Financing is at the top of the list for most business owners. To get the dollars you need, it is important to ensure that you can sell your business – and, more importantly, yourself!
I’ll walk you through some options for financing, as well as ways to prepare you for the tough questions.
Before you ask for money, have your business house in order. Start by putting a business plan in place. Having a plan means that you have thought everything through, and have identified where you want your business to be.
Along with the plan, develop a simple but captivating mission statement that allows others to see the passion and direction in your strategy. For example, this is Apple’s: “To produce high-quality, low cost, easy to use products that incorporate high technology for the individual. We are proving that high technology does not have to be intimidating for non-computer experts.”
Business plans are a stepping stone to financing because they force you to view your business objectively.
A client who owns a personal health company came to us for a business plan. We created one by answering tough questions on where they saw their business going.
Initially the business plan was created to achieve financing for franchising. However, after really looking at their business, they decided that was not the direction they wanted. Instead, they used the plan to get financing, and expanded their existing business internally.
Next, your projections: financiers want the numbers. Investing in your business needs to make dollars and sense. You should have at least the next 12 months in projections. It would also be good to make a three- and five-year plan of where the business will be with the financing.
It’s critical to show financial statements, as they indicate performance and allow users to analyze the numbers. For example, the debt-to-equity ratio indicates the company’s ability to pay its debt. The earnings ratio shows how much income remains before depreciation and tax.
Lastly, like all sales, confidence is key. Confidence will be inevitable with a business plan and projections, because you have already done all the heavy lifting.
Sources of financing
I like to start at home and keep it in the family. Yes, it’s hard to ask for money. But your biggest fans and support will be close to home.
Most family financing comes with more relaxed terms of repayment and interest. However, even with a family loan, an agreement should be drawn up that includes terms of repayment. The pitfall of a family loan is that there may be miscommunication on expectations or understanding. Having an agreement in place can avoid that.
If family and friends’ loans are not an option, consider financing from a financial institution. Most of you have a business account, and as a result, you have been building a relationship with the institution that you have been banking with.
Bank financing comes with strict rules and regulations and terms of repayments. In addition, there is more financial disclosure that they will need on an annual basis. It’s important to factor this into the costs.
Alternatively, you can search around and see what other options are out there. Be cautious to not search too much, though. Sometimes, when a credit report on a business is pulled too many times, it negatively affects your rating. You have the appearance of financially struggling.
With the right contacts, a great business plan and superb sales presentation, you potentially can find private financing. But be aware that private financing comes with a higher interest rate and more terms.
Another alternative is private investment: an investor will bring cash to the table in exchange for shares in the company. Although you will get the financing you need, it will be at the cost of giving up part of the company that you have worked so hard to build.
The preceding is for information purposes only. Prior to making decisions, contact your accountant for advice.
Simeen Gaidhar-Bhanji, CA, owns Simeen Bhanji Chartered Accountants, which offers a variety of services to corporations and individuals, ranging from tax planning and consulting, compilation, reviews and audits of financial statements, corporate and personal tax returns, HST services, and consulting for internal control, financing and tax.