Commercial Lending for Mid-Sized Businesses in Canada: An Overview

Welcome to another informative post. Today, we're exploring various business lending options, particularly focusing on how commercial lending can support the growth and expansion of mid-sized businesses in Canada. While we'll discuss "middle market / commercial lending" specifically, it's crucial to understand the broader spectrum of financial solutions available, such as business lending and leveraging your business to access capital.

As your business expands — whether opening a new branch, establishing headquarters, or launching a separate product division — you'll inevitably need to invest more time and resources. This is where options like business lending for mid-sized businesses come into play, providing the necessary capital investment to fuel your growth.

What is Middle Market Lending?

Middle-market or Commercial lending is a segment of business lending that focuses specifically on mid-sized companies. This type of lending is tailored for businesses generating revenues from $10 million to $1 billion. Commercial lenders, which can include credit unions, banks, and non-bank financial institutions (NBFIs), offer financial products designed to meet the unique needs of these businesses. They are often utilized for pursuing mergers and acquisitions or serving as working capital.

Furthermore, this type of lender can be anyone, including:

• Credit Unions
• Banks
• Non-Bank Financial Institutions (NBFIs)

These types of lenders have financial products that help mid-sized businesses in different ways. For instance, they’re a viable option for pursuing mergers and acquisitions. Moreover, business loans can also finance as working capital.

What Are the Three Main Types of Lending?

Now, there are multiple commercial lending options, with asset-based lending being one of the most popular options. Each type of commercial market financing option comes with its fair share of risks and benefits.

Here’s a quick overview before we get into the details of all three offered to Canadian companies:

Asset-Based Lending (ABL)

The first type is asset-based lending. If you go for this option, you can borrow funds against your physical assets like accounts receivables and inventory. In fact, you can also leverage your equipment in this form of commercial lending.

It helps you use your valuable assets as a way to secure much-needed funding. The pro of this option is that you don’t need to rely heavily on extensive cash flow or even the credit history. ABL loans are flexible and useful for:

• Managing short-term debt
• Funding new initiatives
• Reinvesting in operations

Cash Flow-Based Lending

In cash flow-based lending, you get funds based on your projected cash flow. Instead of your physical assets, you rely on your projected “earnings” – or your expected income. The main pro of this middle market lending option is that it is suitable for a company even if it doesn’t have viable physical assets.

For instance, if a company lies in the healthcare and technology sector, the most valuable assets will be the “intellectual property”. And since that’s an intangible asset, you cannot secure funds through it.

However, if you show strong earnings (i.e., stable revenue streams), you can secure cashflow-based loans. So, if your company is expecting rapid growth backed by strong market research, it is a viable funding option.

Lower Middle Market Direct Lending

This is a subset of middle-market lending. In lower commercial marketing direct lending, the lender will issue a direct loan to a smaller mid-sized business. This will be an entity that generates a revenue between $10 million to $50 million.

The most common lenders here are NBFIs and private debt funds. And, the main reason for that is that lower commercial marketing direct lending requires faster processing and fewer restrictions.

What Is BDC Lending?

BDC refers to the Crown corporation, Business Development Canada (BDC). It finances Canadian businesses through middle marketing lending support. It offers different financial products, including “mezzanine financing”.

It also offers venture capital options and term loans for mid-sized businesses specifically, and across various industries. It is usually a go-to financing option for mid-sized enterprises when there is an urgent need to facilitate high-growth needs.

The BDC corporate plays an important role in the middle market sector. It offers funding options where private lenders can co-fund enterprises too. In high-growth industries, it not only supports expansion but also spreads the risk and promotes financial stability.

Broadly Syndicated vs. Middle Market Loans – The Key Differences

Mid-sized businesses also pursue another financing option in Canada: broadly syndicated loans or BSLs. This is where a syndicate – a group – of lenders pools resources to issue a large loan to a single borrower.

How is that different from a business loan? The main differences are in the type of borrowers and loan amounts. We summarize those differences below.

Conclusion

So, commercial lending is a financial option for your mid-sized business in Canada – if you generated a revenue from $10 million to $1 billion. It can help you fill in the gap when you need capital to grow and expand.

Through a middle market lender like banks or credit unions (or even a private one), you can pursue mergers, acquire other entities, and fulfill high-growth needs.

In the midst of all this, as you browse financing options, don’t forget the importance of investment and finance counselling. Having a Chartered Professional Accountant (CPA) in Canada can help you make the right decision.

Get in touch with Prasad CPA today and schedule a consultation to discuss your financing needs and options.