Question from GrnBayLife: I recently started a service-based business that has essentially no physical assets and no receivables. The business is showing profits, however I need additional funds to advertise in new markets and continue to grow the business. Realistically, what are my chances of securing a loan from a bank to do this? What are other alternatives available, other than friends and family?
Robert Bissett, senior vice-president of GTA commercial banking district at Bank of Montreal: The financing of a new business venture is often challenging. However, financial service providers in Canada have developed a number of innovative solutions to assist small business owners in accessing credit. Companies in the start-up phase generally rely on the financial resources of their owners, family and friends, or early-stage investors (known as “angels”), to finance the establishment of the business. This initial seed and start-up capital is normally supplemented by the Canadian banks and other lenders upon commercialization of the enterprise. Credit facilities for companies at this business stage will normally be supported by the personal guarantee and net worth of the owners.
In some scenarios, additional funding can be raised through mezzanine debt financing and third party equity providers. As the business becomes established and cash flow stabilizes, traditional bank credit facilities come into play in the financing of your company. At BMO Bank of Montreal, we recently reaffirmed our commitment to financing small and medium-sized enterprises with the announcement of an additional $1 billion in capital being made available to fund new business loans across Canada.
Some other alternatives available for financial solutions include institutions, such as the Business Development Bank of Canada, and Economic Development Canada, that partner with Canadian banks to meet the financing needs of small businesses. You will also want to make sure that you are taking advantage of the many cash management (collection/disbursement /information) tools available to ensure that you optimize your cash flow.
Zenon Iwachiw, senior director and regional manager of commercial services at Meridian Credit Union: Traditional low-cost lenders, like credit unions and banks, provide businesses with operating loans secured by current assets (accounts receivable, inventory) or term loans secured by fixed assets (equipment, buildings, etc.). In order to expand a start-up business, which provides service and/or labour, most entrepreneurs need to inject capital, usually from personal resources (personal lines of credit, home equity loans) and/or family and friends.
Venture capital sources and equity funds, typically much higher-cost lenders, would want either a demonstrated track record or evidence of intangible assets (patents, exclusivity of services). Failing all of the above, one should establish a circle of business support, which could include one's lawyer, accountant, personal banker, etc., to help “spread the word.”
The absolute best means of advertising, of course, is word of mouth from satisfied customers.
Mary Gagliardi, vice-president for GTA East at the Business Development Bank of Canada (BDC): Aside from friends and family, there are many sources of financing that include debt financing. These consist of both short- and long-term debt financing, term loans, lines of credit, credit cards, micro credit, supplier credit, commercial mortgages and leases. Entrepreneurs who are in the start-up phase often leverage personal assets to secure financing. They may also use personal credit facilities to fund their business.
Alternatively, entrepreneurs who are in the early growth phase (first 12 months of sales), and who don't have tangible assets can benefit from BDC's experience in helping innovative start-ups. Such entrepreneurs stand greater chances of accessing financing if they meet the following criteria:
• Can demonstrate realistic market and sales potential.
• Possess experience or expertise in their chosen field.
• Demonstrate key personal characteristics of a successful entrepreneur.
• Have assembled a competent management team.
• Have invested reasonable financial resources in the enterprise.
• Can provide personal and credit references.