Alternative Financing Options for Small Businesses

FINANCING
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ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

Content
Content ........................................................................................................................ 1 Purpose........................................................................................................................ 1 Introduction .................................................................................................................. 2 1. Personal Financing .................................................................................................... 2 2. Family and Friends..................................................................................................... 2 3. Unsecured Personal/Business Lines of Credit .............................................................. 2 4. Credit Cards .............................................................................................................. 2 5. Crowd Funding Sites and Peer-to-Peer Lending ........................................................... 3 6. Factoring .................................................................................................................. 3 7. Leasing as a Financial Tool ......................................................................................... 4 8. Other financing options .............................................................................................. 4 8.1. Business Development Canada (BDC) ........................................................................................... 4 8.2. Agriculture Financial Services Corporation (AFSC) ....................................................................... 4 8.3. Canadian Youth Business Foundation (CYBF) ............................................................................... 5 8.4. Alberta Women Entrepreneurs (AWE) ............................................................................................ 5 8.5. Community Futures Loans for Rural Alberta Entrepreneurs (CF) ................................................. 6 8.6. Alberta Entrepreneurs with Disabilities Program ............................................................................ 6 8.7. Canada Small Business Financing Program (CSBFP) .................................................................. 6 9. Grants, Subsidies and Rebate Programs ...................................................................... 7 10. Contests and Awards ............................................................................................... 7 11. Angel Investors ........................................................................................................ 8 12. Venture Capitalists ................................................................................................... 8 13. Issuing shares ......................................................................................................... 8 14. Life Insurance Loan .................................................................................................. 9 14.1. Whole Life Insurance Policy ........................................................................................................... 9 14.2. Universal Life Insurance Policy ...................................................................................................... 9 15. Home equity Loan .................................................................................................... 9
ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

Purpose
Financing is often one of the most challenging and frequent concerns faced by entrepreneurs and small business owners. Whether you are thinking about starting a business or expanding your existing operations, money will be a key requirement to help you achieve your goals. When most people think of financing, traditional lending sources such as banks are usually what comes to mind. Financial institutions are definitely a viable option for many business owners, but in some circumstances, conventional lending may not be possible. Getting a loan from the bank requires many factors including a good credit rating, collateral, a personal guarantee, and a comprehensive business plan. New businesses without a sales history and those operating in higher risk areas will especially be more challenged to access a loan through a traditional lending system. Alternative options to raise capital and expand operations do exist. This guide will explore what you can do in case your business doesnt qualify for a traditional business loan from a bank or financial institution.

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

Introduction
The following alternative financing options are meant to give you some ideas as to the non-traditional and creative ways that you can finance or bootstrap your business.

1. Personal Financing
Financing your business with personal savings will strengthen your ownership in the business and give you more incentive to make your business work. As well, it will provide you with the freedom and flexibility to operate your business as you choose too, and makes your business more appealing to potential investors. Consider the following ways you can raise capital to start a business: Use your personal savings Increase your income For instance you can get a part-time job, ask for more hours at work or ask for a raise, or rent out a room in your house Sell non-essential personal assets Think high value assets such as your second vehicle, property, recreation equipment, furniture and artwork/collectibles Cut expenses or save money Budget accordingly and reduce expenses/debt by sacrificing premium products for budget products or lessen the frequency of luxury or incidental purchases. Daily changes can make a big difference in the long run. You can also ask for lower interest rates with your credit cards.

2. Family and Friends

Family and friends can be a credible option to consider when looking for business funding. This type of funding offers some advantages such as the absence of impact on your credit history, service fees, and no interest or very low interest rates. However, this funding option can be a potential source of conflict within relationships.

3. Unsecured Personal/Business Lines of Credit

An unsecured line of credit allows business owners to access cash whenever its needed. It will help you to resolve (short) cash flow challenges, business expansion or other business expenditures. The interest rate and repayment terms on lines of credit are generally negotiable. Good relationships with your bank and having a good credit history will play an important role in the negotiation of favorable interest rates and repayment terms.

