating of 5/5 based on 3 votes.
Largest Lender Network In Canada
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest
goPeer is Canada's first consumer peer to peer lending platform and connects creditworthy Canadians looking for a loan with everyday Canadians looking...