| | Financing your business | Sources of financing
Financing Your Business
It is said that there is really no such thing as risk capital from a bank. Although banks are concerned with the high risks of new businesses, they are still the chief source of debt financing for small and medium size businesses in Canada.
Be prepared to invest most, if not all, of your personal assets in your business. You can not expect a bank to assume a risk that you are not willing to undertake. Your projected income statement, along with your financial needs, indicates the size of your loan and ability to repay the funds.
Your projected income statement should detail your projected revenue and expenses. You must prove to investors or lenders that your proposed statement is realistic and obtainable. Many numbers for this statement can be acquired through market research and analysis. Projections should be for three years.
Along with your projected income statement, detail your cash needs for fixed asset purchase, inventory and associated start-up costs.
Banks usually request business resumes and personal net worth statements from all business principals. When applying for any loan, be prepared to sign an unlimited guarantee form. Should your company default on repayment, this commits your personal assets.
Sources of Financing
There are a number of sources of financing for a business venture. Funding sources generally fall into three categories
1. Equity Capital
Equity capital is the amount of money that you and/or your partners put into the business, or raise from other investors. Equity capital is not debt. While investors share in the profit and losses of the business, their investment is not a loan.
- Personal Investment
Personal savings, securities, real estate and other personal assets are the most obvious source of cash for equity financing. Friends and relatives may provide additional sources of funds. Personal investment demonstrates a faith in and commitment to your business. This is important to other potential investors and lenders.
- Partnership Investment
Obtaining a partner means that ownership of the business, including profits and liabilities, is normally shared.
- Shared Investment
A business may be incorporated as a private or public corporation. A private corporation can have up to 50 shareholders, but it cannot sell shares to the general public. Public corporations can sell their share to anyone. They provide the greatest opportunity for raising equity capital. However, offering shares to the public can be a long, complicated and expensive procedure.
- Venture Capital Firms
These firms provide equity financing, usually for high risk enterprises with potential. As a general rule, venture capitalists plan to liquidate all or part of their investment in a business for a substantial profit within five to ten years.
2. Debt Capital
Debt capital is the amount of money borrowed and used to establish the business.
- Term Loans (Fixed Assets)
Term loans are used to finance fixed assets, leasehold improvements and other long-term business assets. The loans are usually secured by the assets and standard guarantees.
- Small Business Loan Program
These loans are guaranteed by the federal government at a rate of no more than prime plus 3 per cent. To be eligible, a small business must have annual gross revenues of less than $5 million. Capital is available to finance fixed or moveable equipment, construct, purchase or improve a facility. The maximum available is $250,000. Contact any chartered bank.
3. Working Capital
Working capital is the excess of current assets over current liabilities. It is the money available to finance the routine operations of the business.
- Operating Loans
These loans are usually termed lines of credit, and are used to finance inventory and receivables. Operating loans usually fluctuate over the year, according to your business needs. These loans solve short-term cash flow problems and are secured by accounts receivable and inventories. The loans are usually secured by the assets and standard guarantees.
Potential Sources of Capital
- Agriculture Financial Services Corporation (AFSC)
- Alberta Women’s Entrepreneurs (AWE)
- AVAC
- Banks – small business loans
- Business Development Bank of Canada
- Farm Credit Canada
- Western Economic Diversification
For additional information see the Sources of Assistance section. |
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