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Working Capital Financing Options to Replace Bank Business Loans

When an effective replacement is needed by business owners for small business finance services previously obtained from banks, there are several business financing choices to consider. An increasingly prudent alternative is for small businesses to explore whether there are effective commercial finance options to replace bank financing before they are actually needed because commercial borrowers are likely to hear multiple reports about the growing difficulty in obtaining business loans from banks.

One of the chief ongoing criticisms reported by many small business owners is the failure of most banks to satisfactorily meet their routine daily commercial loan needs. Very few small businesses have the financial means to overlook the current business loan shortfall exhibited by most banks even if there has been a long and prosperous working relationship with a bank. One common (but incorrect) response is that nothing can be done to replace the traditional source of commercial financing although it does seem that the reality of less bank financing is acknowledged by many commercial borrowers. For most small businesses needing to explore immediate ways for replacing bank business loans, the three examples provided below are illustrations of practical small business finance strategies readily available to them.

Among the most useful options to replace business bank financing are working capital loans from non-bank sources that do not require commercial property or other assets as collateral. To replace a line of credit which is being reduced or eliminated by a traditional bank, this type of business financing serves as a viable option. Perhaps a business borrower needs new business funding to buy supplies or inventory. A reliable source of working capital is a key ingredient for continued success for even the most successful business. Traditional banks might need to be replaced by more effective commercial lending sources because as noted both here and in media reports, banks are rarely doing an adequate job of filling this critical role.

Another practical business finance choice to replace bank financing is accounts receivable financing. To bridge a cash flow gap between sales and payment from customers, this form of receivables factoring can be helpful. While this is by no means a new form of business financing, the major use has typically been by large corporations. Commercial borrowers are rapidly learning to adopt this effective financial strategy due to banks exiting their previous active role of providing small business loans.

A commercial funding approach generally referred to as a credit card receivables factoring or business cash advance will also be a useful alternative for businesses which regularly accept credit cards from their customers. By allocating a portion of future credit card processing toward repayment, it is a way for businesses to receive cash now and gradually repay the amount provided.

None of the working capital financing options just noted are totally free of potential complications or problems. At the same time, it should be noted that the sudden lack of reliable bank financing for small business owners is itself a major complication and problem requiring a timely solution. Before finalizing any new arrangement for business financing, the advantages and disadvantages need to be thoroughly reviewed as with any other new business service.

Six Words to Describe Business Financing

This report was produced in a direct effort to provide more understandable insights about some of the most critical business finance issues effecting commercial borrowers. Our approach in this report is to describe current commercial loan circumstances in six words. We have adopted a similar model in other commercial finance reports such as “seven words to describe commercial property loans”. The “simpler is better” perspective reflects the belief that after hearing an almost endless number of reports about commercial lending difficulties, what small business owners might really need is a more concise explanation about these problems and the resulting impact on their business financing options.

Before proceeding, it is important to emphasize that small business finance options are often more complicated than anticipated by many business borrowers. We are definitely not attempting to characterize business loans and working capital financing as either straightforward or simple. In fact, quite the opposite is the case. The unfortunate reality that most business financing processes have always been excessively complicated and that meaningful improvements are not on the way is one of our ongoing observations. We nevertheless feel that it is critical for each small business owner to have an absolute and total understanding of the entire commercial finance process in the face of the prevailing commercial lending complexity. To help in providing more understandable insights about commercial loans and business banking problems, this particular report is one of several thorough efforts on our part.

Our first example of six words describing business financing options is “banks are saying no more often”. For any small business owner still unaware of this harsh reality and who might doubt this observation, a series of candid conversations with other business borrowers will probably remove all doubts. The failure of banks to provide an adequate level of business loans on a widespread basis is the primary point to remember. It is important for small businesses to realize that they are not alone when they hear their bank say no to routine requests for commercial financing.

“Commercial property values have decreased dramatically” is a second observation. There are very few exceptions. The biggest business financing impact is likely to occur with commercial refinancing situations. Many banks are aggressively recalling existing commercial real estate loans and this literally forces a borrower to seek business refinancing even if a business owner has no interest in refinancing their commercial mortgage. With decreasing commercial real estate values, business refinancing will be a challenge for most small businesses.