4. Credit Cards
Credit cards can help your business financially in two ways: by providing access to cash when needed; and in building credit history. Credit card providers also offer loyalty programs that can benefit your business such reward programs, 0% or low introductory interest rates, balance transfer options, travel rewards, among many others. Use credit cards with caution as they can have very high interest rates and using them for longer-term funding can cost you significant money in the end.
ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

5. Crowd Funding Sites and Peer-to-Peer Lending

Crowd funding or Peer-to-Peer lending (also known as crowd sourcing or crowd financing) is an online platform that helps borrowers to access loans via small amounts donated by a large number of people (individual investors). The great thing about crowd funding is that anyone may be a potential lender. Some of the factors that make a crowd funding campaign successful: Attractive and engaging story: tell your story in a manner that capture the potential individual lenders attention, show them your passion, and convince them to take part in your venture. Use videos, images, and photos to attract potential lenders attention. Network: Crowdfunding is built around relationships and therefore online campaigns can play a significant role in getting the word out. Recognition for lenders: in return for their involvement in your venture, individual investors expect some recognition such as being given the opportunity to participate in the design of a product/service or to be the first ones to gain access to the product/service before the general public. Plan time every day to connect with potential lenders by answering their questions. Remember to thank those who donate! Some of the most popular websites specializing in matching borrowers with lenders online include www.kickstarter.com, www.indiegogo.com, and www.rockethub.com Be aware that you will potentially be sharing your business idea with a very large audience.

6. Factoring
Factoring is an option which applies mostly to established businesses that already have a sales history. It refers to the selling of accounts receivables to lenders (also known as factors) who purchase outstanding invoices as collateral for funding. Borrowers have two options: To sell the outstanding invoices to lenders (factors) against a short-term loan at a rate normally ranging from 65% and 85% of the invoice amount. With this option, the borrowers are still responsible for receivable collection. To sell the outstanding invoices to lenders (factors) against a short term loan generally ranging between 70% and 90% of the invoice total value. In this option, the lenders (factors) are responsible for debts collection.

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

7. Leasing as a Financial Tool

Leasing equipment or property rather than purchasing can be a cheaper option for many business owners. Leasing is attractive because it involves a much lower initial investment. Factors that influence lease rates include the leasees credit rating and the value and life-span of the asset. It is advised to compare the offerings of different companies rates, conditions, and type of assets before entering into a lease agreement.

8. Other financing options

8.1. Business Development Canada (BDC)
Business Development Bank of Canada is a federal crown corporation that provides financing, venture capital, and consulting services to businesses of all industries with a focus on small and medium sized businesses. BDC provides financing to businesses operating in Canada or in international markets. BDC offers financing for: Commercial real estate Equipment line to purchase new or used equipment Buy an existing business Information communications technology (ICT) Working capital Start-up financing Business succession Domestic or foreign Market expansion Projects without tangible assets, and Aboriginal banking

For more information on Business Development Bank of Canada and their financial services, visit www.bdc.ca

8.2. Agriculture Financial Services Corporation (AFSC)

AFSC is a provincial crown corporation providing small business loans, crop insurance, and farm income disaster assistance to farmers and agribusinesses. AFSC allows farmers and agribusinesses to access capital via different products and services: Alberta Farm Loan Program to support start-up, development, and growth of farming operations Revolving Loan Programs to assist farmers and agribusinesses with working capital needs Commercial Loan Program as an alternative source of financing for Alberta individuals and commercial businesses Value- Added Agribusiness Program to assist clients with start-up, development, and growth of their agribusiness or value-added businesses Capital Sourcing Program to motivate the expansion of agriculture, agribusiness, and commercial businesses

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

Specific Loan Guarantee Program which allows AFSCs clients to access business loans from other lenders via a guarantee from AFSC. For more information on AFSC and their financial products and services, visit www.afsc.ca

