The current economy has created challenges for anyone wishing to start or expand their business.  U.S. banks were hard hit with the recent mortgage melt down.  Fortunately, Canadian banks and financial institutions were not as heavily exposed.  In fact, our banking system is being closely examined by countries around the world as an exemplary model.  The reality though is financial institutions are more risk adverse than ever.  As I have mentioned previously, a well thought out business plan will be a great asset in convincing lending agencies of your worthiness to receive their funds.  Before you go to a lender for financing, you should give consideration to your personal contributions towards starting your business.  Do you have savings, retirement funds, company buy-out money, or equity in your home that you are willing to risk in your enterprise?  All financial institutions will require some form of investment to offset not only the money you wish to borrow, but also to show you are sharing the risk for the venture you propose.  The more heavily you are invested in your project with your own capital the more a financial institution will be willing to accept the risk.  Family and friends are another source that you should consider.  Just be careful that your financial relationship does not impact negatively on your personal relationship.

Banks are an excellent source of financing.  Banks can provide many different financing options to assist in your business development or expansion.  Again, they will want to review your business plan.  Do you have previous business experience?  What do you know about the business?  Who will manage it day to day or provide the skills to do the work?  The degree to which you can elaborate on your business plan will give the bank some measure of comfort.  Banks typically require more equity to establish a business than some other financial institutions. Banks also do not usually make decisions at the local level, unless the loan values are relatively small.  Don’t wait to the last minute looking for financing, and then be upset when the loan manager can’t meet your timeline.   They also can provide a full range of services to assist in wealth creation.  Keep your loan portfolio manager aware of changes to your business operation.  If you are having cash flow problems, don’t wait until you miss a payment.  A bank will have greater respect for you if you take the time to inform them and develop a manageable solution. 

Credit Unions differ from banks in that they are locally owned by the members.  If you wish to bank at credit union, you will be required to become a shareholder.  The benefit to this system is credit unions may offer reduced loan rates or other incentives provided to their members with the profits generated.  Credit Unions also make decisions at the local level.  For a new business in a small community this may be advantageous.  Many credit unions examine the community development aspect as part of their lending practices.  This means that some consideration may be given to the benefits of your business in the community.  Community development will not be sole factor in whether you receive the loan, but rather a small component in conjunction with your business plan.

Community Futures or CF’s are federally funded organizations that operate at the local level.  In Alberta, we currently have 27 CF’s spread throughout the province-typically in smaller communities.  The mandate for the CF’s is to provide lending assistance to small business.  They can provide loans of up to $150,000.00.  One condition that the Community Futures organizations require is for you to approach a conventional lending institution prior to applying for a loan with a CF.  They are considered a lender of last resort, but they have many different programs available to assist in arranging financing.  CF’s have the ability to take a ‘second position’ for security behind a bank.  This can be very useful when you require loans of a larger amount.  Should your business fail, the bank would receive their portion of funds before the CF.  Community Futures organizations may also consider sweat equity and other forms of equity towards your contribution to the loan.  In Paintearth County we are served by East Parkland Community Futures www.eastparkland.com for our communities west of Fleet, AB.  East of Fleet and into Sask. is Meridian Community Futures www.meridiancfdc.ca.  Each of these organizations provides the same services, just in a different area.

Angel Investors are individuals who are looking for a higher rate of return than other investment tools.  Angel investors may be local people who have pooled funds from the region to assist in the growth of the region, or professionally managed funds specializing in specific industry sectors.  Most will require a portion of your business (become shareholders) as well as a higher rate of interest.  The benefit of borrowing from this lender is they will fund industries where most financial institutions will not.  They require rigorous analysis of your business plan and technology, patents etc.

While this list is not exhaustive in nature, it will provide you with a good understanding of lending practices and services available.  Inventory is a difficult asset to finance.  Many institutions will not consider lending for this as it becomes difficult to track down the item should your business fail.  The value of these assets is also questionable if they have an expiry date like groceries.  One item to note for new business startups, you will likely be required to sign a personal guarantee for your loan regardless of your form of incorporation.  Typically one of the benefits of being a limited company is your personal assets is kept separate from the company (the company becomes an entity unto itself).  However, unless you are a seasoned veteran of business, financial institutions will want to secure their investment in your company by using personal assets.

I hope this brief overview is provides you with some basic knowledge for financing your small business.  Should you wish to discuss your business development plans, Paintearth Economic Partnership will be happy to assist you.
Until next time……
 


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