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					Explore your Financing Options
Know your financial arrangement options

Running a business involves many expenses that require up-front financing to keep it operating smoothly.
Financing your business effectively involves knowing about financial arrangement options, and which lenders
to approach.


This section will explain the difference between available financing options and what to take into
consideration in choosing the right option, or combination of options, to suit your business requirements.


Financing Your Business

Your business will have many day-to-day operating expenses, as well as less frequent requirements such as
new equipment. Different loans with varying terms and methods of security, and a number of financial
strategies are available to cover your particular financing needs.


       Business Expenses
       Business Capital
       Equity
       Leverage
       Short-term Loans
       Long-term Loans
       Respecting Your Loan Privileges


Business Expenses
When you start a business, there are a number of expenses to keep in mind. You must purchase licenses,
pay for permits, engage professional services (e.g.: legal, accounting, insurance), carry out leasehold
improvements, and buy furniture, fixtures and equipment, etc.


You may require initial retail inventory, an opening stock of repair parts, and accessories or office supplies
such as business cards, letterhead, envelopes, staples, etc. Once you start operating, you must replenish
these retail or parts stocks and pay the day-to-day wages of your employees (i.e.: working capital
requirements).


Fortunately, there are financial strategies to satisfy these needs and help you approach sources of financing
(i.e.: lenders & investors).


Business Capital
Money that finances business is called capital. Bank loans approved for day-to-day business operations
(working capital) have characteristics that make them different from those approved for equipment
purchases (long-term capital or capital assets). A bank loan officer can often assist you in finding a workable
combination of these different types of capital. Using loans approved for purposes other than those for which
they were approved is considered an abuse of your loan privilege.
Equity
Equity funds come from the personal moneys of the partners (e.g.: savings, inheritance or personal
borrowings from financial institutions, friends, relatives and business associates), and from the stockholders.


Equity funds are normally unsecured and have no registered claim on any of the assets of the business,
freeing those up to be used as collateral for the loans (debt financing).


Higher equity creates " increased leverage." Leverage reflects the business's ability to attract other loans
and investment. An equity position of $30,000 may enable the business to obtain debt financing of up to
three times that amount. But a fully leveraged business has no further ability to borrow money.


Leverage
Leverage is the relationship of debt financing to equity financing (leverage or debt-to-equity ratio). For
example, a proposal that involves $6,000 of debt, and is based on an equity contribution of $2,000, is said
to have a debt/equity ratio of 3:1. Generally, the lender would like to see a new business owner who is just
building a reputation have this ratio at 2:1 or even 1:1.


Short-Term Loans
Short-term loans usually take the form of operating term loans (less than one year) and revolving lines of
credit. These finance the day-to-day operations of the business, including wages of employees and
purchases of inventory and supplies.


Long-Term Loans
A long-term loan is arranged when the scheduled repayment of the loan and the estimated useful life of the
assets purchased (e.g.: building, land, machinery, computers, equipment, shelving, etc) is expected to
exceed one year.


Respecting Your Loan Privileges
Respecting your loan privilege is crucial to your business and the relationship you have with your lender.
Mismanagement of your loan can result in the decline of your business not only in the short-term but also
affect your ability to secure funding in the long-term. Here’s an example to illustrate how this may happen.


A Cautionary Example
Your business plan tells the banker that your proposed business requires a revolving line of credit of
$40,000 to meet its day-to-day expenses over a number of months. The line of credit is approved because
the banker believes that amount of money is absolutely necessary to enable you to operate over the
specified time period.
Shortly after this approval, you approach the bank again, this time with a request for a term loan of $25,000
to purchase new office furnishings. The bank denies you the term loan, as it does not feel that, at this stage,
the business can service such a large amount of debt. Disappointed by this refusal, you nonetheless decide
to buy the new office furniture, taking the required $25,000 out of your operating line of credit account.
What has occurred? Basically, the integrity of your business plan has been compromised.
With the depletion of your operating line of credit, you can no longer expect to purchase the inventory
deemed necessary to achieve your projections. It will be harder for the business to generate the sales
revenue required to service the existing debt, and your revolving line of credit will have surrendered its
ability to revolve.
You return to the banker pleading for an extension of your line of credit, but the banker, feeling betrayed,
has lost confidence in your management ability and may withdraw the line of credit privilege, insist on more
equity, recall the loan in its entirety or force the business into receivership. Furthermore, this performance
will remain on file as a black mark against your management ability long after the business is only a
memory.


