Finance Alternatives 09Jun01

SPECIAL REPORT

BRING YOUR OWN UMBRELLA: ALTERNATIVE FINANCING SOURCES FOR SMALL TO MEDIUM SIZED COMPANIES.

An adage that is well known to small to medium sized enterprises (SME’s), is that banks give you an umbrella when the sun is shining and they take it away when the rain starts. This may be an unfair statement to banks because of the important role that banks play in your company. A strong relationship with your banker will be critical to your long-term success. The reality of the adage depends on your perspective and experience. The fact is, SME’s have difficulty obtaining financing from traditional lending sources, in spite of Stats Canada report that SME’s represent over $50 billion of Canadian banking business annually.

Raising money is an art form and an experience that every business owner will go through. Fortunately, for everyone that has a dream, the desire, and discipline, it is an art that can be learned. Talk with other business owners and study how they obtained financing and apply some of the success stories to your company.

According to Thompson Lightstone & Company, only 50% of SME’s in Canada rely on traditional banking credit to fund start-ups, growth, or other capital needs. The balance of SME’s rely on alternative sources of capital for their business needs. The following will report on some alternative financing sources that are available and widely used by SME’s today.

There are a number of alternative sources but we are going to focus on eight of the more significant options available to you as the owner of an SME.

1.      Personal Assets;
2.      Love Money;
3.      Angel Investors;
4.      Suppliers;
5.      Customers;
6.      Leasing;
7.      Factoring; and
8.      Canadian Federal Government Programs.

1. Personal Assets. This is perhaps the most obvious source of money, particularly if your company is at the early start up stage. Being able to lever equity in your home, RRSP's, investments etc., will be the quickest way to raise money. Raising debt or equity from outside sources takes planning, time, and patience. You may not have the desire or the luxury of waiting for the months required to find outside investment. Investing your own money can save you time and energy. You also show your personal commitment to your company when you do attempt to raise money from outside sources. Structured properly, you may be able to secure lines of credit and credit cards specifically for your company and have the corporation pay the related interest without cashing in your personal investments.

2. “Love” Money. Another obvious place to look for money is your family and close friends. Your situation may make this a good source for you to look but beware of the pitfalls and problems when borrowing from this group. When it comes to money, families can be tougher that outside creditors. If your company does not succeed, you risk losing more than money. You may loose relationships and respect. The second family and friends come into your company, you will be asked about expense accounts, salaries, and when the money will be paid back. Siblings will want to know how you are spending their inheritance. Ask yourself if you are comfortable in answering these questions.

3. Angel Investors. Although they may seem like a new phenomena, angel investors have existed since commerce began. The profile and awareness of angel investors increased with the technology frenzy of the 1990’s. Angels are typically experienced professionals who are willing to invest personal money into promising businesses. They look to these investments to provide a larger ROI than they receive in other investments held in their portfolios. Usually, angels will take an active management role in the day-to-day management and /or strategic planning of their investments. This can be very useful to you because you are able to draw on their experience and contacts to help your company grow. Angel investors, like the spiritual variety, rarely advertise their presence and are often difficult to find. Chances are that your lawyers, accountants, and bankers can make an introduction to such investors.

4. Suppliers. Unless your company pays cash for everything, you already are using your suppliers as an alternative financing source. Most suppliers require 30-day payment terms and may in-fact offer a discount for quicker payments. Most suppliers will be willing to extend credit periods, especially during tough times, within reasonable limits and with the understanding that they will keep your business in the long run. We have seen examples where suppliers have even made loans or investments into companies that were trusted and important enough to help out in difficult times. At all times, communicate with your suppliers if you need extraordinary terms. If you ignore or take advantage of your suppliers, you could end up without critical supplies for your company.

5. Customers. Any time that you can get your customers to pay for goods or services in advance, in full or part, you are increasing your cash flow for that week. A discount offered for early or expedited payments will be less expensive than your credit line interest.

6. Leasing. Leasing has become an increasingly competitive business, particularly for equipment related purchases, from the most simple office equipment, to sophisticated and expensive pieces of machinery. Leasing allows you to spread out the payments, typically over 24 to 48 months and allows you to expense the monthly payments. At the end of the lease, you don’t automatically own the asset – you have the option to buy it at its residual value.

7. Factoring. For many years factoring was viewed in negative terms by Canadian businesses. In the United States, factoring has long been considered a viable financing alternative for SME’s. Factoring allows you to receive immediate cash by effectively selling your trade accounts receivables for the invoice amount, less a discount paid to the factoring company. Not all receivables need to be sold, but factoring companies prefer to fund receivables that are less that 60 days outstanding totaling at least $25,000. Upper limits may exceed $1 million.

The process is usually very simple. You will likely receive funds within a week of starting the relationship. From that point forward, payments are usually made within 24 hours from when you submit an original invoice and provide proof of shipment. The factor will advance up to 90% of all approved invoices (including those to U.S. purchasers). The balance of your invoice will be held back to mitigate any disputes or other problems, but you eventually receive the hold back, less the factor's fee, once the factor has received payment of the receivable.

Factoring is not cheap financing, but it can give you time to establish your business for more conventional rounds of financing. Cash flow is king, especially in the early days of your business. Factoring fees are negotiable, but a discount rate of three per cent a month is common, with additional fees added should the account not be paid within the stated payment terms. An important point for you to consider is whether advances are with or without recourse. If recourse exists, you will be held responsible for any bad debts.

8. Canadian Federal Government Sources. There are many Federal programs that have an emphasis on SME’s. We have listed a few of the more significant programs available to various sectors along with their web sites for your convenience.

Aboriginal Business Canada (613) 954-4064
Provides services and support to Aboriginal entrepreneurs, youth and organizations to promote the success of their businesses in Canada and the world.

Atlantic Canada Opportunities Agency 1-800-561-7862, (506) 851-2271
By helping people to set up new businesses or expand existing ones, ACOA’s goal is to improve the Atlantic Canada’s economy.

Business Development Bank of Canada 1-888-INFO BDC
Offers a complete range of services, particularly financial, management training and specialized consultation services, to assist small and medium-sized businesses.

Canada Economic Development for Quebec Regions (Quebec) 1-800-322-4636 Through offices in regions around the province, CED provides a range of services for Quebec SMEs.

Canadian Commercial Corporation 1-800-748-8191, (613) 996-0034
As an export facilitator, the CCC provides Canadian companies with access to market opportunities and a wide range of export contracting services.

Export Development Corporation 1-800-850-9629
Provides a full range of trade finance services that help exporters and investors do business in up to 200 countries, including higher-risk and emerging markets.

Federal Economic Development Initiative for Northern Ontario (FedNor)
1800-461-6021 Helps Northern Ontario businesses and economic development organizations access capital, information and markets.

Human Resources Development Canada (HRDC)
Operates Human Resource Centres across Canada which offer information on a variety of programs and services for small business as well as counseling, training and assistance with hiring new employees. Initiatives are also available to help the unemployed wanting to start a business.

Western Economic Diversification Canada 1-888-338-9378
With a delivery network of some 90 points of service across Western Canada, SME’s in most rural and urban centres can access a range of business services. This Western Canada business service network includes Community Futures Development Corporations, Women’s Enterprise Initiative offices and regional offices. Check out the web site for information and links to these services.

There are a number of alternatives that you can explore to finance your business. An understanding of what you want and need to accomplish with the financing should be the consideration for you to make when choosing between these and other types of financing. Bring our own umbrella by developing relationships with each type of lender before you need the money. Having strong ties with a number of different financing sources will also increase your chances of success in the art of raising money.