Financing Canadian Small Businesses (Part 1 – Issues Canadian businesses face in looking for financing)
| Oct. 11, 2011Comments 0
“Our funding specialists have found that small businesses are hampered by access to capital during times of high growth…”
In Canada, one of the biggest challenges that small businesses face is not rising rents, nor is it sourcing qualified labour. The most challenging issue that business owners face is finding financing for their businesses so that they can manage their growth. When a business requires an increase in their credit line to cover payroll for the week, or to replenish their inventory, it becomes difficult as lenders do not like to provide unsecured loans.
Businesses that are less than 5 years old may have an even bigger problem with financing as they don’t have a cash flow or credit history. These businesses are considered high-risk by traditional financial institutions, who like to only invest in companies that have assets to back up the credit. Businesses that have low margins, long operating cycles, or are receivables intensive are avoided. We’ve found that there are three major challenges a company faces in its’ search for financing. These are:
1. No consistent cash flow: Our funding specialists have found that small businesses are hampered by access to capital during times of high growth. If business owners are not on top of their cash flow, or don’t have access to fast capital, it is highly likely that they will fail within the next operating cycle. This is because there aren’t enough funds to carry over the business – especially when the operating cycle is a long one. This is dangerous for a young business, as they don’t have enough sales to cover the gap. There is an even greater challenge if the business is an inventory intensive company as they will need funds to purchase capital goods. You will find that many traditional lenders are reluctant to provide financing for businesses when they are faced with this situation as small businesses (especially young businesses) can’t provide security or collateral for the loan.
2. In-experienced management: A majority of the small businesses are run by owner/entrepreneurs and not professional managers. Many of them do not have the experience or training to run a business. Nor do they have the resources to hire a full management team and this lack of experience can become a problem. Without proper senior management, these weaknesses could be a hurdle that a business cannot overcome unless they fill those gaps.
3. Lack of internal key performance indicator metrics and tracking systems: Without proper metrics and tracking in operations, marketing, HR and administration, a business is operating blind. Often many businesses fail because they did not implement a proper tracking system that measure key performance indicators (KPI). For example – KPIs for a sales team would be: how many quotes are sent out daily, how many hours talk time, how many clients converted, etc…You should be creating, measuring and implementing a process in tracking key performance indicators on a weekly basis which allows and your management team to react to problems and opportunities quicker and with enough time to create a contingency plan.
At Advanceit , we’ve found that these mistakes are common; however, they can be easily fixed. Our successful clients are those who:
- Take time on a weekly basis to create and review their business plan and;
- By implementing and reviewing their KPIs’, making sure that they are headed in the right direction and not bleeding money.
On our next post we shall discuss the second part of the series – where you can look for financing sources for your business.