Equity Financing

Equity funds are the personal moneys of the business owners or partners. Find out how to generate equity
through friends, partners and investors and how it can increase your ability to attract loans.



Equity Financing Explained
Sources of Equity Financing
Approaching Equity Investors


Equity Financing Explained
What Are Equity Funds?
Equity funds come from the personal moneys of the partners (e.g.: savings, inheritance or personal
borrowings from financial institutions, friends, relatives and business associates), and from the stockholders.


Equity funds are normally unsecured and have no registered claim on any of the assets of the business,
freeing those up to be used as collateral for the loans (debt financing).


Higher equity creates " increased leverage." Leverage reflects the business's ability to attract other loans
and investment. An equity position of $30,000 may enable the business to obtain debt financing of up to
three times that amount. But a fully leveraged business has no further ability to borrow money.


How Much Equity Should I Have In My Business?
Twenty-five to fifty percent of your own money in the business shows a lender or investor that you are
committed to the project by being prepared to share the risk. As the business grows, you should always try
to keep your own equity (ownership) at approximately 25% of the total project, as per the latest balance
sheet. Earnings retained in the business will increase both your equity position and your leverage.


Shareholder Loans As Equity
Shareholder Loans represent equity (and, on occasion, debt) paid into a private company by relatively few
"partners in profit and risk" in exchange for share ownership. The shareholder loan may be secured by the
share certificate(s) alone or by a debenture. If it is secured by a debenture or something other than the
participation in the profits, then technically it is not equity.
Venture Capitalists As Shareholders
Venture Capitalists could be companies with more retained earnings than they require for reinvestment into
their own operations; holding companies who wish to diversify their bases; "venture capital corporations"
formed for tax advantage reasons; or individuals seeking to shelter excessive earnings from high taxes or
hedge their fixed incomes against inflation. Venture capitalists are usually shareholders, secured by share
value and legal agreements.


Shareholders and Risk
A stockholder's liability in a limited corporation is limited to the value of the shares they have purchased.
Normally there is no claim by these stockholders on the business' assets; rather they have accepted the
risks and rewards that go with that business.


The rewards are direct participation in the profits of that business as well as any appreciation in the
perceived value of the shares. The risks represent the possible reality that the share-value could drop to
zero. True equity money is unsecured and directly reflects the faith of the investor in the business, its
management and the commitment of its principals to it.



Sources of Equity Financing
There are a number of sources that you can look to in securing equity financing. The most common sources
are family, friends, inheritances and personal mortgages. You can also seek equity financing through equity
partners and investors.


Family, Friends, Inheritances & Personal Mortgages
The most accessible sources of personal money are inheritances, mortgage extensions (on a personal
residence), and family and friends. But be cautious. Many cherished friendships and family relationships
have been destroyed through inadequate provisions for personal creditor repayment in case of business
failure.


If you decide to borrow money from family members and/or friends, consider setting the loan up on a
straight business basis. You may also want to provide some personal security or personal guarantee outside
of the business itself. The offer of a deferred repayment scheme of some kind may be welcome.


In loaning you money, friends and family members are usually assuming a high risk with little real basis for
the investment – as a favour to you. Your concern about protecting their money will go a long way to
ensuring their future cooperation and avoiding dissension. And presenting them with a well thought-out
business plan (link: business planning), even though they may not have specifically requested one, would
probably add to their sense of faith in your business.


Equity Partners
In seeking out a general equity partner, it would be wise to identify persons who have not only the money to
complement your contributions (equity), but who are knowledgeable in the industry itself, connected, and
who have expertise in the areas of the business in which you do not.


Limited partnerships have special provisions to limit the direct involvement of the partner in decision-making
as well as their liability in the debts of the company.


Investors
In seeking active investors (venture capital) for a project, look first within the industry. Logically, investors
will prefer to invest in a business they understand. You will also have far less explaining or selling of the
concept to do. There is a possibility that once they have made that investment, they will also be looking pro-
actively to involve your company in the other things they may be doing, and their influence in the industry
may well provide access to additional contracts.


