Banking for Your Future

MANAGEMENT

When starting your own business, set up the right financing arrangements at the beginning.

Starting your own business can be the beginning of one of life’s great adventures. You have the core idea and the confidence, but what about the money? Certainly, it would be great to have sufficient personal funds for the initial investment, but for many people starting out in business, that may not be a reality. It is also understandable that you are reticent to ask friends or family for a loan or an equity investment in the event that the business goes south.

Find the Best Source for Your Financing

“A bank is a place that will lend you money if you can prove you don’t need it.” So said Bob Hope, a last-generation stand-up comedian.

An astute cash flow manager needs to consider the range of loan services offered by financial institutions to assist a start-up business and ensure a continued ?ow of working capital as the business grows. Experienced entrepreneurs will tell you that the best time to build your credit sources is when you don’t need the money.

Recognize that you will need money not only for today’s operations but for tomorrow, next week, next month, and for all the years your business is going to operate. As an entrepreneur, you should constantly review the current and future needs of the business to ensure you are aware of the various lending vehicles available. Don’t forget that financial institutions are constantly trying to invent new financing instruments in order to do business with you by making financing possible for you and your evolving business and industry.

Federal Assistance

Canada Small Business Financing Program is a loan program sponsored by Industry Canada through Canadian financial institutions to provide financing to businesses with $5 million or less in gross annual revenue. These loans normally finance the cost of purchasing or improving land and buildings for commercial purposes, renovating existing premises occupied by tenants, or purchasing or improving new or used equipment. The maximum loan is $500,000.

A Line of Credit Is Essential

Lines of credit are essential to most business. They are offered by every financial institution and may take various names and forms. Most businesses need a line of credit to buffer unseen cash ?ow shortfalls. By way of example, a business may have payroll on Friday but find that the deposits from sales or accounts receivable were not sufficient to cover the payroll. A line of credit large enough to cover this type of contingency ensures that staff is paid. Usually the line of credit is “linked” to the business operations account to provide funds as needed. Once sufficient funds from cash sales or the collection of receivables are in the operating account, the line of credit is paid down to zero. This reduces interest costs to the business and ensures that an adequate line of credit is always available.

Financial institutions may make business loans that are not “lines of credit.” The loan could be for the short-term needs of a customer. Once the principal amount is established, an amortization schedule indicates the fixed amount of interest and principal that must be repaid on a regular recurring basis over a predetermined time of completion. In most instances, the business assets as well as the personal guarantee of the owner(s) will be required.

Mortgage Loans

Business mortgage loans or commercial mortgages assist with the purchase of commercial property. The loan is typically secured by a mortgage registered on the building. The amount advanced depends on the valuation of the property. Be prepared for additional expenditures because the financial institution will want:

• a current appraisal from an AACI-qualified appraiser (Accredited Appraiser Canadian Institute, the designation of the Appraisal Institute of Canada) or a bank-approved appraiser
• an environmental report that could cover such issues as contamination, soil conditions or flooding
• a building examination to determine the condition of the building, sewage lines, whether the building meets current building and ?re code standards

Financing Arrangements

Lenders normally provide fixed and variable rate options with a five-year term. Usually the principals of the business are personally liable for part of the loan in the event of default.

The Business Development Bank of Canada offers assistance with commercial real estate financing for the purchase of land and buildings, constructions of new premises and the expansion or renovation of existing premises.

The loan arrangements usually require the owners of the business to guarantee a percentage of the loan in the event that the loan is not repaid. This “guarantee” amount is normally insignificant when compared to the total liability for which the principals could be responsible if they were required to guarantee the entire loan personally.

Keep your business credit cards separate from your personal cards.

Credit Cards

Your credit card should be the last resort for borrowing, given the high interest rates and penalties for late payment. Since, however, credit cards are an essential component of day-to-day business operations, wise entrepreneurs should consider obtaining credit cards registered in the business name. These business cards should be used only for business purposes; you should have another card for personal expenditures. Balances should be paid off monthly, either from the operating account or by using the line of credit. Timely payment ensures a solid credit report.

Alternative Sources

Here are some other sources of funds available to select categories of entrepreneurs.

Community loan funds

are for not-for-profit organizations unable to get loans from traditional sources. These loans are offered by communities and range from $2,000 to $150,000.

Aboriginal Business Canada

provides non-repayable contributions to a maximum of $99,999 for the eligible entrepreneur. The funds can be used by those with Aboriginal heritage to start a new business or expand an existing small business.

Angel investors

are individuals or groups seeking a higher return than is usually available from conventional equity investment. Angels expect to be approached by entrepreneurs with an excellent product or idea and a good business plan that will reward them quickly and handsomely. Normally, angels will want to own part of your business to protect their investment. Many entrepreneurs may find this distasteful; however, considering that the angel is not only investing their own capital but also providing practical experience from their own success, sharing the management and control of your yet unproven business may be a good trade-off.

Finding an angel requires networking with local businesses and business clubs whose members may be able to steer you to the right person.

The Bank Account

Not so long ago, small businesses needed just a bank account, a cheque book and a deposit book; today, they must be able to integrate loans and repayment schedules with operating accounts. In addition, a business model must be able to incorporate various means of payment and receipt simply to ensure the cash is in the bank as soon as the work is done and creditors are paid in a timely fashion. Thus, consider setting up banking services that will empower your business to deal with such items as:

• payroll distribution by direct deposit
• email transfers, payments and receipt
• telephone banking
• ATM business deposits and the ability to transfer between accounts
• foreign exchange deposits or payments
• company debit card payment
• credit card and debit card payments
• 24-hour deposit ability
• online banking to make utility, municipal, provincial and CRA tax payments
• online banking to ensure reconciliations, etc.
• tap and go
• mobile device payment and (we almost forgot)… cash

Plan for Tomorrow

Maintaining the cash ?ow requirements of a business is more than just being con?dent that today’s expenses are covered by incoming cash. Wise business planning considers the needs of tomorrow’s business while working with financial institutions to shape banking requirements that meet not only current but also future needs.