“Lines of credit are disappearing fast” is another six-word description of commercial financing. Even the most successful businesses need a reliable source of working capital financing, so this situation is especially serious if a business cannot replace bank financing when it suddenly disappears. Even if a business still has an adequate line of credit, it is important to realize that on a widespread basis banks are reducing and eliminating business credit lines with almost no advance notice.

As our final observation in this report, “business financing is in intensive care”. Extreme measures such as firing their banker and finding alternative commercial funding sources will need to be anticipated by small business owners in many cases. Bankers have not been sufficiently candid about commercial lending problems in the past, and nobody should expect that they will publicly announce that they are in any kind of financial trouble. On the contrary, a prevailing outlook from most banks is they are lending normally to small businesses. When dealing with any commercial lender, commercial borrowers will need a healthy amount of skepticism.

As we noted, this article is one of several efforts to help small business owners survive an extremely challenging commercial lending environment. This report was intentionally designed to produce a concise overview of several complex small business finance issues by describing commercial loan difficulties in six words. A better understanding of practical business financing options for commercial borrowers should also be realized by reviewing related reports such as “six words describing working capital management” and “seven words to describe merchant cash advances”.

SR&ED Financing – Why Wait For Your Cheque?

SR&ED financing is an incredible way of maximizing the whole Canadian SR&ED process in Canada. Of course Canadian business owners and financial managers can wait for their refund – there is certainly nothing wrong with that.

However, if you choose to finance your claim now you can in effect continue to maximize the overall potential of this great Canadian program. Funds can be used for immediate purchase of equipment, allowing you to maintain your competitive market position – an excellent strategy might be to use a portion of the fund as a down payment on a lease or purchase of equipment, thereby reducing your overall borrowing cost.

When we meet with business owners and financial managers one of the key questions we are always asked is how much money can be financed under a claim. That answer is that, in general, you can get 70% of your overall claim, which is, of course, the combination of both the federal and the provincial claims as a total.

Since the claim you are financing is a cash grant, and non repayable the financing you receive under a SR&ED tax credit financing is yours for any corporate purpose. So typically the funds are used for working capital, purchase of new equipment, and even the repayment of any Canada Revenue Agency (CRA) arrears that you might have if you are in the unfortunate case of owing government super priority payments such as GST, Source deductions, etc.

If you are in a position of financing two years of claim, which is the allowable backdating under the program, you can of course get immediate financing ( FOR THE 70%) of the total of the two years claims. That can be very significant dollars in some cases. So as an example, you have filed a SR&ED claim for two years, the current fiscal year and your previous fiscal timeframe. Let’s say those two claims total $450,000.00 as an example. So over the last two years you have expended 450k, (probably much more) on research and development. You have had your claim prepared by a competent SR&ED consultant, and are now waiting for you technical and financial audit, which are standard during the SR&ED process.

So what is the option? As we stated it is a case of waiting, in our estimate between 3-12 months for your cheque, or, as we suggest for consideration, financing that claim now. Under of 70% rule you immediately obtain cash flow and working capital in the amount of $ 315,000.00 to use for general corporate purposes. When the claim is processed, approved and paid by the government you of course receive the balance of the 30% of the claim less financing costs. Financing costs are higher than normal business financing might be via your chartered bank, as in essence you are factoring a receivable that is due to your firm.

In order to ensure a solid and easier financing of your claim we again re state the fact that it is good to have your claim prepared by an experienced person in this area – which in some cases, but certainly not always, be your accountant or C.A. firm. We say ‘ not always ‘ because SR&ED claims preparation and analysis is very industry specific and is not what we would call a ‘ core competency ‘of every C.A. in Canada, and that’s an understatement!

In summary, it should probably go without saying that every Canadian firm should consider filing for their non- repayable SR&ED refund. If you choose not to wait for your government refund cheque, consider financing that claim now and making use of that valuable working capital for your cash flow needs. Speak to an experienced, credible, advisor in this area to initiate your claim financing.