In seeking passive investors who will have little or no involvement in the project, try to find those groups of
professionals who have steady income (to tax shelter) and a prime responsibility of their own that allows
them no time to interfere in yours (e.g.: a doctor or group of medical practitioners, a dentist with a busy
practice, or a lawyer or professional financier preoccupied with their own activities).


Approaching Equity Investors
In seeking partners who will be putting their own money into the venture, you must be prepared to accept
the fact that a partner will most often expect to be involved in the decision-making process of the venture.
At the very least, they will expect to be kept updated regularly on your activities.


Business Plan Evaluation
These persons are being asked by you to take a relatively unsecured position in the company, and should be
presented with a sophisticated, detailed business plan that reveals everything relating to the financial basis
for carrying on this business. The prospective investor will rigorously evaluate the abilities of the
management team, the financial strength of the company structure and principals, and the commercial
viability of the enterprise as to the risk factors portrayed in the projected financial submissions.


Evaluation Considerations
This evaluation will normally require a detailed business plan (in a bound presentation format) which
provides extensive information on the management of the company or project; a detailed history of the
business concept, its products, its production methods, operations and costs, its target markets and position
in the marketplace; the purpose to which this additional equity (cash infusion) will be applied (in intimate
detail); any assets the company owns as well as a detailed summary of all liabilities (debt) and
shareholdings etc.; and extensive financial information and projections.
Assistance to prepare this presentation or prospectus can be accessed through our Business Plan Review
Team (link: Business Plan Review Service.


Long-Term Debt Financing

You might take out a long-term loan to pay for large expenses such as new machinery. There are numerous
sources you can approach to secure a long-term loan, and a number of ways to guarantee it.


Characteristics of a Term Loan
Types of Loan Security Agreements
Approaching Long-Term Debt Lenders
Approaching Sources of Equipment Financing/Leasing Lenders


Characteristics of a Term Loan
"Term" refers to the time for which money (a secured loan) is required and the period over which the loan
repayment is scheduled.


Long-term loans are usually taken out for periods of longer than a year. Lenders will expect to see a detailed
business plan outlining prospects for growth.


Long-Term Loans
A long-term loan is arranged when the scheduled repayment of the loan and the estimated useful life of the
assets purchased (e.g.: building, land, machinery, computers, equipment, shelving) is expected to exceed
one year.
Long-term loans are normally secured, first, by the new asset(s) purchased (up to 65%) and then by other
unencumbered physical assets of the business (for the remaining 35%), or failing that, from additional funds
from shareholders or personal guarantees from the principals.


On the balance sheet, the equipment purchased shows up in the long-term assets section, while the
counterpart loan information is shown in the current and long-term liabilities portions.The useful life of the
assets is directly reflected in their depreciation schedules.


Creditor Expectations
Debt lenders (creditors) make loans to businesses that exhibit strong management ability and steady growth
potential. A written business plan, including a cash flow demonstrating the business' ability to repay the loan
principal and interest over the term of the repayment schedule, is mandatory. The lender will expect you to
have appropriate insurance to protect the assets.


Characteristics: Principal repaid over a period of time directly related to the useful life of the asset(s) (e.g.:
land and buildings - up to 30 years, computers - 3 years).


Interest and Repayment
A loan carries both interest and principal repayment provisions in a set repayment schedule. Early
repayment may bring about a penalty because the lender had not planned an alternate investment for that
money.
The percentage interest rate normally remains constant for the term of the loan. Each payment of principal
reduces the balance of principal remaining and the subsequent interest is calculated on this reducing
balance.
Different lenders make different types of term loans. Term loans often carry lower interest rates than
operating loans because the term is fixed and the loans are secured by assets (asset-backed).


Types of Loan Security Agreements
There are many different options to ensure repayment of a loan. Most of them are a form of written
guarantee that the sum will be returned according to the terms of the loan, or that the borrower will incur
loss of assets to offset the debt.


Promissory Note
A promissory note is a written promise to pay a specified sum of money to the lender either on demand or
on a specified date.


Realty Mortgage
The realty mortgage is a loan (mortgage) whose proceeds are applied to the purchase or re-financing of land
and buildings. A charge against the title is registered with the Province.


