The Small Business Owner's Guide to Business Loans in Canada

Managing a small business is challenging. One of the common challenges for business owners is financing. Your company might not have a lengthy credit history or collateral to apply for a bank loan. Whether you want to grow your business or cover unforeseen expenses, you have come across other financing options. Merchant cash advance and cheques factoring are some of the available options for small businesses.

What Is Merchant Cash Advance?

A merchant cash advance is an alternative financing option for small businesses. You can take the funds upfront and pay them off with a percentage of future sales. The MCA is an ideal solution for businesses that need fast funding and might not be eligible to take a bank loan. The availability of funds is another excellent advantage. If your business needs the funds fast to proceed with the operations, the cash advance will be approved within a day or two.

PROS

Fast access to funds

When timing is crucial and you can't go through the lengthy bank approval process, the MCA is your solution. Small businesses can get funds within a day or two from submission. Unlike the traditional bank process, the financial institutions that issue MCAs don't do rigorous checks. They will check the business's past sales to determine whether they qualify for a cash advance.

Ideal for businesses that work with cash and credit cards

Retail and restaurant businesses rely on a high volume of credit card sales, making them ideal for obtaining MCA. If your business depends on cash or credit cards, a cash advance is the ideal financing method. This opportunity is perfect for the ones that don't rely on invoices. Instead, they take a percentage of the credit card sales to repay the loan.

CONS

High-interest rates

Merchant cash advance comes with higher interest rates than traditional bank loans. The convenience of having the funds fast will cost more. However, the price is worth paying when you need urgent funds to proceed with the business operations.

What Is Cheques Factoring?

A post-dated cheque is a cheque that can be cashed on the indicated date on the document's face. It is a form of advance payment and can be cashed on a specific date. According to Canadian laws, a cheque can't be cleared before this date. If you still need cash to keep your business's liquidity, you can sell the cheque to a factoring company.

PROS

Fast approval

Depending on the date indicated on the check face, you might have to wait long to receive the payment. If you need to meet your business needs urgently, factoring your cheques will provide you with funds quickly. They will pay off a particular value of the face value while keeping a specific percentage as a fee.

No credit score checks

When applying for a traditional bank loan, they will do a rigorous check on your financial history. When your small business is relatively new and doesn't have a credit history, you might be restricted from obtaining such loans. Your ability for cheque factoring isn't assessed with credit history, and you aren't required to disclose collateral. This is very important, as you don't need to put your property or equipment at risk. The factoring company will check the check for authenticity.

Not deal with cheques

Having to deal with cheques is a tedious job. Passing this responsibility to a third party means less time spent sorting out cheques so that you can focus on the more important aspects of your business.

CONS

Higher cost

The factoring company will charge fees to provide you with the cash in advance. They will usually pay 80% of the amount indicated on the face. However, the high cost might pay off if you need money urgently.  

Requirements

Cheques factoring companies might have specific requirements for cashing out your document. For example, the check drawer should be a reputable entity. Also, the factoring company might have particular requirements on the cheque's active time.

Merchant Cash Advance vs. Cheques Factoring

For cheques factoring, you will pay a fee to the factoring company expressed as a percentage of the total amount. On the other hand, you will pay off your MCA as a percentage of your future sales. When choosing the suitable financing method for your company, select the one that is a better fit for your needs. We at 2M7 are dedicated to providing the needed funds to enhance your business's liquidity without restrictions on how to use them. Get in touch with us, and we will answer your specific needs!

What is a business line of credit?

A business line of credit (LOC) is designed to meet the short-term financing needs of businesses. Basically, it is a revolving sum of money lent to a business owner. The borrower pays interest on the borrowed amount while the interest rate may be at a fixed or variable rate, depending on the borrower’s financial state. LOC is a type of debt financing, which is offered by traditional financial institutions in Canada. A business line of credit is often referred to as a “corporate line of credit”. As a debt instrument, they are both the same.LOC is very much like a credit card for your business. The business owner will be given a pre-approved credit amount from which he can draw capital as needed. Once the funds are used, the borrower will need to repay the amount including the interest over the repayment term as agreed. A business line of credit is one of the many options to fund your business or to get funds for a new business. It gives access to affordable credit if the borrower qualifies. The LOC provides ready cash flow, that could help solve the liquidity problems that small businesses tend to suffer the most.

What is a small business line of credit?

