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The Alternative Financing Option

Financing is like oxygen for a business

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For many businesses, especially small businesses and entrepreneurs, the most critical fact of business life is also the most precarious and difficult fact of business life. Funding!

Business loans have traditionally been one of the stickiest obstacles for businesses, with conventional banks being the overwhelmingly primary source for funding. For various reasons, a new trend continues to grow and gain popularity. Alternative financing.

Whether it is conventional (bank) or alternative financing, capital is critical, and is ultimately the difference between struggling and business growth and success.

“Financing is vital for the survival and growth of any small business,” says Calgary’s Dr. Kanwal Bokhari, assistant professor of Finance at the Haskayne School of Business. “It provides the capital needed to start, sustain and scale operations. Financing is like oxygen for a business. Adequate financing ensures that a business can deliver its products and services on time, seize opportunities and avoid operational constraints.

“While a hallmark of entrepreneurs is often being resourceful and making do with limited means, financing is different. A lack of financing can lead to unnecessary compromises that may harm the business.”

Particularly for a small business or a start-up, “Necessary funds are crucially important for day-to-day operations and expansion plans,” explains Lisa Christensen, BDC’s vice president, Financing for Alberta South. “Financing can help small businesses invest, buy inventory or equipment, manage cash flow and even acquire competitors.

“A common mistake is small businesses underestimating how much financing they need, which can limit growth opportunities and make it harder to handle financial challenges.”

According to Steve Dizep, president of Pillar Capital Corp., the privately held lending company that provides asset-based loans from $500,000 to $15 million to business owners across Canada, “For any entrepreneur, including small businesses, access to capital is vital. Without financing, a small business is unable to grow, let alone manage their working capital requirements. Financing also provides capital for growth and expansion, investing in innovation and assisting in providing a competitive edge within their industry.”

The stats and trends confirm it. Alternative financing is a growing trend, particularly in Calgary small business.

“Calgary has a vibrant entrepreneurial can-do spirit and overall environment that is supportive of small businesses,” Bokhari says. “There are various resources to support entrepreneurs in navigating funding opportunities and finding a combination that works just right for their needs. Often, it is a combination of financing sources, including bank loans, lines of credit, grant funding and entrepreneur’s personal investment. And growingly popular alternative financing options like equity/debt crowdfunding, microloans, peer-to-peer lending and grant programs (at municipal, provincial and federal levels). The options complement traditional bank financing, providing entrepreneurs with diverse avenues to access capital.”

As savvy consultants and company CFOs vouch, acquiring funding has been an arduous task and a notoriously speedbumped and slow business maneuver. Spreadsheets and paper trails. Affidavits. Applications. Slow reviews and evaluations. Approvals and rejections.

And conventional (bank) lending used to be the only game in town. Then alternative financing happened. The reputation and demand for alternative financing continues to grow. Perhaps because it is not bogged down with the notoriously tedious process of traditional lending.

“Alternative financing is a growing industry and has experienced significant growth over the last 20 years” Dizep points out. “According to Stats Canada, the private lending market comprises 40 per cent of all lending in Canada, which is substantial. There is a large market of businesses that are under serviced by traditional lenders and therefore require alternative sources of capital to meet their funding objectives.

“Private lenders fill this gap, and the Calgary market has experienced tremendous growth.”

Alternative lenders are typically online-based, private companies that fill the gaps in service that traditional banks don’t offer. They provide additional benefits to make financing easier so that a business can focus on growing the business.

As popular as it is becoming, it is important to understand that opting for alternative financing is not a ‘throwing out the baby with the bathwater’ situation. Alternative financing is not a replacement for the services that traditional lenders offer. It is an alternative option to provide, especially small businesses and entrepreneurs, more access to the capital they need to grow.

Experts caution that, when looking into financing options, it is vital to do proper due-diligence for the funding solution that works best for the individual business. Some in-demand benefits of alternative financing include:

A faster application process. A business that is focused on growth doesn’t want a drawn-out application process pumping the breaks on its plans. With alternative financing, the application time is drastically reduced with fund distribution often being more expeditious. A large majority of alternative financiers have established a clear focus on a one- to two-day turnaround time, eliminating the usual lengthy approval process, compounded by an additional wait for the funds.

Less paperwork. One of the benefits of alternative funding is that it is less stringent in terms of the requirements needed for pre-approval. Less time sorting through files for applications and more time focused on running the business. Alternative financing tends to be technology driven and most lenders use of online tools and digital platforms to streamline the application and loan process, reducing dreaded paperwork.

More flexibility. Traditional lending often has rigid terms, leaving little wiggle room for selecting what works best for the individual business. Alternative financing usually has more flexible underwriting criteria, more small business friendly and more accessible to small businesses with less established credit histories.

The experts agree. The crucially important aspect of alternative financing success is having all the Is dotted and Ts crossed in a sharply focused and effective pitch.

According to Lisa Christensen, vice president, Financing for Alberta South Area with BDC, “Small businesses should have a solid plan for their business and project, good credit history, accurate and up-to-date financial statements, a strong management team and collateral, if needed. Lenders look at several key factors when evaluating small business funding applications.

“They assess the financial health of the business by reviewing past financial statements and comparing them to industry averages. They also evaluate growth plans and financing forecasts, as well as the credibility and experience of the management team, investments in the business and any assets that may be used for collateral.”

Steve Dizep echoes key aspects of a solid funding proposal. “Entrepreneurs applying for financing should ensure their financing request aligns with their business needs. Every business is unique and each lender, will have its own set of requirements. However, at a minimum, all lenders – banks or private – require the basics, including a business plan, financial statements and/or projections, collateral available, personal net worth form in support of a guarantee, and equity or ‘skin in the game’ showing the commitment to the business and mitigating the lender risk.”

Bokhari emphasizes that financing pitches must be based in reality not ambitious wishful thinking. “The first step is determining how much funding is needed and why. Entrepreneurs must convert their business narrative into financial metrics to understand the financial implications of their decisions, focusing on cash flow, and planning carefully for core requirements and contingencies.”

While there isn’t a universal formula, she cautions that entrepreneurs should avoid waiting until two to three months away from a critical cash crisis before applying for financing. “Receiving capital after the application can sometimes take longer than expected, so it is better to plan months in advance. Besides, a buffer helps the business avoid falling prey to predatory lenders or accepting unfavorable terms out of desperation,” she says.

Early planning, supported by detailed cash flow projections, enables entrepreneurs to justify their funding application and secure financing confidently.

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