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Financing Solutions




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

2 Keep Your Day Job

3 Former Employer or Clients

4 Family, friends, and business associates

5 Bartering

6 Potential customers

7 The Landlord

8 Vendor take-back Financing

9 Take on a Partner

10 Commercial Finance Companies

11 Factoring Companies

12 RRSP’s

13 Private investors

14 Private Match Makers

15 Consignment

16 Leasing

17 Chartered Banks and Credit Unions

18 Industrial Credit Unions/Companies

19 Mortgage Lenders

20 Venture Capital Companies

21 The Business Development Bank

22 The BC Government financing programs

23 The Federal Government financing programs

24 Buy Now pay Later

25 Suppliers, trade credit (accounts payable)

26 Floor Planning

27 Community Based Organizations

28 Sponsorship

29 Trust Companies

30 Letter of Credit

31 Foreign Banks

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:

• savings (including Registered Retirement Savings Plans, pension funds, and severance' allowances)

• remortgaging of property

• personal property

• credit cards

Get a no fee credit card and get free cheques

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.

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