Lending providers offer a small business line of credits to small-sized businesses with different combinations of rates and qualifications. These may include the following:  

• An unsecured line of credit (up to $50,000)
• Secured credit (up to $1,250,000)
• Floating interest rates
• Business insurance
• Shorter approval/processing times
• Low monthly fees

A small line of credit under $300,000 can be approved online. For small business owners, a line of credit is one of the easiest ways to secure cash flow for their business operations. The application for a small business line of credit is typically short, and approval can be granted within one business day.

How to get a line of credit for your business?

Banks in Canada have a variety of LOC products for small and mid-sized businesses. You should consider applying for a business line of credit at a bank you’re already registered to. Make sure to apply for a line of credit ahead of time as, unlike loans, it can take up to a month to get approved. In order to apply for a line of credit, you should open a business bank account. Below is a list of documents that you would need to provide for your LOC application:

• Two pieces of government-issued IDs
• Proof of income
• Business financial statements, including income, expenses, assets, and liabilities
• Other personal- and business-specific information such as an address, license number (if applicable), and how long you’ve been in business

How to get approved for a business line of credit?

Whether or not your line of credit is approved depends on your credit score and your business qualifications. The higher your credit score and the more stable your business income, the more likely it is that you will be approved for a line of credit, and the larger it will be. It is very important to have a good credit score and to keep your business financial documents in order. If a bank is unable to adequately assess your business potential, it will lower the chance of receiving a line of credit. With a private lender, things are a bit easier as the lender may adopt different criteria and qualifications to advance the line of credit. Also, private lenders are more open to lending to businesses with lower credit scores. Remember, when looking for a small business loan line of credit, make sure to evaluate several options. The majority of small businesses prefer to choose private lenders as they are able to receive more flexible offers. Check out how merchant cash advance works to see if your business qualifies.

Why is a business line of credit better than a loan?

A business loan is typically obtained and disbursed only for a specific purpose. It is meant to provide access to capital for a one-time, major financial expenditure. Therefore, to manage your operating cash flow, you will have to apply for multiple business loans – each of which will negatively affect your credit score.However, a business line of credit allows you to improve your credit score. You only borrow the money you need and pay interest based on that amount. A business LOC allows for greater financial planning and resolves cash flow problems that small businesses often experience.

Why you may be denied a line of credit?

There are a number of reasons why you may be denied a business LOC. Most likely, your bad credit score will lead to a refusal, but that is not the only reason. The line of credit may be refused for a number of reasons, including:

• Purpose of LOC does not meet the required criteria
• Your industry is too risky
• The commercial bureau reports negative performance
• Business revenues indicate insufficient ability to handle monthly payments

Having a low credit score doesn't mean you can't take any type of loan. Check out some ways to get a business loan with a bad credit score.

Approaching a private lender for a small line of credit

If you require a moderate-sized line of credit, it is worth approaching a private lender. A small lender will not require as many documents as the bank, and the approval process will be faster as well. Also, private lenders accept applications for LOCs online and you can get request a quote online. Private lenders will help you understand why your line of credit has been denied by the bank and can provide the necessary funding in a shorter time with less hassle and stress and treated as bad credit debt help. If you are interested in an alternative solution made for small businesses, talk to one of our experts today for the best business cash advance loans.

A big part of business is focusing on profit margins and productivity, but keeping a business operating healthily gets a bit more complicated than that. One of the concepts you can’t afford to neglect is working capital. Working capital is a necessary data point for any business, and while sometimes it’s taking a bit more time to understand, it is absolutely crucial for maintaining a healthy balance sheet and operating effectively. We’re going to go over what working capital is, why it’s important, and some of its uses in the business world. Let’s get started.

What is Working Capital?

Working capital is essentially what you have left after taking out all the money you need to pay the bills. Think of it like you would in your personal life with a normal job. You get paid, you add up all your household bills and debts, set that money aside to take care of those necessary expenses, and you can work with whatever you have left. If needed, you also have assets you can leverage such as your savings, valuables, and other things that can help beyond the cash you have on hand. In more professional terms, this is everything you have, assets and cash on hand, minus the liabilities you have such as credit card debt, the bills necessary to keep the business running, payable taxes, and more. How you determine your overall working capital is by adding up your assets and financial resources and subtracting the total amount required to pay your expenses. We’ll keep it easy with solid numbers, but your actual calculation will likely be slightly more complicated. Let’s say you add up your assets and have $100,000 in value. After you add up your liabilities, you calculate that you have $50,000 to pay in total. $100,000 minus $50,000 is $50,000. That's your working capital.

Why is Working Capital Important?

Working capital is important in two main ways. At a first glance, it seems as if having as much of it available as possible, but that’s not quite accurate. Let’s go over both ways it can go and why balance is important.

What is Negative Working Capital, and Why it is Important?

