FOR SMALL BUSINESS It's a fact of life; your company needs capital to conduct business. Of course the best way to obtain it is through sales. Most times however, you need other, more immediate sources. When Canadian small business owners need capital their first thought is “the bank”. Even despite the difficulties some have in getting loans there. These days it seems the banks have made it increasingly difficult for a small business owner to obtain a loan. However, these time are a changing! There are all kinds of new possibilities and opportunities emerging for creative small business owners to finance their enterprises. Many of these alternatives are a direct result to the “Tight Fisted” small business lending policies of the banks.
Today we have more financing options and alternatives than most small business owners are aware of. Today more than ever, the small business owner needs to know exactly what his requirements are and the preferences of the lender they are applying to. In this way they can structure their proposal to meet a lenders specific requirements. Some lenders look for and do deals that other lenders avoid. Therefore, it is important to know who you are dealing with.
Different sources of financing may be appropriate for different stages of growth. Start-ups often rely on family members, friends, or local associates. As you grow, you may need to turn to alternative sources such as Venture Capital. Once you've achieved a financial track record, you can turn to other sources such as Commercial Loans.
What is important to know, is that at every point along the way, there will always be alternatives.
Strategies to Raising Capital
Capital is essential to small business growth and success. In fact, lack of capital is the number one cause of business failure, particularly in new businesses. Some sources of capital include:
1. Personal Assets Many entrepreneurs use personal assets as the main source of funding when they start up a business. This choice often goes hand in hand with a decision to start small and grow at a pace the owner can manage and afford.
Start-up capital is risk capital and therefore the most difficult to raise. While some entrepreneurs use personal assets by choice, others may have no alternative- For example, small, new businesses or businesses focused on retail services or knowledge based industry may have little collateral in the form of fixed or movable assets to offer as security to lenders. Some entrepreneurs may not have been in Canada long enough to build up a credit history and, therefore, a credit rating.
Personal assets can include:
use the credit card as a bank account with no account fees
no cheque charges, or withdraws
Your credit limit can act as a line of credit
receive a detailed monthly statement, like a chequing account New credit card companies like MBNA or Capital One have been very aggressive in attracting new business. In some cases, they offer a line of credit up to $50,000 at very competitive rates of interest - 6.9% to 8% . These cards are very often easier to get than a bank line of credit. AMEX has just introduced a special business line of credit with its credit card.
• life insurance policies
Check out those old life insurance policies. Many policies may contain a savings component that would either have a cash surrender value or may allow loans to be taken out against them.
2. Keep your Day Job Moonlighting is one of the most often used ways to get a fledgling business off the ground.
Dale a sporting goods store owner, took a job to work odd shifts in order to finance the slow periods of his retail business and until his new business was established enough for it to support him. 3. Go to your Former Employer or Clients If you have clients or suppliers for your company already lined up, but your lacking the financing to get down to business, don't be afraid to talk about it. Your client may be willing to put up some front money in order to work out a deal. Or, if you have just left a job to start a company on your own, your former employer may be a great first client and possible lender. The employer knows you, believes in your work and may profit by out sourcing your former job to you or may have a project he always had in mind to do, but there was never enough time or the right person.
4. Ask Friends and Family
While it may be hard to get $10,000 from mom, 20 friends & relatives might be able to each come up with $500. Present this as an investment, not as a favor. Treat your family and friends as you would any professional lender: Offer to draw up a contract that puts a time frame on repayment of the loan - including interest payments. Complete your business plan to back up your proposal. Many businesses get their start by convincing family members and business associates that the financing was an "investment" rather than a loan. The start-up capital for the board game “Triva Pursuit” was financed solely from family and friends. This game went on to become the biggest selling board game of all time.
Paying it Back
When determining the repayment schedule for your capital, consider matching the payments to your cash flow - pay it back monthly at 5% of gross sales. In this way, during the slow times your payments will be less.
Be creative here when paying it back. With family or friends, it does not need to be a traditional repayment schedule - based repayment on a % of sales, or net income etc.