Chattel Mortgage
The chattel mortgage is a mortgage on specific assets other than land and buildings. A lien charge against
the title is registered with the Province.


Pledge
The pledge is an agreement similar to the chattel mortgage, except that possession is transferred to the
lender but title remains with the borrower, e.g.: your stocks and bonds held by the bank.
Floating Charge
The floating charge is an agreement that designates all the remaining assets in the business, not already
mortgaged as security for other debts, will be taken as the security for the new debt. The title remains with
you but a debenture is registered with the Province.


Personal Guarantee
This agreement says you will agree that if the limited company is unable to repay the loan, you will do so
personally. If this were in addition to other securities, you would be wise to try to negotiate a limited
guarantee to cover the shortfall in the security for the loan.


Try also to recover your personal guarantee as soon as the business has paid off its obligation or can carry
the debt on its own security. That personal guarantee places those things you and your family hold dear at
risk for the debts of the business.


Postponement of a Claim
The Postponement of a Claim allows the lender to ask for assurance that the company will not repay the
shareholders until the secured lenders have been repaid in full.



Approaching Long-Term Debt Lenders
The predictability of repayment and degree of control over loan security makes the asset-based long-term
loan the preferred investment of most lenders and lending institutions. Provided that the equity
requirement, leverage factors, and asset-based security is adequate, a variety of lenders can be found to
conclude these loan agreements.


How Borrowing Works
Most people approach the subject of borrowing money with some nervousness. You should never view
borrowing money from a commercial loan institution as begging for money. Rather, consider that you are
offering the financial institution an opportunity to do business with you – to make a sale.


You will be renting money from people who, in turn, are soliciting your business. Banks, credit unions,
finance companies and others need your business to make their money work for them. Loans are just
another commodity on a retailer's shelves, and it becomes your challenge, in conjunction with the loans
officer, to find the one that best fits your circumstances.


The loans officer's job is to rent money at profitable rates of interest with a minimum of risk. The loans
officer needs to feel comfortable that he/she has recommended an astute investment, predicated on tested
principles of lending (business plan with financials from which ratios can be developed), when your case is
presented by the officer to the bank's loan review board.


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 long-term mortgage loan financiers to be found in
the private sector. The twenty-five year long term mortgage though, has largely disappeared; a maximum
five-year term reflects the character of today's long-term mortgages. Many of these smaller private
mortgage financiers advertise their services aggressively, especially where those offerings relate to
mortgage extensions on property in strong real estate markets (such as the Lower Mainland market).
A first mortgage will earn the lender approximately 12% interest, a second mortgage, 15%, and a third
mortgage, 18% - 20%. These lenders can be easily located and your approach to them assisted (or
prepared for you for a fee) through consultants known as mortgage brokers (provincially licensed and
bonded).


Approaching Sources of Mortgage Financing
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 financials); 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.


Term Loan Lenders
The providers of basic term loans include the Banks, the Trust Companies, the Insurance Companies, the
Pension Funds and various Loan Specialists.


Approaching Sources of Long-Term Loan Financing
Term loan evaluation tends to be more rigorous and sophisticated than mortgage loan evaluation. In
summary, a term loan lender is evaluating the abilities of the management team, the collateral available to
support the loan and the commercial viability of the situation, as indicated in the projected financial
submissions.


This evaluation will normally require a detailed business plan (in a bound presentation format) which
provides extensive information on the management of the company or project; a detailed history of the
business, its products, its production methods, its operations, its position in the marketplace; the purpose
for which the loan is intended (in intimate detail); any security available to be pledged; and extensive
financial information and projections.


Assistance to prepare this presentation can be accessed through our Business Plan Review Team (link:
Business Plan Review Service).


Equipment Financing/Leasing Lenders
The providers of term loans to finance equipment include the Banks, the Trust Companies, the Insurance
Companies, the independent sales finance companies and, on occasion, the equipment vendors themselves.


Note: Equipment purchase is an eligible activity under the terms of the Small Business Loans Act, a program
of the Government of Canada. The program can be requested to provide a guarantee to the financial
institution to relieve a portion of the risk of the Small Business Improvement Loan (SBIL). Information on
this is available from your local commercial bank, or Small Business BC.


