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.
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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 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.
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.
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.