5. Barter for goods and services When you need something, look into the opportunity of trading for goods and services. If you’re a professional, trade your services for monthly rental space. Or, if you’re an accountant, trade a tax return for .... There are numerous bartering opportunities out there and are even regularly published through local barter books. Cash not spent is cash saved. The direct benefits of receiving needed services and goods without paying cash (and taxes...?) as well as, the marketing opportunities in attracting additional customers make bartering an attractive source of capital.
Use the Barter System
Network to obtain products and services and use the barter system.
eg. When Pepsi went to Russia it took back its investment in Vodka.
Bartering for Customers/Sales - Increase cash flow by increasing Customers!
Sharing (bartering) customers is often a fast track to sales. This means looking for other businesses that are complementary to you - that serve your customers without competing for them. For instance a lawyer serves clients that often need an accountant. The lawyer is a complementary business to the accountant. The lawyer can increase customer traffic to the accountant with his referrals and vis versa. All you need to do is find out who else has your customers and form a relationship with them. What about the movie theatre that advertises with the pub - "movie and Dinner for the price of one". These businesses have identified each other as complementary. As a result, both businesses benefit from the joint venture.
6. Customers Thomas Edison once said, "Get the money first." And if you can't get the money, get contracts which you can use to get money. You might consider negotiating a full or partial advance payment from customers to help finance the preparation costs related to taking on their business. In some project oriented industries it is customary to receive stepped (partial) payments payable at defined stages of project progress, prior to the completion of the project. Consider requiring a deposit for all work This will reduce the need for a line of credit. Deposits collected for work that involves special orders for goods or services will commit the customer to the order and will prevent the business having to absorb costs resulting from non payment.
We needed a line of credit to finance my clients sawmill requirements. All the banks said no, so we identified a customer who was only too willing to give my client a $100,000 line of credit for the right of first refusal on all subsequent production. No problem! $20,000 was needed to help an employee purchase a share in my clients hair salon business and the employee had exhausted all sources. As fate would have it, one day, this employee was cutting the hair of a loyal customer of his, and as the conversation turned to this business opportunity, the customer surprised the employee by offering him a loan of $20,000 for 100% of the financing. The deal was done within the next week. In some cases, you may be able to negotiate the financing of a Purchase Order received from your customers with your banker.
7. The Landlord Leasehold Improvements
When you are negotiating a lease for a rented premises, remember that a substantial amount in leasehold improvements will be going into that location. The person in the best position to oversee the leasehold improvements as a security for the loan is the landlord. Moreover, the landlord or property manager will often agree to provide a portion (a dollar amount per square foot allowance), or all of your leasehold improvements against a longer term lease. A three or five year lease gives you a reasonable negotiating position for including leasehold improvements in the deal and paying for these through your rent over the course of the lease. This may represent $30,000-$60,000 of start-up expenditure for retail locations, for example, and off-laying that can significantly reduce the start-up cash and equity required. In addition, it can make a balance sheet appear healthier when its ratios are examined.
TIP:In addition, I have known landlords to throw in and offer financing to clients where a bank would turn them down. My client had a good business plan and had finally negotiated a great lease. When it was time to move forward with the business plan, because of several delays, the financing had fallen through. Not wishing to loose a good tenant, the landlord, as a last resort, offered to provide the necessary financing for my client. The landlord stepped in and made the loan, to make the business happen ! In addition, depending on how anxious the landlord is to secure a lease, it is not uncommon to negotiate free rent (in some cases, up to 6 months)!
8. Vendor Take-Back Financing This technique is very well known in the real estate industry. The seller takes back a promissory note (loan) for a portion (or all) of the sale. This loan from the seller is then paid back over a negotiated time and at a negotiated interest rate.
This technique should be part of any business purchase strategy. In buying a business, this type of financing can be valuable, not only closing a deal but securing the integrity and honesty of any representations made during the negotiation process. In other words, this can provide the new owner some insurance against any misrepresentations. At the very least, ensure that a seller will be around to train the new owner (if training is part of the deal).
9. Take on a Partner What the right partner at the right time can do for you. And what you give in return.
Question number one is always, "Do you want to be a big fish in a small pond or a little fish in a big pond?"
