How Accounting Software Helps Small Businesses Qualify for Loans, Credit, Grants and Subsidies
- ReInvestWealth
- Dec 20, 2022
- 12 min read
Updated: Jan 16, 2023
A good accounting software is a safe haven for entrepreneurs starting up businesses in Canada. Cloud accounting software is also a Canadian entrepreneur’s best friend when applying for financing. As changes in the digital era continue to intensify, business owners are seeking the most cost-effective, inclusive, and productive ways of combining financial data with automated accounting. Canadian business owners are also looking for automated accounting software to simplify their lives when preparing financial statements required to apply for credit, loans, grants, and subsidies.
Cloud accounting software, while not a new product, is adapting with the times by shifting to incorporate AI and automation technologies, which any astute entrepreneur is going to utilize to their advantage (and not just to make tax returns easy). Since small business bookkeeping and banking are predominantly done online now, so too should small business accounting and tax filings (including sales tax tracking). While there are other resources to help with obtaining Canadian grants, loans, and credit, a good cloud accounting software is the best tool needed in your quest for capital.
Table of Contents
Overview of Loans, Credit, Grants and Subsidies
There are different types of grants and financing that the government and other resources offer to small startup businesses to help kickstart or improve their infrastructure. While there are several financing guidelines that are available for your use, as an entrepreneur it would be in your best interest to have an overview and general understanding of them already. (If you are already well-versed on the topic, skip this section.)
Loans
Loans are a typical source of financing, whether they come directly from the government, from other financial institutions like banks, or from private entities. The money lent out is what is referred to as a loan; the amount is typically given in one payment and is anticipated to be repaid by a specific due date. Loans tend to be given in larger sums and with quicker processing.
Loans are on the more flexible side of funding, however small business owners should answer these seven questions before applying for a loan to make the application process as smooth as possible.
A loan’s main disadvantage is the need to keep up and maintain fixed monthly payments – which may restrict your company's cash flow, depending on the amount and if it’s manageable for you to maintain. Keep in mind that business loans usually have high interest rates and yearly service fees. The goal with obtaining a business loan is to generate more revenue than the interest you pay on the loan while keeping up with the monthly payments. Once the loan is paid off, your business will be significantly more profitable assuming the increase in revenue is sustainable.
Lines of credit
A line of credit (LOC) is a type of financing that is similar to a loan, a sum of money that is offered to people or corporations. An LOC is a credit limit that a company can use, but unlike a loan that is a fixed financing agreement, one can repay the outstanding balance on the LOC and then borrow the money again once needed, similar to a credit card.
While there are some striking similarities between a loan and a line of credit, LOC's are frequently utilized for day-to-day needs whereas loans are generally used to finance large purchases. Business owners can apply to receive a line of credit either through a bank or other online lenders.
It is vital to understand that many parties will only consider lending money via an LOC to an established company with a strong credit history. To qualify and receive a line of credit, those institutions generally look at a business’s latest financial statements, current credit performance, and some projections to see the creditworthiness of the company in the future. This is where a good accounting software, like ReInvestWealth, comes in handy.
Business lines of credit can be secured or unsecured.
A secured line of credit requires the business to put up collateral, such as equipment or other property, to secure the loan. If a business is unable to repay the borrowed funds, it may be required to sell the collateral used to secure the line of credit in order to pay off the debt.
An unsecured line of credit does not require collateral, but the credit limit may be lower and the interest rate may be higher.
Grants
Different from loans and lines of credit, grants are available to help finance small businesses. Grants are considered an award, a sum of money given by an institution (usually from the government, but also some companies and foundations) in order to facilitate a certain business goal and help with revenue performances. Grants typically involve zero financial risk since they are typically completely non-repayable.
Often, Canadian grants have few restrictions as to what the money can be spent on. The benefits do not just stop there, though. Grants offered by the government give your business the ability to grow with the government's stamp of approval; therefore getting publicity and further networking opportunities for your burgeoning business.
While grants are an amazing opportunity if given, they take time to apply for, often with a lengthy application process, lots of eligibility criteria, and the amounts given are typically much lower than that of a loan or Line of Credit.
You can find a list of grants by checkout out our articles made for Ontario businesses and/or Alberta businesses.
Subsidies
Similar to grants, subsidies do not need to be returned, or paid back. Subsidies are direct contributions, tax breaks or other government assistance to businesses that aid in operating and management expenses over a longer period of time. In short, subsidies are given by the government to companies to aid in maintaining lower costs of products and services. Subsidies help businesses encourage production and consumption. Businesses in industries that prove beneficial to society are the ones most eligible for subsidies, such as environmentally conscious businesses. Following the best ESG accounting practices is a great way to bolster your small business’s eligibility for subsidies.
