Business Financing in Canada

Cash is the lifeblood of any business.

Without cash, a business will fail. Most businesses that fail don’t fail because of bad business ideas or bad execution. Most businesses fail due to a lack of enough cash, a lack of sufficient business funding.

So what to do if you don’t have enough funding for your business?

Contrary to popular belief, there’s an abundance of funding available to businesses. There’s actually significantly more cash available than there are businesses that need funding. There is always an oversupply of cash in the marketplace desperately looking for investments. Cash supply exceeds cash demand.

Cash is invested in businesses as a Loan or Equity.

Equity investors receive an ownership stake in the business. Lenders receive interest on their money.

Loans are the most abundant and common form of financing. A lender charges an interest rate to the borrower in order to earn a “yield” or interest on the invested money. The interest rate depends on the probability that the borrower can repay the loan. This probability is calculated by analyzing factors such as:

  • How long the business has been in operation
  • Business revenue and financial & operational ratios
  • The assets of the business or business owner
  • The business’ credit score
  • The business owner’s personal credit score… and more.

Lenders can offer unsecured loans that are secured by no assets. These loans tend to have high interest rates. For example, an unsecured business credit card is an unsecured loan. It can have an interest rate as high as 24%.

Generally, if a business loan is secured by assets such as accounts receivable, machinery, equipment, or vehicles, it will have a lower interest rate than an unsecured loan.

Types of Secured Loans include:

Business Vehicle Financing

A business can receive a fixed-term loan to cover all or most of the cost of purchasing new vehicles (cars or trucks) for business use. The vehicles act as collateral for the loan.

Generally, a vehicle financing loan covers 80% to 100% of the vehicle’s value.

Equipment Financing

A business can receive a fixed-term loan to cover all or most of the cost of purchasing new equipment for the business. The equipment acts as collateral for the loan.

Generally, the equipment financing loan covers 85% to 100% of the cost of the equipment.

Invoice Factoring

The accounts receivable (unpaid invoices) of a business has value. This is a valuable asset on the balance sheet of a business.

The business could sell its unpaid invoices to a third party at a discount. The third party would then assume the responsibility to collect the invoice payments directly from the business customers as the invoices come due.

Generally, a business can sell its invoices at a price of 75% to 90% of the value of the invoices.

Invoice Financing

If the business doesn’t want to sell its invoices outright, it can choose to get a term loan secured by the unpaid invoices.

Generally, the business can receive a secured loan of 75% to 90% of the value of the invoices. And the business pays an interest rate equal to 2% to 3% of the value of the invoices to the lender.

Merchant Cash Advance

If a business receives its revenue in the form of debit or credit card transactions, it can receive a loan as an advance on future debit/credit receipts. It will then pay the advance back plus a fee from a percentage of its daily business debit/credit receipts revenue.

Generally, the business can receive an advance of as much as $250,000. And pay a fee of up to 1.5 times the dollar amount that has been advanced.

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