COMMERCIAL FINANCING – PART 1

WHAT ARE THE MOST POPULAR SOLUTIONS?

René Gélinas – Marketing Director | Hitachi Capital Canada / CLE Capital

Many commercial financing solutions are available to businesses and self-employed workers. Depending on the type of equipment to be acquired or the financing and cash management needs, some financial products are more attractive or more appropriate than others. Here are some of these products; a brief description is made (avoiding the technical jargon of the initiates).

While leasing, lines of credit and traditional commercial lending are widespread and well known, we also present other financing products that are a little less so, although they can sometimes be very useful.

Credit cards

Obviously, credit cards are a very common short-term financing tool and it's not surprising that in Canada, this option is the most popular among business owners. Many banks and financial companies offer this type of credit, and you can go around the market to find the best rates. The credit card is obviously very easy to get and use. The margin allocated by the issuing institution will vary according to several parameters (financial situation of the applicant in particular). Be careful in choosing a credit card. Terms of use, membership fees, applicable interest rates (often very high), benefits (insurance, partner discounts, etc.) and participation in loyalty programs vary and it is often necessary to be patient in order to read all the clauses describing and explaining the privileges and conditions related to the use of the card.

However, credit cards are the most popular form of financing and are omnipresent both in the general population and in entrepreneurs and businesses of all sizes.

Mortgages

Whether it is to acquire new premises, expand facilities, refinance or consolidate current debt, corporate mortgages have modalities, amortization periods and repayment schedules that meet the specific needs of the business. Typically, the mortgage is secured by the financed property (building or equipment). This type of financial product is rather well known and widespread. To the extent that the property under mortgage is not related to any other creditor, this type of financing can be relatively easy to obtain. For companies, interest is a tax expenditure and the value of the acquisition gives rise to an annual depreciation.

Leasing

Leasing is a financing mode for new or used equipment that is very popular. The majority of commercial finance institutions offer it. Payments (also referred to as rentals) are spread over several months: 36 to 72 months in most cases, depending on the type of equipment and its characteristics. From a tax point of view, monthly payments are an expense so the cost of acquisition does not result in depreciation. In leasing, the owner of the equipment is the lessor; the ownership of leased equipment is usually transferred to the customer – the lessee – at the end of the contract, subject to the payment of an option: sometimes $10 or more in some cases depending on the agreement reached at the time of signing the contract.

The process of obtaining funding through leasing is usually simple and very fast. Depending on the application and the credit record of the applicant, often no personal monetary contribution is required. However, personal guarantees or the endorsement of a third party may be necessary. Additionally, sales taxes are not required at the date of acquisition of the equipment; they are rather payable monthly at the time of payment of the rents.

The terms of lease financing are relatively flexible (possibility of seasonal payments or skips of payments at the beginning of the contract, for example). Besides the value of the equipment, the monthly rentals are determined by factors such as the specific circumstances of the applicant, the type of equipment to be financed and the characteristics of the equipment. It should also be noted that financing companies do not accept to finance all types of goods and equipment in leasing. In restaurants, for example, some companies will accept to fund cold rooms and others will refrain.

Long term commercial loans

With leasing, traditional long-term commercial loans are also very popular financing solutions. Commercial lenders tend to offer long-term loans for working capital financing, equipment refinancing, acquisitions of new equipment and even business expansion. A good credit rating and a well-established company make it easier to get a long-term loan and good terms. It is also beneficial to have a solid and clearly presented business plan before making your loan application. If it can be demonstrated that such a loan will promote the growth of your business, it is even better; since the loan is long-term, the better the future perspectives, the better the chances of obtaining the requested financing.

When such a loan is contracted for an equipment acquisition, this equipment is owned by the business or contractor, not the institution that made the loan (as in the case of leasing). Therefore, taxes are payable in full at the time of purchase and monthly repayments are a debt repayment and not a tax expenditure (except for interest). On the other hand, annual depreciation is incurred. Depending on the equipment category, the depreciation rate can vary from 10% to 30% (half the rate in the first year). Amortization is degressive, which means that the rate is applied to the unamortized balance. The depreciation is therefore more important in the first years and decreases with time.

Moreover, since the equipment belongs to the firm or the contractor, there is a creation of equity, which may be of interest in obtaining a line of credit based on the value of the asset.

Short term loans

The short term loan is an amount you borrow from a financial institution or other type of lender and rather than paying back with fixed monthly installments, you repay the entire amount due on a specific date. As the name suggests, this loan is appropriate for a company's short-term needs: purchasing goods, settling certain accounts payable, finalizing a project that will give a quick return on investment.

Most short-term loans are for relatively small amounts (often less than $100,000) and are particularly useful for seasonal businesses. They are usually offered by banks, credit unions and other authorized lenders. This type of financial product looks like a term note. In general, the process of obtaining a short-term loan is quick and interest rates can vary significantly from one institution to another.

A particular form of short-term loan is the bridge credit. This type of credit allows you to meet your temporary liquidity needs while waiting for an inflow of funds, a subsidy, a tax credit or a public share issue. This is a short-term loan; the repayment date of the principal is often determined at the time of signing the contract. Since this type of funding is often provided where the applicant can demonstrate short-term cash receipt (ex: a subsidy with a known date of the first payment), the period for which interest accrues is often so that even if interest rates can sometimes be higher than in the case of a traditional commercial loan, the total interest expense remains acceptable. On the other hand, since it is a short-term loan, its use on a regular or medium / long-term basis can generate significant interest charges.

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