Small Business - A Special Advertising Supplement sponsored by Scotiabank - Monday, October 22, 2001
Where to go when you need money
Monday, October 22, 2001
There are many more options for small businesses to obtain financing than a decade ago. So says Michael Slan, a lawyer and partner at the Toronto law firm of Fogler Rubinoff (http://www.foglerubinoff.com). In fact, says Slan, who specializes in corporate finance and advises both lenders and entrepreneurs, "it pays to shop around when looking for financing."
It's also important to fully discuss the impact of interest rates, as well as the length of the loan, on your individual situation. Slan points out, for example, that a longer term for a capital loan could be quite beneficial for an independent business that requires a lot of cash flow for growth. He advises that entrepreneurs research, discuss and evaluate different options that may be offered.
Some options for small business in Canada include:
Banks: Inquire about the Small Business Loan program available to companies -- in most sectors -- with annual gross revenue of less than $5-million. This government-guaranteed loan offers a maximum amount of $250,000. Under the program, authorized lenders can finance up to 90 per cent of the purchase or improvement of fixed assets that fall into a number of categories. However, personal guarantees are limited with this program. Check with your bank for details. In addition, the banks traditionally provide operating lines of credit to finance accounts receivables and inventory.
Business Development Bank of Canada: The BDC offers a wide variety of specialized and flexible financial aid (from loans to venture capital) for commercially viable businesses. Although the bank (http://www.bdc.ca) supports all industry sectors, it does place emphasis on knowledge-based and export-based companies. As well, it focuses on the overall strength of the firm -- financial structure, management team and ability to repay. The bank also offers consulting services that can go hand in hand with financing.
Asset-based lenders: Originally a U.S. concept, "asset-based lending" has become a financing option for Canadian entrepreneurs that has grown in popularity during the past decade. Money is lent against a company's current assets, much as a bank lends. However -- and this is what makes it attractive to some entrepreneurs -- the lender allows for much higher leverage than a traditional bank. Still, there is a quid pro quo to this type of lending that should be considered, Slan notes. This type of lender often will manage your cash flow, he says, even to the point of a "lock-box" situation in which your receivables are paid into a bank account over which the lender maintains control.
Mezzanine financing: This isa hybrid type of financing that advances money through term loans. These funds are generally based on cash flow, as opposed to assets. In addition, in many cases, the lender receives an "equity kicker," Slan explains. "These lenders are looking for a total return in the 20-to-30-per-cent range, and they can't get that through interest alone. So they take an equity position to boost their return."
When you are looking for financing, contact your lawyer, accountant or your local Chamber of Commerce or Board of Trade to help direct you to private companies such as asset-based or mezzanine-lending firms.
Venture capital: At one time, this was an option only for companies that required multimillion-dollar financing. Today, many venture-capital firms aim specific programs at small and emerging companies, particularly in the seed-money stage. Understand, however, that you will have to give up some equity to the venture-capital firm and have at least one representative from the firm on your board of directors. (This can be very helpful for the expertise the person brings to the table.) For information on venture-capital firms in Canada, check with your bank -- many offer specialized venture-capital programs through affiliate companies -- or contact the Canadian Venture Capital Association (http://www.cvca.ca).
Community/regional funds/development corporations: This type of lending was launched with the support of governments and business leaders. Although its terms and conditions vary widely from community to community, this financing can encompass loans, loan guarantees or equity investments. However, remember that the goal of this financing is generally to create or maintain long-term employment in a community.
There are also a number of government/banking programs that target specific geographic regions of Canada. Their criteria vary, but each program is aimed at building employment in a particular area or region. For more information, contact your local economic-development or trade office or banking institution.
With the wide array of financing options today, entrepreneurs can take advantage of many opportunities, Slan says.
"So, whether you are looking for startup or expansion funds, take the time to really inquire -- and then evaluate what is best for your company, for both its short- and long-term growth."