Most small businesses need financing at some point for startup, to develop a new product, or to expand but they often find it difficult to obtain the capital. Traditional lending sources, such as banks, want to see a proven track record or a strong credit history before they even consider making a loan. A small business can secure financing in other ways, but some require more creativity. All it requires is an awareness of the new small business lending landscape that is developing in Canada.
Through a joint effort by the Canadian government, credit unions, alternative lenders, and community groups, a new form of small business lending has emerged that caters strictly to credit-challenged small businesses. Microfinancing or microlending opens the door for smaller businesses or startups to get loans in the range of $5,000 to $20,000. Generally, microlenders don’t require a strong credit rating or collateral, relying instead on a solid business idea backed by a viable plan. Many microfinance programs are location-based, offered to entrepreneurs in specific regions of the country. To find a microlender in your area, you can contact the economic or social development agencies that serve your community.
If you have a going concern but find that your cash flow is unsteady or cyclical, you can consider factoring. Factoring is a process in which you sell your invoices to a factoring company in exchange for a cash advance on the invoice. Instead of waiting 30 to 90 days or more for payment, you can receive up to 90% of the collectible value of the invoice within a matter of days. It is an expensive form of financing, costing 3% to 5% of the amount of the advance for each month the invoice is outstanding. However, the factoring company does all of the work, so you can focus on your business. Because the factoring company relies on the creditworthiness of your invoiced customers, it doesn’t require you to have a strong credit history.
Peer-to-peer lending has become a popular form of small business financing in Canada. Through a P2P online platform, small businesses can apply for loans up to $500,000. Once your application hits the marketplace, individual investors can view your business profile, the loan amount, the reason for the loan, and the amount of interest your loan will pay them. Your loan interest amount is based on the strength of your business revenue, your operational history, and your personal credit score. If you have little of each of those, you can still obtain a loan, but you’ll pay a higher interest rate. Although most of these financing sources may not be as cheap as traditional bank loans, new technology continues to give small businesses more access to capital at a reasonable cost. It is up you to develop a viable plan for using the money responsibly and having the capability to pay it back.