How will I Finance my Business
Sources of Financing
It is very common for entrepreneurs to find funding from within their families. However, it is very important that you treat this loan as if the money had come from a bank or a formal investor. Prepare a written agreement
detailing the loan and repayment process. Keep this loan as business like as possible. Don’t let the business destroy a friendship or a family.
While it is often said there are large pools of “free money” for small business owners this isn’t necessarily the case. Most often this money is available for staff training, technical research, tourism development, or export market
Human Resources and Social Development Canada (HRSDC):
HRSDC offers a Self-Employment Benefit Program, one of the most extensive grant programs for new entrepreneurs. It can include personal income
support for up to a year as well as training and other support. HRSDC finances many other programs especially those involved with employee training and counselling.
For Aboriginal entrepreneurs there are several federal initiatives that offer training and financial support. Further, some of the Canadian Aboriginal Bands will offer financial assistance to their own members who become
In reality grants are “few and far between” and most are very hard to find. On the internet there are companies that are trying to sell you lists of grants for a price. Beware! Many of these companies “take” more than they “give” back. Now there are programs that might assist you, take a look... it’s always worth your time to find “free” money.
If you think you might be borrowing money from a financial institution understand that writing a business plan isn’t optional - it’s a must have. Credit
Unions and Banks are leery about lending to new businesses because there is no track record – they have no proof that the business has a viable future and therefore it appears as a major lending risk.
Essentially banks lend out funds to entrepreneurs in one of two ways:
Term Loan Loans given with a fixed repayment period with a fixed interest rate are called term loans. These loans are generally given for the purpose of purchasing assets such as fixtures, vehicles and equipment.
Line of Credit A line of credit is a form of a loan that allows the
borrower to “overdraft” (go into the red) with a chequing account up to a predetermined amount. On average borrowers are required to pay back a portion of the money each month at a variable interest rate.
Lending decisions are based on the strength of your
business plan, a good credit rating, and sufficient
collateral to secure the loan. It is normally difficult for new ventures to get bank financing. But just because one bank says “No” doesn’t mean you should give up. Banks are in competition with one another; try them all!
Instead of spending a large amount of money on new equipment and
vehicles, consider leasing. This is an easy way to start up a business and it often requires little or no down payment. Buying a building for a new business is often viewed as a bad idea even if you can afford it. Owning the building can often be too confining for a new business. Business owners who also own the building have a tendency to limit their business around the size, shape, and mishaps of their building, i.e. If you are in a leasing position; however, you are more willing to move to a different location if your business outgrows the current one as well as make demands of the landlord to meet the changes within the market.
Every lease will come with a leasehold agreement. Lease agreements are often negotiable. Don’t sign anything until you are satisfied. Areas that are negotiable:
||The going market value of basic rent is usually based on location and square footage.
|Percentage of Sales
||Some landlords may want a percentage of your retail sales on top of the basic rent. By offering them a percentage of your sales you can significantly lower the amount you pay in rent each month.
|Maintenance and Other Expenses
||You must determine who pays for basic utilities. You will also want to determine such areas as garbage and snow removal, or the amount of money spent on contractors to do repairs to the building. Who is responsible?
|Length of the Lease
||How long do you have to stay in this location and what are the stipulations if you choose to leave?
||What areas of the lease can be renegotiated when the lease term ends?
|Many landlords will argue that any leasehold improvements such as renovations, modifications and improvements are to the benefit of the business and should be paid by the business owner. If you can prove that they also improve the building itself you might be able to convince the owner to share in the costs.
Many suppliers will give you a month or two to pay for their goods and
services. Often you will have to demonstrate ability to pay for a set period of time in order to establish a good standing with the company.
Often businesses only need a credit card to help them through the periods of slow business or to help with inventory purchases. However, heed this
warning: Keep business spending separate from your personal purchases and don’t let the purchases pile up. A credit card company’s intent is to make money based on their interest rates; so be careful.
When people invest money in your business it means that they have an equity position; the investors own a portion of the business. However, just because they own a portion of the business doesn’t mean that they have to act as active partners (have a say) within your business. These are things that need to be outlined in your partnership agreement.
If you are opting to incorporate your business, specifying that you will retain a 51% share in the business (or higher) will allow you to maintain control while still allowing you to obtain funding. Often in a corporation you will find
informal investors called Angels. These relatively wealthy individuals are
often senior or retired professionals who enjoy taking on risk by investing in small businesses, especially if it allows them to provide advice to the business owner.
The Business Development Bank of Canada (BDC) The BDC is a financial institution owned by the federal government. For small ventures and young entrepreneurs it offers micro-loans (usually up to $25,000) and for established businesses it has loan programs that offer funding up to $5 million.
The Canada Small Business Financing Program (CSBF) CSBF lends money for the purchase of fixed assets. These loans are negotiated through a regular bank, but are similar to a student loan in the sense that repayment is mostly guaranteed by the federal government. You can borrow up to 90% of the value of the asset at reasonable interest rates.
Community Futures Saskatchewan (CFS) CFS consists of 13 individual Community Futures Development Corporations throughout Saskatchewan. They provide a variety of community economic development initiatives and entrepreneurial programs, including: business counselling, loan programs and business information to communities. There are two Communities Futures in our region:
Small Business Loan Associations (SBLA In our region over 30 SBLA’s exist through a number of local administrators. The SBLA program offers loans of up to $15,000 with repayment terms of up to 5 years. Interest rates are comparable to financial institutions and vary from association to association. For a complete list of the SBLA’s in this region please contact us.
Keep in Mind
It is unlikely that your business will make the exact same amount of money each month. As a business owner you need to consider seasonal
fluctuations when recording a cash flow statement.
i.e. A retail store is likely to make almost 50% of its total yearly profits within the Christmas season alone.
It’s important to prepare 3 sets of financial statements so you have an all around picture of what might happen to your business within the next year.
Some financial institutions might also expect you to prepare financials for 3-5 consecutive years so they can get a good idea of how you expect your company to grow.
Love Money-money that is borrowed from relatives and/or friends for a business venture
HRSDC-Human Resources and Social Development Canada, the department of the federal government concerned with training and employment. It has various programs that support entrepreneurship and provide training assistance to small businesses www.hrsdc.gc.ca
Export Development Canada offers various forms of financial assistance to firms that will be exporting products and services from Canada www.edc.ca
New Ideas? See the National Research Council website at www.nrc.ca
Look at the Aboriginal Business Canada website. Start with www.ainc-inac.gc.ca , click on Economic Development and then Aboriginal Business www.canadabusiness.ca
If you would like a copy of your credit report call Equifax Canada at 1-800-465-7166 or visit their site www.equifax.ca
Lease-a contract renting land, buildings etc. to another person for a specified period of time, typically one year
Basic Rent- the minimum rent charged by a landlord for commercial space on top of which may be charged a percentage of sales, maintenance fees and other expenses
Lease Hold Improvements-the modifications to the structure or décor of a commercial property that will remain the property of the landlord, even though the changes may have been paid by the lessee
Trade Credit-a time allowance for paying for inventory or purchases. A company might offer you 30 days to pay your bill
Investor-someone who provides your business with money or assets in hopes of achieving financial return in the future
Angels-wealthy individuals who invest in independent small businesses and who are not related to the business owners
BDC-The Business Development Bank of Canada - a federal government agency charged with lending money to small and medium-sized enterprises under reasonable terms www.bdc.ca.
You can get information on CSBF loans from the branches of most banks, or use the search feature of the Strategis website www.strategis.ic.gc.ca
Community Futures Saskatchewan website www.cfsask.ca