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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.


And,


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.



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