Questions to answer before asking for money
Applying for any type of financing in Canada can be painful – that is, until you have the right resources at hand and answer all the questions you have. For every Canadian entrepreneur, your reasoning for applying for a loan, LOC, grant or subsidy needs to be fully understood before you apply. If you still need help figuring out what financing path(s) is best for your Canadian small business, book a free consultation appointment with one of our ReInvestWealth financial experts today.
After figuring out which financing you want to secure, the next question to answer is how much capital does your business need? Before you jump to the conclusion that the more money you are able to get a hold of, the better – it's often not the case. Most businesses, especially small startups, already have a lot of balls in the air to juggle, and getting more money than you can afford to borrow can have disastrous consequences for your business. Asking for too much money can also be a waste of time if your business won’t qualify anyway. To avoid the pitfalls of taking on too much debt, we recommend using automated accounting software to get accurate financial projections, which will make all the difference. Ahem, this is where we unabashedly suggest our free business projection template to determine exactly how much money your business needs. More on financial projections later.
Finding the right type of financing and the right amount of money for your business are crucial steps in the financing process. Creating a business plan through financial projections and using ReInvestWealth’s free accounting software put the process of securing financing into hyperdrive.
The purpose of financial statements when asking for money
Financial statements present your case for why you deserve to borrow others’ money. When your company applies for funding, whatever form that may be in – whether it be a loan, line of credit, grant or subsidy – institutions will typically want to view your financial statements, which include, but are not limited to, the company's income statements and balance sheets over the last two fiscal years
Essentially, these statements indicate the company's financial situation for a given period and include your assets, liabilities, equity, income, costs – in other words, what is held, due, and how much was earned and spent. The goal of financial statements is to illustrate the outcomes of your operations, cash flow while giving insights on future performances. By exhibiting sales growth, investors may determine whether there is or isn’t potential for an upward trend, revealing your company's capacity to generate profits. This is essential for financial institutions to make decisions as a kind of due diligence, the quality of their investment, and to evaluate the risk factor associated. they need to know if you have the income to repay the money if they lend it to you.
Financial statements are also an important step when applying for grants, in addition to loans and LOCs. When it comes to grants, the granter often wants to see that you have a system in place for tracking your revenue and spending. When it comes to grant applications, it is preferable to provide precise data in comparison to previous years, all of which you can provide in your company's financial statements. Often institutions bestowing grants want to ensure you are a legitimate business needing capital before they approve your grant.
How to analyze financial statements
As an entrepreneur, analyzing your business own set of data, including but certainly not limited to financial statements, comes as a beneficiary in the long haul.
If you are new to financial statements, I recommend to check out our in-depth Financial Statements guide.
As a reminder, there are 3 main financial statements. The income statement, the balance sheet and the retained earnings.
An income statement indicates income and expenses. To draw up one of these statements, you would have to list your revenues, expenses, costs of goods, gross profit, operating income, depreciation, income before taxes, income taxes and net income. Analyzing income statements helps understand current financial performance and predict future opportunities, deciding on business strategies while creating goals for your team.
To be able to effectively read a balance sheet, a few things should be noted. A balance sheet shows the value of a company, allowing holders to see what resources are available along with information on how they were financed. The primary accounting equation used is Assets = Liabilities + Owners’ Equity. If that doesn’t explain it, we have a comprehensive guide on how to analyze balance sheets and the other financial statements.
Overall, Canadian business owners able to review and understand financial documents will have a critical skill that will help them glean insights on their company’s vitals and trajectory.
How accounting software helps with financing
Today, technology helps everyone with effectiveness and efficiency; for Canadian entrepreneurs, automating everyday accounting tasks and weekly bookkeeping is a gamechanger. Not only has accounting software helped with productivity, but it keeps your businesses data and statements organized and error free.
There are several steps to automating the accounting for your small business. First, you should look at what your current bookkeeping operation consists of. If you are managing a startup or smaller business, chances are that your accounts aren’t too complicated (albeit likely still in disarray). However, accounting software is a must as you grow. The older accounting software platforms make collaborative work difficult, which causes users to spend significantly more time reconciling raw data instead of analyzing key insights to improve execution.
There are newer, leading edge options available, such as ReInvestWealth's free accounting software, providing newer, faster, and more user-friendly software. In the end, the software your company chooses should be indicative of your long-term goals.
Once you’ve understood your business’s needs and selected the right cloud accounting app for you, there are few steps left to automate your accounting. You’ll need to set up and link relevant bank accounts with your software. Some accounting software's such as the one we have at ReInvestWealth allows you to link to any major Canadian financial institution with top-notch security. The online accounting software will then be populated with all your company transactions, automatically posting them into your ledger.
It might seem confusing to review past transactions. Nonetheless, with some accounting software, including ReInvestWealth, you have the ability to quickly and easily add classifying labels to all transactions, filtering them into different accounts. It will also enter the relevant sales taxes for each transaction.