Approaching Sources of Equipment Financing/Leasing Lenders
Detailed and well-presented business plans and statistics that financially justify new equipment, are key in
impressing lenders.


What lenders require
These financiers (commercial banks, trust companies, credit unions) look for many of the same proofs of
commercial viability that the Long-Term Loan people require. Again, a bound business plan is in order.
Remember to make the financial information in the plan easy to locate. The role of the loans officer in the
commercial banks is to prepare a loan summary report from your information, which will be submitted to his
or her loan supervisor with the officer's recommendation to support or reject. These financiers are eligible
under the Small Business Improvement Loan (SBIL) program loan guarantee.


If the purpose of the business plan is primarily to secure the capital 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 sheet, cash flow and income statement). 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 sheet, cash flow and income statement).


Include an expectation of the useful economic life of the new equipment and resale value over the course of
its useful life.


Business Development Bank of Canada
The Business Development Bank of Canada (BDC) (ineligible for the SBIL Loan Guarantee Program) is also a
key lender when it comes to equipment purchases and fixed asset acquisitions. While the BDC does not offer
discounted interest rates, it can choose to schedule the repayment over a longer term than the commercial
banks.


Sales finance companies, in cooperation with the equipment suppliers (vendors) commonly offer sales
finance programs and lease-back options on their equipment. The onus is upon you to ask your vendor if
they have access to any such finance programs, or if the vendor will finance the purchase directly.


Short-Term Debt Financing

There are a number of different financial arrangements available for setting up a short-term loan, which is
used to finance the day-to-day operating costs of a company. You can approach mortgage lenders, banks,
credit unions or other lenders.


Short Term Debt
Short-term refers to the time for which a loan is required and the period over which its repayment is
expected to take place. Short-Term Loans usually take the form of operating term loans (less than one year)
and revolving lines of credit. These finance the day-to-day operations of the business, including wages of
employees and purchases of inventory and supplies.


Also bridge financing (interim loans with a short, fixed term) can be used to finance accounts receivable
contracts, which are relatively risk-free, but delayed for one to three months.


Short-term operations money may be secured against:


         Any unencumbered physical assets of the business
         Additional funds from shareholders or personal guarantees from principals


On occasion, inventories can be used as temporary security for operations loans. Bridge financing is
normally secured by assignment of all the receivables and personal guarantees. On the balance sheet the
accounts receivable, inventory and supplies stocks show up in the current assets section, while the
counterpart loan information is displayed in the current liabilities section.


Lenders normally charge a higher base rate of interest for operating loans, reflecting this relatively weaker
security position. The amount of the operating line of credit will be determined from the projected cash flow
information in the business plan. Lenders favour businesses that exhibit strong management, steady growth
potential and reliable projected cash flow (demonstrating the business' ability to pay the monthly interest
payments on this line of credit from its projected revenues in a written business plan).


Operating Term Loans
Operating Term Loans for working capital are used to enable a retail, service or manufacturing business to
purchase raw materials, or retail or parts inventories, and to process or promote these and pay monthly
expenses including principal and interest on outstanding term loans, wages and salaries, rentals, leases,
utilities, etc.


If a business was able to sell all its inventory (stock) at full margin and collect the cash for it immediately,
realizing its profit before it had to pay suppliers for that stock and before it had to pay its monthly expenses,
that business might require no particular working capital loans. However, most are not cash businesses and
don't enjoy that luxury. They face build-ups of day-to-day and monthly expenses such as stock parables,
wages, rentals, leases, etc., often in advance of collecting the cash sales revenues to pay the trade
suppliers, the labour commitments and the regular overhead expenses.


Operating Term Loans (Working Capital) are commonly offered by credit unions and non-commercial lenders
who are unwilling or unable to offer operating (revolving) lines of credit to their customers. This term loan is
made like any other term loan, and is fully secured against unencumbered assets, personal guarantees and
co-signers.


Revolving Lines of Credit
A line of credit is a long-term commitment by a commercial lender to honour the day-to-day cheques of a
business up to a maximum figure agreed to in consultation with the business. The lender retains a number
of signed drafts from the business on hand to use as required to place funds as needed into the account.
The business was made responsible for depositing all sales revenues on a regular basis into the account to
"buy down" the outstanding loan balance whenever there were the funds available to do so.


