Your Roadmap to Financing Success

Transcription

1 1 Your Roadmap to Financing Success Like many entrepreneurs, you are probably always thinking about how to finance your business. And, like many entrepreneurs, you may think of a chartered bank as the first place to go for financing. Indeed, your bank is the most common source of financing for small and medium businesses. Banks provide a variety of financing options, such as short-term loans and long-term loans, lines of credit, loans against inventory or accounts receivable, as well as financing and business consulting services. In fact, the banks have frequently taken the initiative in creating services for small and medium businesses. In the chapters that follow, you will learn how to deal with the inevitable financing challenges every business faces at various points in its cycles and discover the many varied sources of financing that can carry you forward. You will discover creative ways to obtain the best financing arrangement possible while continuing to meet the criteria of your bank s financing model. You will also learn how your bank can be an effective player on your financing team but not necessarily the only one. As you read this Toolkit, you will discover appropriate financing alternatives discussed in a practical and straightforward manner, gems of real-world wisdom and strategies for succeeding, both with your bank and other lenders. This is your first-stop resource for understanding financing, gaining focus, and preparing to take the next step with greater confidence. You will also learn from the stories based on the actual experiences of Canadian business owners that you are not alone in your business financing needs and frustrations. Best of all, you will see how others who have gone before you have been successful sometimes immensely successful. Their roads were bumpy at times but they found new directions and new sources of financing and, in the end, they succeeded. Your Financing Options This Toolkit and the accompanying CD will guide you step-by-step from identifying and understanding your options right through to developing a proposal that will obtain the best financing model for your specific needs. For example, a business experiencing sudden growth will likely have an urgent need for financing but may find it difficult to get traditional bank financing because it might lack equity and/or a proven track record. This Toolkit will help a business at this stage in its cycle as well as those at other stages tap into the many available sources of financing.

2 4 The Financing Toolkit for Small & Medium Businesses Throughout the following chapters, you will get to know the broad spectrum of financing sources available to businesses today. You will also learn about some important factors you need to consider when preparing to approach these sources. It is not just enough to find the source and show up at the door. } You re the one. Your experience, your knowledge, your credibility make the difference between getting the loan or staying small. ~ But, in the end, it s you who makes the difference. Your credibility as a knowledgeable, well-organized businessperson is essential to your success. The key factors in the lender s decision are the credibility of your leadership, the competence of management, the foundation of the business, and the reasonableness of your projections as a guide to the likelihood of business success. Communication, both oral and written, must convey this credibility in order to instill confidence. Successful Financing Successful financing is measured not only by the quantity of funds obtained though this can be of prime importance but also by the quality: the cost of funds, the terms and conditions of the loan, and the required collateral are equally important. If the cost is prohibitive or the terms unusually demanding or even unrealistic, then the financing could do you more harm than good. This Toolkit will help you understand the scope, as well as the limitations, of the financing system. The key to successful completion of your financing proposal is proper planning and preparation. There are four essentials to keep in mind: Understand the five Cs of credit: Character, Capacity, Collateral, Conditions and Capital (particularly, the priority of character and capacity); Develop a thorough and comprehensive business plan; Define and analyze your market; and Establish the capacity of the business by preparing credible forecasts outlining the required financing and the projected cash flow available for debt servicing.

3 Chapter 1: Your Roadmap to Financing Success 5 The Five Cs of Credit Character: The character of the owner(s) and management and their willingness to observe the terms and conditions of the financing. The lender s confidence in the management of the business, the proper and judicious use of the funds based on previous experience with the principals, and the extent of confidence demonstrated by outside creditors. Capacity: The ability of the business to meet the terms and conditions of any financing based on the profits and cash flow resources at its disposal. Collateral: The realizable value and enforceability of any security, together with its compatibility with the purpose and term of the financing. Capital: The amount, composition, and adequacy of funds invested by the owners in relation to the business risks, profitability, and the risk to be assumed by the lender. Conditions: The elements of the economy, locally or nationally, are critical, as well as the status and outlook of the particular industry. Working with Your Professional Advisors Professional advisors your chartered accountant, banker, lawyer, financial consultant, insurance advisor, broker, chartered business valuator and others may all play important roles in helping you achieve your financing objectives. A number of groups in the financial community are also available to assist a company and supplement the efforts of the financing team. Each colleague will play a different role, often at different times, such as: Determining what type of financing is appropriate for your particular business Refining or developing your business plan, financial model and growth forecasts Identifying any potential obstacles to obtaining financing from either lenders or investors Helping you assess the terms and conditions of the financing Negotiating repayment, security, terms, prepayment and other conditions Acting as a financial advisor when you are seeking financing to expand, restructure or acquire a business

4 6 The Financing Toolkit for Small & Medium Businesses Liaising with a company or institution that provides funding to businesses Assisting you in satisfying any legal requirements, providing insurance documentation, or meeting other conditions set out in the offer to finance Expediting the disbursement of funds approved under a financing arrangement. Their roles may range from just putting you in touch with a potential source of funds to assisting you throughout the entire funding process. Each member of your financing team plays an important consultative role in identifying and defining the requirement, sourcing the financing, and expediting the disbursement. What This Book Offers You } Sound professional advice has a way of paying for itself. Do not put your business at risk by trying to do everything yourself. Get the right professionals on your team. ~ Consider this book a map: it will show you how far it is from here to there and what obstacles lie in between. After having read it, you, the traveller, will have gained a better understanding of how to reach that much-soughtafter destination: financing adequate to realize your business plans. It is not intended to provide specialists with all the technical guidance and materials needed to solve every problem an impossible task for one publication, in any case. Keep in mind that getting financing is not a solo effort of the company s accountant or financial officer, but a team endeavour. Of course, the team needs a quarterback to coordinate the various parties; the accountant or the company s financial officer often assumes that responsibility.

5 Chapter 1: Your Roadmap to Financing Success 7 FOCUS ON FINANCING Your Roadmap to Financing Success In this chapter, we introduced the four essentials for successfully preparing and planning your financing program. These four points form a foundation for exploring the topics in the chapters to come. Understand the five Cs of credit: Character, Capacity, Collateral, Capital, and Conditions. Develop a thorough and comprehensive business plan. Define and analyze your market. Establish the capacity of the business.