This is the primary concern most business owners are going to have, and it’s certainly one that is most immediately noticeable. Negative working capital is when you use the formula we provided earlier, and you don’t have enough to cover your liabilities. That means you don’t have enough to pay your bills, essentially. If you don’t have the capital available to pay off your liabilities, you certainly can’t commit to any sort of growth, and the immediate future of your business doesn’t look promising, either. There are solutions to this that we will talk about later, but this is the worst-case scenario in a lot of situations.

What is Positive Capital, and Why it is Important?

Positive working capital is the opposite of negative working capital. It’s when you do have some resources left over to work with. For example, if you were the average homeowner working a normal job, you’d have some money left over after paying bills. Not all of it is “take home money”. Some of it has to go into savings in case you plan something big, like a major family trip abroad. The same concept goes for positive capital in business. That doesn’t mean that having it in extreme excess is optimal, though. In fact, it can mean that you’re making poor business decisions. If you regularly have way more working capital than expected, it typically means that you’re not taking advantage of growth opportunities, low debt situations, and other crucial parts of the business world. In the long term, this can mean that your business growth stagnant and that excess will start to decline eventually. It can also mean that you’re not providing reasonable upkeep for your business, which has major consequences, or it can mean that you’ve failed to account for various liabilities and your results are false; which is a major accounting error. In the vast majority of situations, you want to have your growth goals in mind, and you want enough to facilitate those goals. It’s also “working” capital. So, make sure it’s working for you.

How to Increase Working Capital for Higher Growth Potential?

Whether your business has a negative working capital amount, or you simply have larger growth goals you want to accomplish, increasing your working capital is usually going to be attractive. As long as you’re actually using it. Doing that can be difficult, but there are some key data points to target and strategies to use. Primarily, you’ll have two core options: You can increase the number of assets you have to offset your liabilities, or you can get rid of some liabilities such as debts that are close to being paid off.

Increasing Working Capital Assets:

Increasing your working capital assets is going to focus on improving your margins. The larger your margin is, the more working capital you’ll have left over assuming you don’t increase your liabilities. This is essentially the same as telling you to "earn more money”, which isn’t very constructive if money is the problem in the first place. If you’re already generating positive working capital, focusing some of those resources on short-term growth that helps with your margins is a strategy you can use. However, that’s a problem if you’re in the negative since you don't have anything to work with. For example, let’s say you have positive working capital, but you don’t have enough to focus on your goals. You might not be financially capable right now. Instead, pump some of that into marketing a big sale, increasing your inventory in high-demand areas, and similar things to earn more working capital. That’s where a working capital loan comes in, and we’ll get to that shortly.

Decreasing Liabilities to Gain Working Capital:

The other way to earn more working capital is to get rid of liabilities where possible. If there is debt that can be paid off in the short term, paying that off frees up a little more to go toward working capital amounts. If you can lower your tax liability, that’s another way to keep a bit more of your margin. It can also be possible to delay purchases. While growth is the ultimate goal, if you’re struggling to maintain a healthy balance sheet, delaying purchases until you can generate more working capital to accommodate them is crucial. For example, let’s pretend you’re a restaurant. You’re moving around $50,000, but after you pay your vendors, staff, and landlord, you’re only keeping $10,000, and that’s your networking capital. If you can consolidate some of this cost, for example automate ordering process and reduce waiter’s team, you can lower the liability cost and generate more profits. Again, this is something that a working capital loan can help with if liability removal strategies aren’t working or aren’t feasible.

What is a Working Capital Loan?

Alright, we’ve talked about a variety of issues that can pop up with working capital and damage your ability to grow, but now it’s time to start talking about real solutions. There are a lot of situations where you just don’t have any room to work with. You can’t boost your assets, because you don’t have capital, and you can’t remove any liabilities, because they’re all long-term, non-negotiable, and absolutely required. So, how do you get over that speed bump? Primarily, you can get a working capital loan. A working capital loan is a loan used to overcome cash flow problems; but it’s not just used in negative circumstances. Any business owner can benefit from one at a certain point, and it can be a positive experience. Here are some of the ways it’s used.

1. Funding Growth Goals

Sometimes, you’ll have growth goals, and you’ll have positive working capital, but you just don’t have enough funds. In that circumstance, you can use a working capital loan to get that extra bit of funding you need in the short term. For example, let’s say it’s the perfect time to open a new location, but you’re $20,000 short on the overall costs. A working capital loan can help. Of course, the payments will become liabilities later. So, it’s best to be in a relatively healthy position when using a loan for this purpose.