The right partner can do more than provide you with capital. A meaningful relationship with a well respected partner is an attention getter and a fast track to connections and resources. If you pick your new "partners" intelligently, you may also get some experience, knowledge and contacts thrown in free. This can save you not only thousands of dollars but thousands of minutes - precious time.
"We are a business partner with IBM" Wow! The math makes sense...I would rather own 75% of a company earning $1,000,000 then 100% of a company earning $500,000.
Choose your partners on the basis of strengths versus your weaknesses and visa versa. If two people in a business always think the same thing, then one person is not thinking.
Do not strive for equal power, strive for balance. Equal power in politics and business partnerships can too often lead to gridlock. The tough part is deciding who will be in charge of what. After deciding who is in charge of what, you can get opinions from the other person; but the person who is in charge gets 51% of the vote. Pete Pearson
10. Commercial Finance Companies Sales finance companies, in cooperation with the product suppliers (vendors) commonly offer sales finance or factoring programs and lease-back options on their equipment. The onus is upon you to ask your vendor if he/she has access to any such finance programs, or if the vendor will finance the purchase directly, through a factor or floor-planner scheme. Small office equipment may often be purchased on a lease-to-buy arrangement. Generally, these will expect a less detailed business plan, but will be particularly interested in the parts that relate to sales projections, stock movement and replenishment and monthly cash flow information.
11. Factoring Companies Factoring Companies buy accounts receivable outright and assume all the risks of collection. These companies advance funds against purchased receivables, less a percentage. In the past, these companies were often only interested in larger enterprises. However, some of these companies have recognized the need and the opportunity of this unique financing approach for small businesses. In some cases, with receivables as low as $1,000. Commercial Finance Companies often advance funds upon assignment of receivables and warehouse shipping/receiving receipts.
12. RRSP’s (Refer to Reg 4900 and 5100 and to IT-320 for more specific information.) You cannot take out your RRSP’s to finance a business. Yes or No? Maybe, it depends...
Some clients who have lost their job have no other source of income but have substantial equity in the family house. In some cases, they cannot get a loan because they have no income or monthly cash flow. In these cases it may make sense to restructure the RRSP investments to include a mortgage on the principal residence. In this way, proceeds from the RRSP can be taken out of the RRSP in the form of a mortgage against the family home tax free. Now the RRSP has been used as a loan to finance the business, the interest is both tax deductible as a business expense and is tax free income in the RRSP. The following rules apply:
1. The mortgages must be applied against the principal residence (owner occupied).
2. The mortgages must insured by CMHC (GE Capital Corp. now offers mortgage insurance)
3. 2nd mortgages qualify only if the first is also insured.
Canadian Private Corporation Shares
Investments in private Canadian small business corporations are eligible RRSP investments, with some exceptions. The corporation must be a:
1. Canadian Controlled corporation as defined in subsection 125(7) and 248(1) of the Tax Act.
2. Specified cooperative corporation as defined under the proposed amendment to Regulation 4901(2) of the Act.
3. Prescribed venture capital corporation as defined under regulation 6700.
1. The shareholders must not be “specified shareholders” as defined by sec 248 (do not own more than 10% of the outstanding shares in any class of shares).
Note: Beginning in of 1997 an amendment to Regulation 4901(2) of the Act. allows an exemption to the rule where the total investment is less than $25,000
2. The shareholder cannot be related to a related group who control the company.
3. The shareholder must deal at arm’s length with the corporation.
4. All or substantially all the of the property must be used in a “qualifying Active business” in Canada.
13. Private Investors/Angels Private individuals are often a surprising source of capital. They are referred to as “Angels” simply because they often come out of nowhere. In our current day low interest rate world there are more and more individuals actively interested in these opportunities. Investments in operating companies are attracting more and more attention. As an accountant I often have clients that are seeking investment opportunities and business owners often seeking investment capital. With the Internet, the opportunities here are vast and growing.
If you are going to raise funds this way, you are going to lose some amount of independence. If you raise funds from equity-type investors, you will no longer have outright control of your company.