8.3. Canadian Youth Business Foundation (CYBF)

Canadian Youth Business Foundation provides up to $15,000 of funding for young entrepreneurs between 18 and 39 years old. Successful applicants who need more than the CYBF loan ceiling may qualify for up to an additional $30,000 of financing through the Business Development Bank of Canada matching program CYBF also provides business support to a specific niche of clients. These include young newcomers who do not meet credit score requirements; and recently retired or transitioning Canadian Forces members interested in entrepreneurship. CYBFs basic eligibility criteria are: Be between the ages of 18-39 Canadian citizen or a permanent resident of Canada Not a full-time student Show a minimum investment of 10% of total value of the project For more information, visit www.cybf.ca

8.4. Alberta Women Entrepreneurs (AWE)

Alberta Women Entrepreneurs (AWE) finances qualifying womens ventures up to $150,000 no matter their business stage. AWE offers flexible repayment options and terms up to 5 years. They also work with their partners to increase funding for borrowers seeking more that the AWE loan ceiling. Some of the requirements to qualify for a business loan from AWE are: Being a women who controls a minimum of 51% of shares Operating a for-profit business Being Canadian citizen or permanent resident living in Alberta The business must operate, be headquartered, and pay taxes in Alberta

For more information, visit www.awebusiness.com

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

8.5. Community Futures (CF) Loans for Rural Alberta Entrepreneurs

Community Futures manage loans of up to $150,000 to support rural Alberta entrepreneurs business start-ups or expansions. You may qualify for a Community Futures business loan if: You are a rural Alberta entrepreneur You have a viable business idea

Your business has the potential to assist with the economic growth and diversification of the community. The Community Futures business loan can be used to start or expand a business, to apply new technology, to upgrade businesss facilities and/or equipment, to cover costs related to the development of new products and markets for the business, to commercialize a product or service; and to access working or patient capital necessary to fund business growth. For more information, visit http://www.cfna.ca/entrepreneurship.php

8.6. Alberta Entrepreneurs with Disabilities Program

People living with a documented disability may qualify for a business loan to start a new business, to expand or upgrade an established business, or to purchase an existing business through Disability Employment Counselling Services of Alberta (DECSA) in Edmonton, Momentum in Calgary, and Community Futures in rural Alberta. The Alberta Entrepreneurs with disability program is funded by the federal government through Western Economic Diversification Canada (WED). For more information, visit http://www.wd.gc.ca/eng/13643.asp

8.7. Canada Small Business Financing Program (CSBFP)

The Canada Small Business Financing Program is a federal government initiative administered by Industry Canada and managed by most banks and credit unions. Through CSBFP, small businesses or start-ups operating for profit in Canada, with gross annual revenues of $5 million or less may qualify for up to $500,000 to finance eligible fixed assets. The interest rates, which may be variable (lenders prime rate + 3%) or fixed rate (lenders single family residential mortgage rate plus 3%) are determined by financial institutions. Loans can be used to finance up to 90% of the cost of: Purchasing or improving land, real property or immovable Purchasing new or existing leasehold improvements Purchasing or improving new or used equipment

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

Personal guarantees are required but are limited to a maximum of 25% of the loan. A one time up front government registration fee of 2% of the loan amount is payable to the government and can be added to the loan principal. For more information on CSBFP, contact your local bank or financial institution or visit http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02855.html

9. Grants, Subsidies and Rebate Programs

Grants are non-repayable financing provided by government, nonprofits or other organizations (grantor) to eligible applicants called grantees. There are no generic small business grants and individuals looking to apply for a grant will need to review each grant qualification criteria first to see if they are eligible to apply. Grants are targeted to specific industry sectors (e.g. non-profits, arts/culture, research & development, agriculture, etc.), are highly competitive, and you need to provide extensive reporting and tracking how funds are being used. Grants may be available in the form of cash, a reimbursement of eligible expenses, or a type of tax credit. To learn more about Federal and Provincial grants, visit www.canadabusiness.ab.ca/index.php/financing/46-grant-programs-