This up and down nature of the loan amount (account balance) is why it has come to be called a "revolving
line of credit." There is no scheduled repayment of principal because there is no set principal amount of the
loan. The interest rate normally floats at 2%-3% above the prime rate and is applied to the largest amount
of loan outstanding in that account during the course of any month. There are no other account service fees.


Traditionally, revolving lines of credit are the preferred borrowing formats of most commercial businesses
and manufacturers. The normal sources of these loans are commercial lenders, the chartered banks, and
more recently, some credit unions.


Most commercial businesses require differing amounts of cash each month to meet their actual operating
commitments for that month; they want to pay only interest justified by the actual usage of borrowed cash
(without penalties); and pay nothing at all when revenues are entirely sufficient to pay the month's
expenses. This requires a special kind of loan that can provide long-range flexibility (allowing the principal of
the loan to vary from month-to-month); that can temporarily cancel the loan without penalty in a month
where borrowing is not required; and that can provide an almost automatic approval from the lender for
each new loan amount (to a maximum overdraft). While a Bank Overdraft Scheme might achieve some of
this, the more commonly accepted way is to use a revolving line of credit.


Modern Overdraft Scenario
More recently, the banks have fine-tuned this program to what could be called a planned overdraft scheme.
The bank will approve a business for a certain overdraft amount. They no longer work with a series of pre-
signed drafts. The actual interest rate has been dropped to a point to two points above the prime rate and a
system of service charges for the overdrafts has been substituted to make up the difference.


Interim Loans
Interim loans are a type of financing intended to "bridge the gap" between the time a specific receivable is
received in cash and the time the company's parables become due. The assignment of the receivables is the
primary security for the loan. This is quite common where a government agency purchase has been made.
The lender knows the customer will pay, but also that the cash may take some time to collect.


When a government financial assistance program makes an award, reimbursable only after the moneys have
been spent or the project is in place, bridge financing is an appropriate format.


Assignment of Book Debts (Receivables)
The receivables are assigned to the lender to secure the operating line of credit. These are still collected by
the business, but in the event of business default, the lender can assume collection of these directly. The
assignment is supported by the monthly submission of the list of receivables.


Security under Section 88 of the Bank Act
Section 88 of the Bank Act allows a business to use goods-in-process, future crops, livestock, etc., as
security. Possession and title are retained but the lender has certain rights with respect to the sale of the
finished products.


Security for Working Capital Loans
The lender uses accounts receivable (the money owed by customers) and inventory as the security
(collateral) for the loan. For accounts receivable, lenders may lend between 50% and 75% of the total
outstanding receivable, first deducting any invoices that have gone over 90 days.


On inventory, lenders may lend up to 50% against cost based on supplier invoices. Any additional cash
required must come from your own resources or by careful management and re-circulation of the business'
profits and cash.


Personal Guarantees
The principal makes an agreement that if the limited company is unable to repay the loan, they will do so
personally. If this guarantee is on top of other security, it is advisable to negotiate a limited guarantee to
cover only the shortfall in the security. Recover the personal guarantee as soon as the business has paid off
its obligation or can carry the debt on its own security. A personal guarantee places too much at risk.


Postponement
If there are also loans from shareholders, the lender may ask for an agreement that the company will not
repay the shareholders until the secured lenders have been repaid in full.
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.


A first mortgage will earn the lender approximately 12% interest, a second mortgage, 15%, and a third
mortgage, 18% - 20%. Many of these will have, in turn, leveraged and sourced two-thirds of their funds for
this mortgage from an institutional or commercial lender, and accordingly they will have to comply with
various restrictions placed on their investments by that lender.


Private mortgage financiers would normally be approached after you have exhausted the commercial
channels and been rejected from dealing directly with them due to a weakness in your equity or personal
guarantee abilities.


Approaching Mortgage Lenders
There are many short-term mortgage loan financiers to be found in the private sector. Many of these private
mortgage financiers advertise their services aggressively, especially where those offerings relate to
mortgage extensions on property in strong real estate markets (such as the Lower Mainland market).


Commercial Banks and Credit Unions
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.


Approaching Commercial Banks/Credit Unions
Loan evaluation tends to be more rigorous and sophisticated than mortgage loan evaluation. In summary,
these lenders are 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.