Private investors can be approached on the basis of a loan or an investment (silent partner) or some combination. You are limited only by your imagination. What ever the deal, keep in mind their concerns and How much you are willing to give up! Private Investors
When approaching investors, whether they are known personally or are strangers, their main concerns are:
1. How will I get my money back?
2. When will I get my money back?
3. How much money will I get back?
Know the answer to these questions beforehand - How much are you asking for and, How much are you willing to give or giveup in return...
I have a client that made an arrangement with his investors as follows:
1. Would be paid 6% of net profit for every $10,000 invested for 5 years.
2. Any shortfall (commutative payments less than $10,000) after five years would be made up.
3. All payments over the initial $10,000 would be profit to the investors. For the investor, the down side is getting only the original $10,000 investment back. The upside is unknown ... and could likely be greater than the $10,000 over 5 years. The sky is the limit!! In this case, let the investor use his own imagination... Only in Canada
As discussed, small business corporations are eligible RRSP investments. This means that as an additional incentive, an investor can make an investment in your Limited company, roll it into his RRSP and receive up to a 40% tax credit against his taxes payable. In other words, a $10,000 investment in your company would end up costing him only $6,000 after tax. Investments between related persons or specified shareholders (>10%) are not eligible. (Related by blood or marriage) Investments from aunts, uncles, nieces, nephews are OK.
14. Match-Makers/Brokers There are companies out there will match your capital requirements and business plan to investors and vise versa. One such company is called The Spectris Corporation in Toronto. This company is a nationwide information database that has facilitated over 25,000 introductions of investors to investment opportunities. This is a computerized search and match making service for investors and capital seekers. In the information gathering process, registrants describe their objectives, investments requirements and preferences in a questionnaire.
15. Consignment When you think of consignment, you typically think of pawn shops and second hand stores. However, this is not limited to second hand goods. There may be opportunities to stock your empty shelves with quality merchandise and pay only when they are sold. This could work in almost any retail situation. For example, I have a client who sells ATV's. He approached a dealer in Courtney about selling his stock through his store; instead of a opening another up a second location. Now he stocks his store with the Courtney stock and pays him when they are sold. They split the profits 60/40.
16. Renting and Leasing vs. Buying Leasing is on a come-back. In aggressively competitive equipment markets, most leasing companies will be pleased to arrange lengthy leases on equipment and computers with an "option to purchase” in order to close the sale for the supplier. Renting or leasing can free up equity capital for investment in other areas of greater return; free up borrowing power (improves cash leverage) for more critical borrowing; requires no down payment; fixes the rate for a set term; allows you to deduct the full expense from your taxable income; and still allows you the flexibility to exercise purchase options at a later date at a predetermined price. The Lease Advantage:
Conserves capital and improves cash flow. Lease payments can provide the lessee with increased cash on hand, especially during the first year of use, since there may be less out-of-pocket cash for a down payment.
Up to 100% financing provided through the lease (which may even include shipping and installation charges), as opposed to a loan, which typically requires a significant down payment.
Preserves bank lines of credit which are increasingly difficult to extend. Your available credit line remains intact at your bank since the lease is handled through and payable to another funding source.
Fixed terms and payments are predetermined so that you can accurately predict future equipment costs and cash needs. The structure of the lease may also provide for skipped payments to accommodate seasonal slumps or changing cash flow needs.
Full use without ownership upon delivery. Your business can begin using the equipment and operating more efficiently immediately.
17. Commercial Banks and Credit Unions Bankers are not business people nor are they entrepreneurs. They crunch numbers and shuffle loan applications. Bankers look for evidence of commitment, a sense that you are committed and determined to succeed. They are as much evaluating you as your business plan.
TIP:Temper your excitement during bank visits. Your enthusiasm terrifies him. Your wild-eyed optimism represents anything but pragmatic realism. Impressions here are everything - cold hard facts, backed up by a well thought out plan. Bankers are the last of the Mohicans risk takers. In many instances you will lack the traditional bankable characteristics - strong asset base and security. All you have is your:
< Business Plan
< Yourself - your commitment and integrity
You never get a second chance for a good first impression - do your homework and be prepared ! When you need the money banks are uneasy in lending it. When you don't need the money banks are only too willing. Bankers love security. They are in the business of making safe loans. Be prepared to answer the worst case scenario questions. Get to know your banker, invite him to your business.
