Author Archive

Start Up Money Tricks #3: Debt First

March 27, 2008

You can build wealth faster and feel more in control of your business if you don’t give away equity too soon. Too many entrepreneurs fail to use up all their non-equity sources of financing. They move to equity financing too quickly. This inevitably leads to dilution fever [!] with all its side effects (momentum hiccups, eye off the ball blindness, and I’m not in charge anymore headaches).

 

Todays topic is about conventional debt like bank debt, private borrowing, and other loans.

 

Here goes. BEFORE you go for conventional debt you should make sure that you have used up all your non-equity sources of capital first. Any lender will want to know that you have enough skin in the game before they will even consider lending you money.

 

To look good to a lender you must already have:

 

  1. Cashed in some RSPs for equity injections.
  2. Taken out home equity by way of mortgage for equity injections.
  3. Taken money out of savings for equity injections.
  4. Use the proceeds from a trimmed lifestyle (e.g. downsizing fancy vehicles, recreation property, expensive vacations, your salary, etc.) for equity injections.
  5. Completed all the possible grant applications that you can find. Search carefully. There are many good programs out there such as those that sponsor entrepreneurial women, just to cite one example.
  6. Placed all your previous lottery winnings into the company [!].

 

Once you have done the aforementioned penance, you can confidently move to the next step using up non-equity room for business financing:

 

1. Personal Lines of Credit. Most entrepreneurs and their business partners/spouses/close relatives/supporters/supportive friends with average Alberta incomes can obtain a personal bank line of credit in the $10,000 to $25,000 range. Be sure you have the capacity to pay the monthly charge. You can see how readily one can collect $100,000 or even double that.

2. Personal Loans. Friends and family will often lend money to their favorite entrepreneur [!]. Though I must give you the usual warnings about getting too involved with families and loans (it can often be a disaster), if you get a bit creative you can make it work. For example, why not make the loans convertible to equity upon some future event, or why not make the loan convertible to product or services (if the product or service is something tangible and valuable to the lender)?

3. Forgiveable Loans. There are numerous programs out there such as the well know community futures programs that may possibly provide loans/grants to specific kinds of businesses (check carefully — there is some flexibility out there).

4. Bank Loans. Banks will be quite rigorous and formulaic with you. They will want to see evidence of sales growth and they will carefull analyze all the conventional bank financial ratios (see your Accounting 101 text book for the basics) and your repayment ability. But shop carefully. Character and personal integrity can still tip you over the line and into the much desired YES message. Go to the smaller banks first. Go to credit unions. Go to insurance company/mortgage banks. Save the big banks for your last round of bank loans. They will be very tough on you and you don’t want to have shopped them first as word sort of gets around (confidentiality rules notwithstanding) that you are out shopping for a loan. Capital loans are often accompied by business lines of credit too, in some combination.

5. Equipment Leases. There are good lenders out there including leasing companies and banks who will be interested in signing a lease with you. This is much easier on cash flow than buying capital equipment outright. Most leasing companies will also lease back equipment you are building or fabricating, provided they area convinced you know what you are doing.

6. Private Lenders. There are numerous companies that will provide loans and convertible debt. Though their conditions and due diligence may seem onerous, it is still possible to find good lenders who will provide you with some kind of a loan or business line of credit. These are usually sourced from your networking skills.

7. Factoring Receivables. There are conventional sources of factoring or receivables loans such as the major banks. But there are also many U.S. base large banks and financial institutions that will factor Canadian receivables using quite modest criteria. Shop carefully and perhaps be pleasantly surprised.

 

In my opinion you CAN find many good options for financing your business BEFORE you start giving away equity. Personally, I love the idea of staying in control and using carefully structured, responsibly planned, DEBT!

 

Henry Kutarna

Alberta Deal Generator