2. Overcoming Financial Speed Bumps

Every business will experience a speed bump in its financial growth at some point. Take COVID-19 for example. Nearly every business went from doing great to suddenly seeing a drop in assets for one reason or another. A working capital loan can help overcome those bumps. If you go into the negative slightly, you can get a working capital loan that helps you remove smaller liabilities and invest in ways to build up non-depreciating assets to grow your margins. There are strategies involved in using a working capital loan this way, but one can save a business and keep it above water in such situations. It’s a lot like when you accidentally spend too much of your check as an average person, and your car payment is coming up. You don’t want to lose your car. So, you get a personal loan to cover it until you’re in a better situation.

3. Waiting on Invoice Payments

In an ideal world, all customers would pay on time, and you’d know exactly when funds were going to arrive. Unfortunately, that’s not how it works. Sometimes, you’ll technically have plenty of working capital on the horizon, but invoices just aren’t getting paid on time. A working capital loan can work like an advance on those invoices to make sure you’re still able to make moves while you wait.

4. Taking Advantage of Opportunities

Sometimes, you’ll be presented with opportunities you don’t want to pass up. For example, maybe you rely heavily on a supplier’s hardware for one of the products you manufacture. For a limited time, they’re offering half-off on bulk shipments of that hardware. That can allow for tremendous savings in the future and a lot of potential for growth. However, you might not have the ability to fund it without throwing your balance sheet off balance. This is another situation where a working capital loan can be the little edge you need to come out on top. Its fast, gets the job done, and keeps you from missing such fruitful opportunities.

Understanding the Working Capital Cycle

Beyond noticing problems with your working capital and finding solutions, you’re also going to want to look at the working capital cycle. This will help you predict when you’re going to have certain assets available, and that allows you to plan for them efficiently. The working capital cycle is the time it takes for your assets to become cash that can pay off your liabilities. For instance, think about the customer invoices for a subscription service. You know that 1000 customers are set to pay their invoice on the 30th. That means that, while you have those accounts as assets, they aren’t realized yet. You don’t actually have the money. The time between now and those payments clearing is your working capital cycle. After the 30th, you would be able to pay your liabilities in this scenario. As such, you want to streamline your working capital cycle as much as possible to ensure everything is moving quickly and efficiently. The best way to do this is to ensure that your customer payments are covering your liabilities. Since waiting for accounts to clear usually takes the longest, ensuring that they pay the liabilities off allows your other assets to simply keep growing and building up more working capital.

The Risk of Certain Working Capital Assets

You’ve probably put together a decent understanding of what working capital assets are at this point. If not, the basics are your customer invoices, inventory, cash, and pre-paid debts. One of those is somewhat volatile, and you shouldn’t aim to build much of your working capital on it. That’s your inventory. Your inventory can be a risky asset. It can become obsolete, depreciate in value, and dramatically impact your working capital amount without any chance of turning into cash. Take fidget spinners for example. During the craze, everyone stocked up on them. That was almost guaranteed cash flow. However, when the trend stopped, that inventory became largely useless. Anyone with too much inventory consisting of that product saw their cash flow tank. This can happen with anything. So, it’s important to understand that risk, diversify assets, and have a solid plan to use your inventory; not just stockpile it for perceived working capital. Think of all the people who bought into Beanie Babies in the 90s, and then think of what happened a few years later when no one cared. The Beanie Babies represent your inventory, and no one caring represents your entire inventory devaluing like crazy. You don’t want things sitting around unless they are guaranteed to be necessary for the future.

The Three Types of Working Capital and How to Differentiate

Finally, there are three types of working capital, and while they all generally work the same way, you will need to differentiate between them.

1. Net Working Capital

This is all the working capital you have at your disposal, and it’s the general number that you’re going to want to keep tabs on.

2. Temporary Working Capital

This is your working capital amount in temporary situations. Think of things such as the speed bumps we talked about earlier, or maybe even expected boosts such as holiday sales. Since the causes for the fluctuations are temporary, you have to work that into your understanding of your working capital during that time period.

3. Permanent Working Capital

The name of this one is misleading. It’s not the amount you’re guaranteed to have all the time. It’s the amount you absolutely need to make it. If you make less, your business’s health starts dropping, and you either fix it or lose it. This is the bottom line of what you need to barely get by, and you want to calculate it regularly since your liabilities and assets will change regularly.

Get a Working Capital Loan with 2M7 Financial Solutions

If you’ve gone through this brief guide and realized you could really use a working capital loan to help your business for any reason, contact us to start the process. We specialize in advanced loans that can help your business seize opportunities, fix temporary problems, and continue operating in a healthy state.