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Exploring the landscape: The pros and cons of alternative financing sources for your business

Exploring the landscape: The pros and cons of alternative financing sources for your business

Synopsis
8 Minute Read

Alternative financing opportunities can provide significant benefits for Canadian business owners, but they’re not without their risks. Knowing your options for funding can help you make informed decisions to get your business off the ground or expand in a way that meets your needs.

Senior Manager, Private Enterprise
Director, Capital Markets

For entrepreneurs and businesses working towards expansion, securing adequate funding, especially during difficult times, stands as a pivotal challenge.

While traditional financing avenues such as bank loans remain important, a growing number of business owners are turning to alternative financing sources to meet their diverse needs.

In this evolving financial landscape, the spectrum of non-traditional financial options – ranging from crowdsourcing to peer-to-peer lending, angel investors, private credit and private equity, and strategic partnerships – is growing.

According to a recent Globe and Mail report, non-bank lending is expected to double from $1.5 trillion to $3 trillion by 2028, opening up opportunities for business to access capital from non-traditional sources.

But business owners must carefully weigh the advantages and disadvantages that come along with these alternative funding options to ensure the choice made is one that will benefit the unique needs and aspirations of the business.

With a trusted advisor, you can plainly assess your options and make the right choice for you that will help guide your business to a successful future.

Why might a business owner explore alternative financing options?

While there are many reasons a business might look to different funding streams – from difficult economic situations to changing market demands and growth opportunities – here are a few of the most common scenarios:

  1. Limited access to traditional financing:
    • Traditional bank loans may be harder to secure, especially for startups or businesses with limited credit history. Alternative financing options can provide access to capital when traditional avenues are not available.
  2. Quick funding needs:
    • Alternative financing methods often involve less paperwork and a faster approval process compared to traditional loans. This can be crucial for businesses facing urgent financial needs or opportunities.
  3. Flexibility in repayment terms:
    • Alternative financing sources may offer more flexibility in terms of repayment structures. This can be beneficial for businesses with fluctuating cash flows or those seeking customized payment schedules.
  4. Innovative financing models:
    • Alternative financing methods often leverage innovative models, such as peer-to-peer lending, crowdfunding, and revenue-based financing. These models can provide unique solutions tailored to the needs of specific businesses.
  5. Industry-specific support:
    • Certain industries may have specialized financing programs or grants available. Exploring alternative financing options allows business owners to tap into industry-specific support that may not be available through traditional channels.
  6. Funding for specific projects or initiatives:
    • Businesses may require funding for specific projects, such as research and development, expansion, or launching a new product. Alternative financing sources can be more willing to support these targeted initiatives.
  7. Diverse funding sources:
    • Diversifying sources of funding can reduce risk and dependence on a single financing channel. Exploring alternative options allows business owners to build a more resilient and varied funding portfolio.
  8. Entrepreneurial networks and support:
    • Many alternative financing methods, such as angel investors or business incubators, come with additional benefits beyond capital. They often provide valuable mentorship, industry connections, and expertise that can contribute to the business's success.
  9. Responsive to non-traditional business models:
    • Some businesses operate with non-traditional models that may not fit the criteria of traditional lenders. Alternative financing sources, particularly those familiar with innovative business approaches, may be more receptive to supporting these ventures.
  10. Global market access:
    • Crowdfunding platforms and certain types of investors can provide exposure to a global audience, allowing Canadian businesses to attract funding and customers beyond national borders.

What are some alternative financing options for Canadian businesses?

Both startups and established enterprises encounter a distinct set of opportunities and challenges when seeking financial support.

Here are a few of the options available to business owners looking to explore alternative funding opportunities:

  1. Government grants and subsidies:
    • The Canadian government offers a range of grants and subsidies to support businesses, especially in specific sectors like technology, innovation, and export. Research and development (R&D) grants are also available.
  2. Venture capital:
    • Venture capital firms invest in early-stage companies with high growth potential. They typically take equity stakes in exchange for funding. In Canada, there are numerous venture capital firms focused on various industries.
  3. Angel investors:
    • Angel investors are individuals who invest their own money in startups or small businesses in exchange for equity. There are angel investor networks and groups in Canada that connect investors with entrepreneurs.
  4. Private equity:
    • Private equity firms invest in established businesses with growth potential. They may acquire a significant stake in the company and often play an active role in its management.
  5. Private debt financing:
    • Private, non-bank lenders can provide the necessary capital to fund your growth, often with more flexible loan covenants.
  6. Crowdfunding:
    • Platforms like Kickstarter and Indiegogo allow businesses to raise funds from a large number of people, often in exchange for pre-selling products or offering other incentives.
  7. Peer-to-peer lending:
    • Online lending platforms connect borrowers directly with individual lenders, bypassing traditional banks. This form of lending can be an option for small businesses seeking loans.
  8. Invoice financing:
    • Businesses can use their outstanding invoices/accounts receivable as collateral to secure financing. This provides a way to access cash flow without waiting for customers to pay.
  9. Factoring:
    • Similar to invoice financing, factoring involves selling accounts receivable to a third party at a discount in exchange for immediate cash.
  10. Supplier financing:
    • Some suppliers offer financing options to their customers, allowing them to delay payment for goods or services.
  11. Business incubators and accelerators:
    • These organizations provide not only funding but also mentorship, resources, and networking opportunities to startups and small businesses.
  12. Strategic partnerships and joint ventures:
    • Collaborating with other businesses can provide financial support, shared resources, and access to new markets.
  13. Equipment financing:
    • If the business requires specific equipment, financing options are available where the equipment itself serves as collateral.
  14. Intellectual property financing:
    • If intellectual property drives your business value, this unique approach can help you go from concept to reality.