The Commercial Banks and Credit Unions are normally prepared to offer financing based on accounts receivable bridging and/or inventory purchases. Revolving or operating lines of credit (and overdraft schemes) are offered by the major commercial banks and some credit unions.
Equipment purchase is an eligible activity under the terms of the Small Business Loans Act, a program of the Government of Canada, which provides a guarantee to the financial institution to reduce a portion of the risk of the Small Business Improvement Loan (SBIL). Loan maximums are to 90% and not to exceed $250,000. The owners personal guarantee is limited to 25% of the loan amount.
Loan evaluation tends to be more rigorous and sophisticated than mortgage loan evaluation. In summary, this lender is evaluating the immediate abilities of the management team, the collateral available to support the loan and the short term commercial viability of the situation, as portrayed in the projected cash flow financial submissions. A well prepared business plan is mandatory.
TIP: Always ask for 10-20% more of what you need If the purpose of the business plan is get the financing to purchase an expensive new piece of machinery or to upgrade an existing production line, include a dual scenario financial argument. One full set of financial projections should be provided utilizing the existing numbers and the current equipment situation (balance sheets, cash flow and P and L's). A second full set of financial projections should cover the same period of time and show the situation as if the new equipment were in place (balance sheets, cash flow and P and L's).
18. Industrial Co-operatives/Credit Unions These companies are hard to find, yet they are out there. These are co-operatives in specific industries that have been setup to provide services to companies within their industry. In many cases, these services include financing arrangements. These co-operatives are more common in heavy equipment industries. For example, Forest & Marine in Nanaimo is setup to provide loans to the marine and forest industry.
19. Mortgage Lenders The institutional providers of first level mortgage lending include the Insurance Companies, the Banks, the Trust Companies and the Pension Funds. There are also many short term loan financiers to be found in the private sector. Many of these advertise their services aggressively, especially where their offerings relate to mortgage extensions on property in stable real estate markets (such as the Lower Mainland market).
These can be easily located through licensed and bonded consultants known as mortgage brokers. These offerings normally involve terms of one year or less with liberal provisions for renewal. For these reasons these mortgages often charge only interest, but have hefty penalties for returned cheques and late payments.
Private mortgage financiers would normally be approached after you have exhausted the commercial channels and been rejected from dealing directly with them due to some weakness in your equity or personal guarantee abilities.
A first mortgage will earn the lender approximately 9% interest, a second mortgage, 13%, and a third mortgage, 18% - 20%. These lenders can be easily located and your approach to them is assisted (for a fee) through consultants known as mortgage brokers (provincially licensed and bonded).
Mortgage financiers must normally be approached with a prepared proposal, which will be judged on the basis of who the borrower is (i.e. personal financial); the type of building and its use; the location of the property; its condition of repair; its value established by professional appraisal, comparative sales, cost and income; the company balance sheet; and the projected or actual cash flow. Again this approach can be prepared for you by contacting a provincially licensed and bonded mortgage broker.
20. Venture Capital Companies Venture capital firms offer capital in exchange for equity in a company. These are companies such as the Workers Opportunity Fund that are in the business of investing in private companies. In return for their investment, they typically take back a equity position that can vary wildly. Their main criteria is high growth potential (a IPO), solid management and strong financial projections. This type of financing is ideal for new businesses since venture capital firms focus mainly on the future prospects of a company when banks use past performance as a primary criteria.
21. Business Development Bank of Canada In 1995 the Business Development Bank changed its name and mandate. The bank is no longer restricted to being a lender of last resort. As a result, it has introduced many innovative lending programs and services in direct competition to the banks. The Business Development Bank (ineligible for the SBIL Loan Guarantee Program) is also a key lender when it comes to equipment purchases and fixed asset acquisitions in general. While the BDC does not offer discounted interest rates, it can choose to schedule the repayment over a longer term than the commercial banks.
