Alternative Financing for Canadian SMBs: High-Interest Environment

Small and medium-sized business owners struggling to manage their liquidity in a high-interest rate environment constantly ask themselves the same question: how else can I have more capital without increasing my interest expense through costly debt? As a Canadian SMB, you're in a better place than you can imagine, especially in a software development-based industry. If you're not, don't worry; there are plenty of options for you. Support for SMBs in Canada is by far and large very strong, given it serves as the backbone of the Canadian economy, employing close to 10 million people and ~88% of the private labour force. Below are a few programs and actionable items you can pursue to have more capital.

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Canadian Small Business Financing Program (CSBFP) – Government-Backed Loan Program  

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The Canadian Small Business Financing Act was created to increase the availability and access of financing to small businesses. As a small and medium-sized business owner, you obtain up to $1 million in government-backed term loans, which can be used for,

• purchase or improvement of land or buildings used for commercial purposes
• purchase or improvement of new or used equipment
• purchase of new or existing leasehold improvements, i.e., renovations to a leased property by a tenant
• intangible assets and working capital costs.

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Under the terms of the financing program, you can borrow up to $1.15M through a $1M term loan and a $150K line of credit for working capital expenditures. Because these funds are government-backed, it's much easier for your business to qualify than qualifying for a regular term loan, which is also more expensive. Interest rates on the CSBFP loans are also appealing, with floating rates of prime rate + 3% and fixed rates at single-family residential mortgages + 3%.  

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What are the criteria for this government-backed financing? Small businesses and startups across Canada making less than $10M in gross annual revenues are eligible, excluding non-profits and farming businesses.  

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To read more about the CSBFP, check out the Government of Canada’s website on it.  

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Scientific Research & Experimental Development Tax Credit (SR&ED)  

The SR&ED tax credit program was created by the Government of Canada to support industries that invest heavily in scientific research & experimental development. Its objective is to incentivize investment in new areas of technology within startups and SMBs. Eligible businesses such as yours can claim tax credits for qualified expenditures aimed at technological advancement that fit under the umbrella of the SR&ED program.  

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For SMB owners seeking alternative financing options, the SR&ED program presents an opportunity to access funds to support their R&D projects. By participating in eligible R&D activities and documenting your expenditures, you can claim tax credits, which can then be used to offset corporate income taxes payable or, in some cases, refunded as cash. To read more about the SR&ED, check out the Government of Canada’s website on it. If you're seeking help obtaining every SR&ED credit you can get, check out Boast AI’s platform.    

Renegotiating Accounts Payable Terms

If you're a business owner with a solid and consistent operating track record, you've most likely proven yourself as a trustworthy creditor to your suppliers. With this in mind, you may have leverage in returning to the negotiating table with your suppliers to negotiate for better trade credit terms. The objective of renegotiating trade credit terms is to elongate your Dales Payable Outstanding, which would, in turn, reduce your Cash Conversion Cycle (CCC). A shorter CCC means more cash in your hands and more options for you as a business owner.  

Going Lean & Cutting Costs

The harsh reality is that to ensure your business continues to operate through a challenging operating cycle, you might be better off going lean in your operations, which might mean cutting expenses and jobs to improve firm liquidity. Across the Canadian business landscape in 2023, businesses sacrificed short-term growth for profitability and better cash flow. A few things you might learn from this is that your business can most likely run on less fuel than you thought it did. Many companies hired loads of new employees during the Covid Era only to discover they were no longer needed once things resumed their course. A leaner business is also a more straightforward business, and that means fewer headaches for you.  

Conclusion

In conclusion, navigating your capital needs in a high-interest rate environment can be a very complex and stressful challenge for Canadian SMB owners. Lucky for you, there are many options listed above, amongst others, that you can implement to shore up the balance sheet and emerge in a better position.