What are the risks and benefits of alternative financing sources?

Benefits

Access to capital
Alternative financing can provide access to capital when traditional avenues are not available or are insufficient.
Less reliance on hard collateral
Unlike traditional bank loans, many alternative financing options don’t require traditional collateral, like inventory, land, buildings or equipment, or personal guarantees.
Speed and flexibility
Alternative financing methods often have quicker approval processes and more flexible terms compared to traditional loans.
Innovative models
Innovating financing models, such as crowdfunding and peer-to-peer lending, can offer unique solutions tailored to the needs of specific businesses.
Industry-specific support
Certain industries may have specialized financing programs or grants available through alternative channels.
Diverse funding sources
Diversifying sources of funding reduces risk and dependence on a single financing channel.
Additional support and resources
Some alternative financing providers, like business incubators or angel investors, offer additional benefits such as mentorship, industry connections, and expertise.
Global exposure
Crowdfunding and certain investors can provide exposure to a global audience, potentially attracting funding and customers beyond national borders.

Risks

Higher costs
Alternative lenders tend to source their capital through private means, and do not depend on cheap deposits the way banks do. Their higher costs are then transferred to the end borrower or investee company.
Potential equity dilution
Venture debt and venture equity almost always require either a direct or contingent claim on the equity of a business as part of their underwriting approach. Since alternative financing is generally unsecured, investors demand consideration in place of hard collateral, which often boils down to a form of equity, i.e., convertibles, warrants, etc., otherwise the interest rate is sky-high.
Highly customized
As part and parcel of their flexibility, terms and conditions of alternative financing can be less standardized than traditional arrangements, leading to more complexity and potential challenges in understanding obligations.
Sharing control rights
Some forms of alternative financing, like venture capital or private equity, may involve investors taking an active role in the management and governance of the business (e.g. being a board of directors observer, or taking a voting board seat). This could potentially lead to disagreements between founders or original owners and the investor group.

Takeaways: What are Canadian business leaders doing?

The financing landscape in Canada continues to evolve as a response to the current economic environment.

Though the availability of alternative lending options has gained popularity in recent years, traditional financing is still the most used funding method in Canada.

There is an opportunity for alternative lenders to increase their footprint in Canada by offering increased flexibility and easier access to the business.

Next steps

Alternative financing can open the doors to innovation and expansion, but a thoughtful approach is vital. Acknowledging the complexities, risk, and rewards inherent in these unconventional funding streams can be made less stressful with a trusted advisor at your side.

MNP’s Private Enterprise team of professionals can help you navigate the intricate needs of your business and the opportunities that exist for financing. Whether it’s exploring government subsidies and grants, assessing the viability of crowdfunding, or looking to peer-to-peer support, an advisor brings valuable insight into the process.

Alongside MNP’s Private Enterprise team, MNP Corporate Finance Inc., (MNPCF) is a specialized team with experience working with a broad range of accredited investors, private equity, alternative lenders, and high net worth individuals. MNPCF is registered with the Ontario Securities Commission as an exempt market dealer (EMD).

We can deliver strategic financing solutions that can help you realize and fully execute your growth opportunities, refine your capital structure, and enhance the value of your business. We also have extensive relationships with a wide variety of investors and can find the right investor given the size, type of financing, and growth stage of our clients.

We can assist by:

  • Analyzing current financing
  • Developing financing recommendations
  • Preparing financial packages
  • Presenting to financiers
  • Reviewing, analyzing, recommending, and negotiating for optimal terms and conditions

The journey to alternative financing requires a well-informed approach. Collaboration with a trusted advisor and a commitment to ongoing education can help you harness the potential benefits and mitigate associated risks.

Contact us

Tanvi Gupta CPA, CA

Senior Manager, Private Enterprise

Pedram Kaya CPA-CA, MBA

Director, Capital Markets

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