In addition, the BDC has several new innovative loan programs:
1. The micro loan program (new in 1996)
Specializing in smaller loans of up to $25,000 for startup financing and up to $50,000 for existing businesses. Applicants must have taken an approved Entrepreneurial course within 6 months of applying. Part of the management services program where a Case Counselor is assigned to assist with performance. No industry exclusions. 3-6 year terms at rates of Base plus 2% - 4%.
2. Term Loans
This programs offers customized term loan financing for asset purchases or working capital. BDC can structure the repayment terms to best suit cash flow requirements.
3. Venture Financing
This new program provides loans to companies that require financing that lack the requisite owner equity or asset security. Loans for upgrading, expansion or working capital. Must have established earnings, strong management and strong growth potential Funding under this program is generally in excess of $100,000 to $1,000,000. Repayment a combination of interest and royalties on sales. Follows projected cash flow. Retail and wholesale industries excluded.
4. Patient Capital
Loans for knowledge based industries with high growth potential. Provides long term capital under flexible repayment terms. The principal repayment can be postponed and interest capitalized for up to three years until the company begins to generate revenues and has the capacity to pay. Loans range from $50,000 - $250,000. Partnerships with other lenders are encouraged. Repayment follows projected cash flows. term 6-8 years at rate of Base plus 6-8%.
5. Venture Capital Equity
Capital advanced on the basis of an equity take back. Based on a minority position and the owner retains control of the company. A BDC representative is appointed a director of the company. This is very specialized and evaluated on a case to case basis.
BDC maximum debt to equity ratios are 3 to 1. Recently, Forest Renewal has joint ventured a program with BDC whereby it provides loan guarantees of up to
$1,000,000 for approved forest related projects.
22. The BC Government Financing Assistance Programs Forest Renewal BC
A new program to sponsor and provide financial assistance to employers expanding and requiring training for employees. This program provides training allowances to employers in forest related industries. Also, the program can provide loan guarantees for expansion through the community futures programs.
Forest Renewal has provided funds to local community futures organizations to make loans available for up to $75,000
qualified businesses. The programs are administered through the Credit Union lending infraucture. Along the same
lines, in co-operation with BDC loan programs and guarantees are available through BDC up to $1,000,000 per applicant.
Equity Capital Program
The Equity Capital Program (formally called the Small Business Venture Capital Program) is designed to encourage arm's-length investors to make equity investments in businesses involved in export enhancement, import replacement or otherwise diversifying the B.C. economy. The prime objective of the Equity Capital Program is to assist business creation, expansion and preservation in "value-added" sectors of the provincial economy. The program is designed to reduce the debt-to-equity ratio in small businesses and thus strengthen the B.C. economy as a whole. The Government of B.C. provides a tax credit to investors equal to 30 per cent of their investment.
The concept works in this way. Say 5 High net worth individuals wish to invest in a qualifying business. A VCC is applied for and if granted, their funds are pooled together in a VCC that owns a minority interest in the targeted company. If a wider net of investors is required then other factors come into play such securities regulations and Offering of memorandums. The participating shareholders of a VCC cannot be specified shareholders of the investee company.
Employee Share Ownership Program
The Small Business and Equity Investment Branch of the Ministry of Small Business, Tourism Culture supports two types of employee investment. The first is the Employee Share Owners Plan (ESOP) which provides employees with an opportunity to invest directly in shares of company which employs them. Employees can get a 20% tax credit on a total investment of $50,000 per employee. (maximum tax credit is $2,000 per year). The gov't also contributes half of the set-up costs.
Employee Venture Capital Corporation
The other is the Employee Venture Capital Corporation (EVCC) which encourages employee groups to purchase shares in their own EVCC, which in turn invests in one or more companies. Tax credits are similar to those of an ESOP, but employees can also put the investments in their RRSP.
For information on financial assistance for employers hiring income assistance recipients, contact the local Social Services office listed in the blue pages of the telephone book.
