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  • Eric Watchorn

Corporate Considerations

Ways to fund a business with the least amount if pain:


How often does a plumber-turned-entrepreneur, or an employee-turned-operator start their own exciting venture with limited funds, say $10,000, but soon encounter cash flow problems?


The first client check might not arrive for 30 to 60 days. But payments for labor and materials and everything else are due NOW.



Undercapitalization, or “not enough money,” is one of the top reasons businesses fail.


Yet in efforts to acquire the capital they need, sometimes the medicine can be worse than the disease. Where can business owners turn for financing where they won’t be bled dry?


Some options may include Merchant Cash Advances (MCA’s) funded mostly by private lenders. This avenue is risk compensated, yet they often come with ugly fees and high costs that can trap business owners in cycles of debt.


What may be some better options? This list is likely not 100% exhaustive, yet it can be a great starting point. In the world of lending things can change overnight. Look at it as a journey.


1. Banks and Credit Unions

Major banks offer affordable financing with single-digit interest rates. Options include term loans, lines of credit (secured and unsecured) and equipment loans.

Unfortunately, major banks only approve 25% of loan applications, according to Forbes.com.

You’re twice as likely to be approved by a community bank or credit union, though you’ll still need a strong application. You’ve probably heard the saying, “banks only lend money to people who don’t need it.” That’s also true with businesses.

Don’t have excellent credit, cash flow and assets? Just starting a business? Be prepared to look elsewhere.


2. Canadian Small Business Loans

Small loans or Lines of Credit are Out of the box private solutions that exist with companies such as:

They serve industries such as Grocery Stores, Home Businesses, Contractors, Auto Shops, Health Services, Beauty Salons, Pet Stores and eCommerce Businesses. Some Covid-19 reservations exist at this time.


There are others, but these show the most resilience during these interesting times.

3. BDC Small Business Loans

Many have found success in recent months with the BDC. Applications are done online and $100,000 is available at excellent rates if the need & ability to repay can be substantiated. (www.bdc.ca)


4. Federal Canadian option for financing

– Canada Small Business Financing Program

Further Federal help directed towards the needs of the pandemic include the Canada Emergency Business Account (CEBA), the Regional Relief and Recovery Fund (RRRF), as well as several other important potential sources worth mentioning such as the Business Credit availability Program (BCAP) and the Highly Affected Sectors Credit Availability Program (HASCAP)


This list is incomplete as the Canadian Government seems committed to address these issues. Mindful searching should lead to possibilities.


5. Provincial options for financing

Naturally the Canadian Provinces have joined in the cause to assist business owners. Whilst the labelling of these programs differ slightly, the purpose is in general the same with similar requirements and offerings.


The Small and Medium Sized Business Recovery Grant (updated December 18th, 2020 criteria) offers Grants between $10,000 and $30,000 to support BC businesses that employ between two and 149 BC residents.


6. Peer to Peer Lending

Peer lending platforms are a cakewalk compared to banks. You can obtain up to $25,000 in a week or so from an online peer lending platform such as www.gopeer.ca


7. Crowdfunding

With crowdfunding platforms such as Kickstarter and Indygogo, the goal is to obtain a small amount of money from a large amount of people. Musicians use crowdfunding to raise money to record and manufacture CDs. Tech gadgets and apparel businesses are also common participants.


8. Angel investors and Venture Capitalists

Angel Investors are wealthy individuals and venture capitalists are typically companies or firms. They both have cash and are looking for opportunities for exceptional returns and ownership interest in a fast-growing business. They also bring with them invaluable knowledge and experience. However, be cautious, as they may want more control than you would like to give them.


9. Friends and Family

This is an area where you must proceed very cautiously! The positive side is that you may have friends and family who believe in you and are willing to help. On the negative side, friendship and kinship don’t always mix well with money. You should definitely have a business plan and write out a promissory note so that both parties understand the expectation and obligation.