10. Contests and Awards

Contests and award programs are competitions for entrepreneurs and small businesses organized by nonprofit organizations, business corporations or government bodies. They usually take the form of business plan competitions but can also be for other specific achievements (e.g. environmental stewardship, innovation, etc.). Prizes may include cash, recognition, or in-kind support. Some of the benefits of winning an award contest include: Marketing Technology tools Increase of credibility of the winners business Cash prizes associated with many award programs Mentoring and coaching to help entrepreneurs grow their businesses. Business contests happen throughout all times of the year and come from many different places. Ways to find about them include: Subscribing to The Business Links E-News and social media pages Becoming a member of a business or industry association Scanning periodical (magazines targeted towards small business) Magazines or business sections of the newspaper Educational and post-secondary institutions Searching on the internet or news websites

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

11. Angel Investors

Angels are private investors that provide financing to eligible early-stage start-up businesses. In addition to their goal of recovering their investment, angel investors are interested in helping new ventures to get off ground and succeed. Angel investors use different approaches to minimize the risk of failure: they mostly invest in businesses they have previous experience working with and require some equity control in terms of ownership; they bring their expertise and network of contacts on the service of the businesses they finance, and provide them with advice to help them succeed. For more information on angel investors, visit the websites of the National Angel Capital Organization at www.angelinvestor.ca

12. Venture Capitalists

Unlike angel investors, venture capitalists are open to investing large amounts of money as long as they believe the venture has high-growth potential and can receive a high rate of return on investment. Since they are willing to take more risk and to invest large amount, venture capitalists will expect to be more involved in the businesses they finance in terms of making decisions until they recover their money. Some key considerations venture capitalists consider to invest in a business: Management skills Market size Product with competitive edge Awareness of risk

Venture capitalists usually invest other peoples money and are professional investors . For more information on venture capitalists, visit the websites of the Canadian Venture Capital & Private Equity Association at www.cvca.ca and the National Angel Capital Organization at www.angelinvestor.ca

13. Issuing shares

If you have an incorporated business, you may be able to raise capital by issuing shares (ownership in the corporation). You can issue either voting or non-voting shares which means that some shareholders may or may not have a say in how the corporation is run. Issuing shares will require you to lose a percentage of ownership in your business (and potentially control), but will help to increase capital. You should have a shareholder agreement and a lawyer can help in working out the arrangements and creating one for you.

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

14. Life Insurance Loan

14.1. Whole Life Insurance Policy
Whole life insurance policy provides the insured lifetime coverage and also builds cash value. Whole life insurance allows their holders to build equity (cash value) through monthly premiums and to borrow against their value by using it as collateral for the loan. This highlights the importance of making an informed choice when you first purchase a life insurance. If you plan to borrow against your life insurance in the future, buy a whole life insurance policy that provides both a death benefit and cash value. If you build enough equity, you will be allowed to borrow up to 90% of your policys cash value. Although a life insurance loan is repayable with interest, the rates are more favorable than regular loans and there are no credit check prior to approval as they use the life insurance as a collateral, meaning that the death benefit will be reduced by the outstanding loan amount.

14.2. Universal Life Insurance Policy

Universal life insurance policy also provides the insured lifetime coverage and contains a policy fund. The policy fund is built by extra contributions above the monthly cost of insurance. The money in the policy fund is invested and can grow significantly. Withdrawing money from the policy fund is subject to tax on any growth that the policy fund sees, but there is no interest on the amount borrowed from the policy fund.

15. Home equity Loan

A mortgage allows the mortgagor (mortgage holder) to build up equity through payments and appreciation of the property. The equity is therefore the current market value of a home minus the outstanding mortgage balance. There are two types of home equity loans: Fixed rate loans: the loan is repaid over an agreed-upon period of time and fixed interest rate over the lifetime of the loan. Home-equity lines of credit which is a variable rate loan that allows borrowers to access a pre-approved spending limit and to withdraw cash when they need it via credit cards or special cheques. This type of loan has also a lifetime at the end of which the borrowers must pay the outstanding loan amount.

ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)