23. The Federal Government Financing Assistance Programs For information on individual programs contact:
Suite 900-650 West Georgia Street, Vancouver, BC V6B 5H8
Telephone: (604) 666-0434 Fax (604) 666-8330
Business Improvement Loans (BlLs)
A business improvement loan is available through Canadian Chartered Banks and some Trust companies to assist small businesses in the purchase, installation, renovation or improvement of fixed assets. Assistance includes up to 90% of land and buildings, or up to 80% of equipment costs to a maximum of $250,000. BIL interest rates are a maximum of prime plus 1.75 per cent.
Program for Export Market Development (PEMD)
The PEMD is designed to encourage export marketing activity in new markets outside of Canada. Assistance includes contributions towards costs incurred by a company in its development of new markets (repayable if incremental sales are made in a new area). Contact Industry Canada in Vancouver at (604) 666-0434.
Labour-Sponsored Venture Capital Corporations
In some situations, where the Federal Government co-ventures a LVCC tax credits of up to 15% for shares purchased after March 5, 1996 are available.
Western Economic Diversification
This is a Federal organization setup to assist small business in variety of ways. They do not provide direct financing but have setup a variety of loan funds with various financial institutions and will assist with information, screening, consulting and applying for a specific fund. They can pre-screen applicants and offer advice on what lending programs are best suited to meet the small business owners needs.
24. Buy now Pay Later This is a selling inducement that is becoming very popular for financing big ticket items such as computers, appliances, stereos, furniture etc.. In some cases there is no payment required for up to one year - no interest and no principal. However, there is a small administration up front of about %50 in most cases.
Caution must be used here. This would not necessarily be part of a prudent personal financial plan. Though in a business start-up this may fit. In a startup, cash flow is usually less in the beginning and over time, sales increase and cash flow would improve making it easier to afford down the road. As a result, a business may be in a better position to pay for the purchase out of future cash flow rather than now at the start-up stage. In contrast, where personal cash flow is often flat and tied to a set wage, this would serve no purpose or advantage and merely delays the inevitable.
25. Suppliers An alternate way of realizing working capital is through Supplier Financing. Trade Creditors offer terms of 30 days before payment for stock purchases is due. With newer, unproven operations, C.O.D. (Cash On Delivery) is often required. Occasionally, in a buyers' market, an important large dealer will be offered 60 day payment terms. Often a 2% discount will be offered to dealers who pay within 10 working days and a penalty (e.g. 1.5% per month interest) will be imposed on account balances unpaid after 30 days. This can be a very important source of financing, special terms can sometimes be negotiated with suppliers.
26. Floor Planning Although a relatively new financing source, floor planning is a lending approach in which companies can finance their inventories. In floor planning, inventory is financed based on the credit of the vendor as well as the company receiving the financing. The inventory purchased acts as collateral until the sale is made. Occasionally, such a supplier promotion plan will enable a dealer to pay for specific items only as they are sold (supplier retains ownership of goods until paid for).
These plans empower a representative of the supplier to enter your premises and take spot-counts of the supplier's merchandise in your stock. The supplier then invoices you for what has been sold according to the representative's report, and replenishes your stock to the original agreed level. This system also permits the supplier to constantly alter the mix of his/her merchandise on your shelves, quickly replacing slow moving items with those that seem to sell more quickly in your particular market.
27. Community Based Organizations One such organization is Community Futures. This organization promotes self-employment through small business start-up and ownership as a viable option to UIC or welfare.
There are 32 Business Development Centres (BDCs) operated under the Community Futures Program throughout the province (excluding the lower mainland and the CRD). The BDCs are able to make business loans to a maximum of $75,000. Recently, an additional $75,000 has been made available through the Working Opportunity Fund in some specific areas.
The loan evaluation process requires a business plan. If upon the initial interview the application has merit it is then presented before a board of community representatives for a final lending decision.
The lending practices and decision processes are radically different. Here the emphasis to lend or not is not based entirely on security and the numbers but on intuition. I’ve had a chairman of the local board remark to me, “... this is a very unique organization, entirely different from any I’ve experienced in the past where our decisions not based on cold hard facts but often on intuition”.