This cash flow projection will normally be included in a detailed business plan (in a bound presentation
format) providing extensive information on the management of the company or project; a detailed history of
the business, its current products, its production methods, its operations, its position in the marketplace;
the purpose for which the loan is intended (in intimate detail); any security available to be pledged; and
extensive financial information and projections.


Assistance to prepare this presentation can be accessed through our Business Plan Review Team (link:
Business Plan Review Service).


Trade Creditors, Factoring and Commercial Finance Companies
Trade Creditors offer terms of 30 days before payment for stock purchases is due. With newer, unproven
operations, COD (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.


Factoring Companies may buy accounts receivable outright without recourse and assume all the risks of
collection. These may advance funds against purchased receivables, less a percentage.
Commercial Finance Companies often advance funds upon assignment of receivables and warehouse
shipping/receiving receipts. They will also consider short-term equipment financing.


Approaching Trade Creditors, Factoring and 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 responsibility is upon you to ask your
vendor if they have 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 finance
companies 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.


Alternative Sources of Financing

Sometimes, alternative sources of capital will be required. These often involve making arrangements with a
link in the business process, such as the supplier or customer.


Supplier Financing
Renting and Leasing vs. Buying
Leasehold Improvements
Advance Payment from Customers
Factoring Accounts Receivables


Supplier Financing
An alternate way of realizing working capital is through Supplier Financing. Suppliers may be willing to
extend payment terms to 60, 90, or even 120 days. Some suppliers offer 2% discounts for early payment
(within 10 working days) and penalize slow paying dealers with monthly interest charges. Other aggressive
suppliers may offer floor planning or factoring options to assist dealers in financing stock purchases.
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 require that you give authority to 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 their merchandise on your shelves, quickly replacing slow moving
items with those that seem to sell more quickly in your particular market.


Renting and Leasing vs. Buying
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, and free up
borrowing power (improves cash leverage) for more critical borrowing. It 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.


Leasehold Improvements
When you are negotiating a lease for a rented premise, 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. A skilled lease
(contract) lawyer, acting on your behalf, can perform great service in this kind of negotiation.


Advance Payment From Customers
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 a stepped (partial) payments payable at defined stages of project progress, prior to the completion
of the project.


Consider requiring a deposit for all work (normally deposits are held in trust pending completion). This will
reduce the need for a line of credit. Deposits collected for work that involves special orders for goods or
services will serve to prove the customer was committed to the order and will prevent the business having
to absorb costs resulting from non-payment.


Factoring Accounts Receivables
An effective way to grow a business with limited working capital is by utilizing a factoring company to
discount your accounts receivable. In fact, with good supplier credit and a professional factoring company,
you may need a lot less capital than you think. The factoring company can also provide you with credit
management expertise.


What happens is basically the same thing that happens when a retailer accepts a credit card. You receive
the money right away while it is the factoring company who waits for payment. By having the use of your
money right away you can begin to concentrate on making the next sale.


Factoring is more expensive (typically 3 - 5% of your invoice) than most other forms of finance therefore it
is important to find ways to build it in (pricing) and earn it back (suppliers). There are also savings realized
by not having to perform necessary credit functions yourself. If you can use the factoring monies to add new
business then the costs or factoring are fairly easy to justify.


By factoring your receivables you do not increase debt or dilute equity. You are simply given access to your
own money when you want it rather than when your customer chooses to pay. As you build your own
working capital you can reduce the amount that you factor and carry more of your own accounts receivable.
Eventually you can become completely self-financed. (Special thanks to First Vancouver Finance for this
information on Factoring.)


Further Information

These are a selection of excellent resources to explore further in each specific area of financing options


Funding/Financing


Strategis Sources of Financing
Sources of Financing helps you to find the lender that meets your needs. Access a Canadian database of
government and private sector sources of debt and equity financing.


Commercial Finance Online
Commercial Finance Online is a database of over 14,000 debt and equity financing companies worldwide.


Steps To Growth Capital
The Canadian entrepreneur's guide to securing risk capital. Includes a self-study guide and an investor
readiness test.


Government Sources


Overview of Government Financing.
The Small Business BC directory of government financing for small business.

				
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