Most accounting software apps include a form of automation. Simple algorithms can help save days of sorting through past transactions each year; and depending on the software you choose, you can automate accounting workflows, bookkeeping, involving, tracking revenues, tracking expenses, or making online payments.
Canadian businesses that aren't switching their bookkeeping to AI-powered accounting software are putting themselves at a severe disadvantage. It’s never too late to switch over to cloud accounting. A financial expert at ReInvestWealth is happy to help assist you in setting up an account on our free cloud accounting software.
Why do you need financial projections?
Based on informed guesstimates, financial projections illustrate what your business expects to happen, and are often used to prepare a course of action. Projections are based on modeling techniques, while providing answers to questions that stakeholders, lenders or investors might have.
While important for all businesses, financial projections are critical for your startups; they show your current financial needs and the best time to make expenditures in the future; focusing on long-term goals. The baseline for financial projects and statements is that they determine and evaluate the worth of your company, which would be indicative of the amount of funding your business may be eligible for – therefore, critical to your quest for securing financing.
As important as financial projections may be for others who view your business, they are mostly beneficial for the entrepreneur. Financial projections can help you with discipline in financial management which ultimately leads to better results in your business’ success rates. If used properly, a financial projection model will help your business see if, when and whether your business is due for profit. You will also have more informative knowledge of your cash position; this will help make optimal decisions for your business. Indirectly, financial projections can help show you when it is time to hire more staff, buy more inventory or make investments.
How to create financial projections?
While setting up this template, another question will arise: how will your business allocate the financing?
The process of getting the attention of lenders and investors has an exponential amount to do with numbers, especially company revenue and accurate financial projections. A first insight onto analyzing financial projects may seem confusing and overwhelming; but once broken down will be an extremely useful skill. To eliminate any confusion, financial statements indicate past and present company performance, while, financial projections show estimated numbers for future performances based on those statements.
Without a doubt, lenders will ask this question to make sure your business is profitable and that the amounts given out, plus interest, will be repaid. Hence, another reason to create your free business projection template.
In terms of creating your own financial projections there are a few simple guidelines. You can find a more detailed guide in the projection template.
1. Estimate your company's revenue and expenses
Calculate how much financing you'd be spending while operating your business throughout the years. This would include but not limited to; payroll, rent, utilities, and most of manufacturing.
2. Create a cash flow projection
Determine the amount of cash that is predicted to be collected and spent, along with the surplus expected. Make sure to keep left-over cash in case of an incident where your company needs to pay for unforeseen expenses.
3. Report and share findings
Keep all your data collected and organized, consider using charts and tables that are available on ReInvestWealth.
4. Monitor your performance
Avoid making a projection and forgetting about it. Make sure to set monthly, or at a very minimum, quarterly reminders to compare your actual performance against your projections. It's completely normal to adjust your projections along the way.
Other benefits of accounting software
Now that a general layout has been given about what accounting software is and with what aspects it can help with, there are a few more benefits given that should be noted. One of those pros includes the relief that accounting software can provide when dealing with tax returns.
Online accounting software allows for real-time bookkeeping, at anywhere, anytime. Cloud accounting software also helps with organization when it comes to importing different sets of data, and stores them into the same place. Accounting software should also aligns to government regulations, so that business owners don’t have to worry about regulation and can focus on other business aspects.
The perks from accounting software don’t stop there, at ReInvestWealth we take pride in our cutting edge simplicity, security, and automation. The ReInvestWealth free accounting software allows you to stay organized through automated bookkeeping and optimized tax filings. It's one of the best accounting software to help grow your business using free resources, as it allows you to start for free and upgrade only when you need additional accounting solutions.
Since our system is online based, you'll also be doing a hefty job in saving the environment. Without the need to print out documents and send them out, ReInvestWealth and some of our competitors store everything on the cloud for you and your clients. In addition, ReInvestWealth's servers are all located in Montreal and powered by 100% renewable energy.
The technological benefits don’t stop there, at ReInvestWealth we also work with digital invoices. With online invoicing software you can apply any outstanding fees, offer different payment options, and even send out reminders.
If the benefits above haven’t appealed to your interest yet this final point without a doubt will. Hiring an accountant or accounting team is a huge expense for any business. ReInvestWealth’s all-in-one business accounting plans means you’ll have your bookkeeping, accounting and taxes, financial statements all covered in one place, with next to no extra work on your part.
Conclusion
Now that a run down has been given about accounting software, general information on how to set it up, the intention for this article was to give you, business owners, insights on ways to optimize your business. For more information and a better detailed understanding there are
several other free resources provided on ReInvestWealth. You can also set up a complimentary appointment with one of our financial experts, for more personalized advice and to get started here at ReInvestWealth. And don't forget to create your free account today!
Written by Laureta Mrizi
Edited by Behdad Karimi Dermeni, CPA
