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The Globe and Mail

Small businesses battle 'risk' tag on loans

February 4, 2010. Matt Rendall, CEO of Clearpath Robotics a new company in Waterloo that creates robots for mechatronic university classes, displays one such model in their Waterloo offices, February 4, 2010. (J.P. Moczulski/The Globe and Mail)


Matt Rendall is a lot like other entrepreneurs. He works 70 to 80 hours a week. He sleeps at his desk. And, when it came time to look for funding this past year, he did a beeline past his bank's door.

The CEO of Waterloo, Ont.-based ClearPath Robotics assumed it would be locked anyway.

"To be honest, I never even thought about getting money from the bank right off the bat. At the moment we're in a risk bracket that is too high," says Mr. Rendall, whose 10-employee company creates "really cool robots for scientific, industrial and government research applications."

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Instead of going the traditional route to secure funding by hitting up family, angel investors, venture capital firms or the bank, he decided to focus on a novel idea: get more customers who would pay his bills.

But there was one little issue. Not only was he launching his business in the middle of a recession, the type of customer the company targeted – government with lengthy sales cycles – was truncating cash flow. So Clearpath changed its actual product, robotic land mine detection units, to become teaching robots for university classes instead.

"I realized that we would probably run ourselves into the ground trying to sell our old land-mine technology at this stage in the game," Mr. Rendall says.

Not as bad up here

Finding creative ways to stay afloat on the heels of a financial downturn is never easy for a business of any size, but small businesses often have a more onerous time when the going gets tough if credit streams dry up. The Canadian situation, however, is not quite as dire as the one in the United States, says Ted Mallett, chief economist for the Canadian Federation of Independent Business.

"Things are fairly stable right now, but it's still well below what we think of in terms of scenarios back at the top of the business cycle," he says.

One way to determine the health of the small business economy is to look at how many companies are unable to pay their bills. In comparison to U.S. loan delinquency numbers, Canadian small business rates are much lower than those of their American counterparts, according to data supplied by PayNet Inc., a U.S. firm with a Canadian arm in Toronto.

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"The Canadian small business market is clearly not as financially stressed as the U.S. small business economy is," says William Phelan, president and co-founder, who points out that the lending risk level here is about 65-per-cent lower than the United States.

Knowing exactly where the economy stands, and how much risk you actually pose to a traditional lender, can give a boost to those looking for money.

"As a business borrower, if you know these numbers, you're more likely to demand and get more favourable terms on your loans," Mr. Phelan says.

Meanwhile, south of the border, President Barack Obama stepped up to the plate, and the microphone, on Jan. 29 to announce a proposed $33 billion tax credit that would encourage small businesses to increase wages and hire more employees.

He followed that announcement by asking the U.S. Congress to temporarily expand two lending programs for the owners of small businesses. In the past there had been talk of banks not doing their part to ease the burden on struggling smaller enterprises.

Never easy

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Convincing banks to pony up funds for new or growing companies has never been easy. Most small businesses are simply considered too risky.

Toronto small business superstar I Love Rewards, which raised $9-million in May, 2009 and had American VC firms courting it, tends to access other funding streams, from angel investors to venture capital, even friends and family. It has to. Most of its collateral is of a more cerebral quality – intellectual property.

"There is no calculator for risk managers at banks to assess how much money they could lend against that," says Razor Suleman, the company's founder and CEO.

But according to Mr. Mallett, finding financing is not as important to many small businesses anyway, particularly after the previous two recessions decimated many companies that got into debt that was too deep. Now, after crunching numbers and finding a drop in those willing to take on formal funding, at 60 to 65 per cent, down from about 75 per cent back in the 1980s, he says businesses are more interested in reducing exposure.

PayNet's Mr. Phelan is even more convinced that shrinking demand accounts for the lower number of deals.

"As demand for products just fell off the table for small businesses, they stopped borrowing money. You can't lend money to someone who doesn't want to borrow it. You can't force them to take the money," he says.

Those criticizing the U.S. tax credit say that if companies are still not selling goods and services, a $5,000 tax break for hiring each new employee would be moot. There is no use looking at job applicants if your current employees are standing around waiting for orders to come in.

Speaking of government

Although there have been no similar sweeping statements of small business funding change in Canada, new programs have been launched over the past year and there are still older ones to tap into.

Mr. Suleman says his company hired accounting firm Deloitte to slash through red tape and track down federal and provincial funding. So far it has come up with "hundreds of thousands of dollars" from federal tax-credit programs, Scientific Research and Experimental Development (SR&ED) and the Industrial Research Assistance Program, or IRAP (and no, I Love Rewards is not a science or technology company).

"I don't think enough small businesses realize that that money is available and that they should apply for it," he says.

On a provincial level, Ontario just released two new venture capital funds within the past year. The Ontario Venture Capital Fund made an investment in Mr. Suleman's company, making it the first investee in the province. There is also the Ontario Emerging Technologies Fund, a quarter-billion-dollar fund that matches capital from a qualified financial investor.

Another reason to go after government funds? It can open the way to capital from the banks down the road, says Iain Klugman, CEO for Communitech in Waterloo, Ont., a not-for-profit organization that works with technology companies in the area.

"Banks are always happy to loan against cheques you're going to get from the government," he says.

Regardless of how companies in start-up or growth mode come into their cash, whether through banks, a re-mortgaged home or government grants, it's important to spend it wisely or save it for an even rainier day.

"Capital is scarce so hold onto it. You never know when you're going to get the next round of financing," Mr. Suleman says.

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