Each BBC is under the control of a local board. For addresses and phone numbers of the BBC contact the local Human Resources Development Canada office, Community Futures Branch or call Community Futures, Human Resources Development Canada in Vancouver at (604) 666-5515.
28. Sponsorship An entrepreneur set up a wilderness tour company to take tourist through remote parts of the west coast. In order to finance his equipment he made a deal with Coleman to supply his camping gear, in return he would make time on every tour to explain the features of the equipment his was using and plug "Why this was the best...". In effect, he became sales rep for the company. The company benefitted from his captive audience of groups up to 10 people at a time and he did not have to pay for his equipment. He used this same approach on other suppliers for his tents etc..
29. Trust Companies Canada Trust has recently introduced a new small business lending program targeting owner operated small businesses. They will lend up to a $50,000 Line of Credit against personal property (up to 75% of the appraised value) with rates starting at prime and in most cases unsecured. They place a greater emphasis on personal credit history and income. In most cases they do not go through the usual business evaluation process and do not require company financial statements.
For loans over $50,000 and up to $250,000 they will secure this against real estate up to 75% and require company financial statements. They do not do start-ups unless they are approved franchises. They generally require that the business has been operating for at least 3 years with a least 2 profitable years.
30. Letter of Credit Letters of credit are simply promises to pay by financial institution if there is a default or on demand. No funds change hands but is simply a promise to pay a specific payee and for a specific amount. In this way, this can be used as collateral for trade payables or the like.
31. Foreign Banks Recently introduced legislation for financial institutions has been announced by the Secretary of State Doug Peters to allow foreign banks to operate branches in Canada without having to establish Canadian subsidiaries first. For example, Wells Fargo, a major US bank, intends to mass market unsecured loans of up to $100,000 to Canadian small businesses. At the time of this printing, the program is not yet available but has received the approval of the Canadian government and is proceeding.
ING of Holland is a “virtual” bank operation with no conventional branches that pays above-average interest rates on savings and offers lines of credit for a flat 7.8 percent.
Don't Take No for an Answer! If your proposal is refused, ask for the specific objective reasons. Do not accept reasons such as "We just don't want to do it" or "We don't think it will work". By finding out why you were refused, you can determine if it is worth changing the proposal and, if so, what you have to do to make it acceptable. Use the lender's assessment of the proposal as feedback to help you identify and correct any weaknesses in your plan. If certain changes (more collateral, further capital, revise sales forecasts etc.) will make the proposal acceptable, decide if your are willing to make the changes suggested. If so, get the lender's assurance that your proposal will be accepted once you have complied with these requirements. Rarely, is plan A (first submission) the version that is accepted and implemented. Often, some changes are necessary to make the plan fit the circumstances and specific requirements of the lender. Don't be surprised or discouraged by these requests.
The Beatles were rejected by 5 record companies before EMI signed them.
Dr. Seuss was turned down 27 times before his first book was published.
Henry Ford suffered 3 bankruptcies before he got it right.
Richard Bach was turned downed by 18 publishers for Jonathon Livingston Seagull In sourcing the financing for my clients sawmill, we were turned down 8 times and did 3 business plan revisions over ten months. Finally, on the 9th attempt we found a banker who was willing to take a chance. Be Prepared for the Fee
Most lenders will evaluate a loan application on a preliminary basis. If they see merit in proceeding further then normally a fee will be asked for in advance. Most of this fee will be refunded if the application is later rejected. Fees can start @ $1,000 and go up to 2.5% of the loan principal amount.
Get the offer in Writing
Once your request has been approved, ask the lender to put the offer in writing, specifying the terms as well as the obligations of both the lender and the borrower. A written offer ensures that there will be no misunderstanding and establishes the basis for further negotiation.
Prepare to Negotiate
Often, business owners are so anxious to have their applications approved that they don't bother to question the terms and conditions of the loan. In fact, many of the terms and conditions of a loan are negotiable.
Try to negotiate a minimum acceptable level of security or collateral given. That way, if you need to go back to the "financing well" again down the road, you have something to offer.