FINANCING YOUR BUSINESS – Where To Go For What You Need
By Carl Solomon
“Nothing is more important when you’re starting a business than financing. Without adequate seed money from some source, it’s hard to make an impression in the marketplace and brutally difficult to grow or to survive for long enough to start making a profit. Where do you get this money?”
These funds are usually needed to finance accounts receivable, inventory and, generally, day-to-day operations. Operating funds are available from your bank, suppliers and factors.
The cheapest form of operating financing is to pay your bills a little slower than you would normally. Suppliers often provide terms to you when you purchase their goods and services. Taking advantage of these terms and sometimes stretching them provides operating funds at no cost
The amounts that you may borrow from a bank depend on the amount and quality of your current assets. More specifically, lenders will often advance operating financing by margining accounts receivable. This means, for example, if you have $100,000 in accounts receivable and the lender’s margin rate for your business is 75%, he or she will lend you up to $75,000 against these receivables. However, no accounts that have been outstanding for longer than 90 days will be considered as marginable. The amount is intended to fluctuate almost daily with the cash flow in your business. You will be expected to provide regular accounts receivable listings and to keep your borrowing within the margin rate based on your current listing. The rate of interest charged by the bank depends on the security and the credit history of your business and of you.
Factors finance accounts receivable in a different way. This is a way of financing when the bank says, “No.”. Instead of concentrating on your credit, they consider the creditworthiness of your customers in making their lending decisions. Once they are satisfied with this, they will buy invoices from you at a discount. The rate of discount depends on the length of time the amount is outstanding. Customers are told to pay your bill directly to the factoring company at full value. Factors, generally, require that you commit to finance at least a specified minimum dollar value per month through them. They take extensive security from you as a backup in the event that they cannot collect from your customer.
Long-term financing is used to finance long term assets. For example, if you are purchasing equipment, a building or even a vehicle, you should finance the purchase the assets using long-term debt. Many sources such as banks, mortgage companies, finance companies and leasing companies provide long-term financing. All of these contracts require regular payments, usually on a monthly basis, for a specified length of time
In addition to the usual credit checks and other criteria, these lenders take the assets purchased as security for their loan. The assets are in your name. However, the lender registers its security so that you cannot dispose of these assets without fully paying for them. The exception to this occurs when you lease the assets. Until you have paid them off, the assets are in the name of the leasing company.
Contracts from these lenders differ greatly. Pay attention to them so that you don’t get any unpleasant surprises. Interest rates differ from lender to lender.
Equity is needed by businesses in the start-up phase or when they are starting new projects or developing or launching significant new products. It is different than loans since equity investors become part owners of your business and can be either active or passive. How much ownership share they require depends on how much money they are advancing, the worth of the business, your worth to the business and their desired rate of return on their investment. There are a number of equity sources in Canada. They can be you or your friends or relatives. These funds can also come from venture capital companies or syndicates.
Friends and relatives will often invest when the institutions will not. Often, their decision to invest is based on their personal relationship with you. Even when they accept the passive role (“silent partners”), you will be inundated with questions on an ongoing basis. The same personal relationship that they have with you extends into the business. You have to be prepared for this.
Venture capital companies invest in companies with large growth potential. Their criteria are far more stringent than personal investors. They like to say that they are just “visiting”. Generally, they will invest in a business for a time that they predetermine. At the end of that time, they hope that the business has prospered and that their shares are worth much more than they paid for them. They, then, dispose of those shares. Usually, you are expected to be the purchaser.
Syndicates are groups of people who have been organized by someone who is prepared to sell your investment requirement to them and to administer it for them. This method allows you to raise the needed capital from people who are sharing the risk by each investing relatively small amounts.
Expectations of the Lender/Investor
- Your business is profitable.
- Your purchase or project will add value/profit to your business.
- You have adequate security for the loan.
- Your credit history is acceptable.
- You and your company have the expertise to carry out your goal and that you have planned how to do that.
- You and your company have the ability to repay any loans.
Getting financing for new or start-up businesses, as they are often called, is difficult. At that point in a business’s life there is no record of success and lenders or investors are being asked to provide their money on faith. The best recommendations that you can put forth are your own experience in managing the type of business you propose and a reasonable investment by you in the new business. The investment by you is often obtained from family or friends when you need to invest more than you personally have. All the facts should be put together in a well presented business plan.