10. Credit Cards

As you can imagine, this is not the best or cheapest source of business financing! We wouldn’t suggest that it be a major source of business financing, however, it can work well to use credit cards that you pay off monthly for convenience and for added perks such as travel benefits.


According to statistics, 37% of business owners use credit cards (personal or business credit cards) to cover costs in their businesses. As with a line of credit, you’ll want to line up the credit before you need it.



Your Own Savings or Investments

11. Home Equity Line of Credit

If you have a home with equity, a HELOC can be an excellent funding source, as it is secured against your home and therefore the interest rate is low. According to statistics, HELOCs are used by 25% of business owners.


There are catches, though. You will typically need more than 20% equity in your home to benefit from a HELOC, and a minimum credit score of 620. And you will definitely want to set up the line of credit while you have a reliable and verifiable income source.

And keep in mind, if the housing market declines or you make payments late, the bank can lower or freeze your credit line.



12. Liquid Investments

You may have savings accounts or brokerage accounts (outside of retirement accounts) that can be used. These are good sources to tap when you need to put some of your own skin in the game, which more traditional lenders often require.


13. Whole Life Insurance Cash Value

Whole life cash value is the savings portion of a whole life policy. We like high cash value whole life as a funding source for several reasons.

· You can borrow or withdraw for any reason. There’s no credit check or confirmation of income. We recommend borrowing so that you continue to build your asset and replenish your funding source.

· You can borrow against an asset that continues to grow—even while being used as collateral.

· Low interest. You can probably borrow against your policy for 5-6%, depending on how your policy was set up and whether it’s fixed or variable. But another great option is using your policy as collateral to borrow from a bank, often at prime lending rates.

Can you see the potential of borrowing at a cost of 3.75—7% against an asset earning perhaps 6%? While it shouldn’t be seen as “free money,” the growth of the collateral offsets the cost of your business funding when you use whole life insurance. It pays to “be your own bank!” Don’t be off-set by the higher policy loan interest, since the dividend structure of 6.25% plus on the entire cash value ledger is greater than the cost of the smaller loan balance.



Four Rules of Thumb of Business Financing


As we compiled the resources above, we couldn’t help but notice, there seem to be some common themes or “rules of thumb.”


Rule #1: Your credit matters. Whether you’re applying for a loan, a line of credit, or peer lending, good credit makes funding a business cheaper and easier. It’s a good idea to bolster your credit before starting a business, and try to keep your score high.


(There are exceptions. No one asks crowd funders what their credit score is—that’s all about persuasion and networking. And your score does not matter is when borrowing against your life insurance policy. Your policy determines the rate.)


Rule #2: It pays to plan ahead. More affordable business financing options typically have longer time frames. The faster you need the cash, the more expensive it will be.

The best option is to line up money before it’s needed. Shark Tank’s Barbara Corcoran advised an entrepreneur that it is better to use a credit line then giveaway equity in your business. However, to do this, you must establish the credit line while you still have plenty of cash. “They’re not your friends – the banks, and they won’t be there when you need them if you don’t move early.”


Rule #3: Savings saves businesses! Those who save or build equity first have more options later. There is not only an advantage to having money, but entrepreneurs who have skin in the game tend to be more successful in business.


Notice that savings are not the same as investments. You may have noticed, there’s a catch to some of “your” assets. Even if you have money or equity in a retirement plan or home-equity, you will still have to either qualify to get it or jump through some expensive and complicated hoops to get it.

The least restrictive sources of funding will be highly liquid, such as savings accounts, brokerage accounts outside of retirement plans, or whole life cash value.


More and more earnings in the future will rely oneself-employment. Why not start your children out on a positive strong and financially savvy footing? Whole Life policies, as per above, are great value, and for the most part, simple to set up for the majority of children. Payments can be limited to 8, 10, 15 or 20 years with cash values accruing fast and insurability locked in for life.


Rule #4: THINK from a prosperous mindset. If you lack savings, assets, or good credit, don’t despair. Your mindset matters, and if you think you can fund your business, you will find a way. Ultimately, there’s no lack of money in the world, only a lack of ideas.


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