By WENDY MAYHEW | PIVOT Magazine Contributor
It is difficult to start a business without any money but it is strongly encouraged to bootstrap your business instead of going into debt, if possible. However, if bootstrapping isn’t an option then you will find the following information useful on when looking for financing.
The one thing that all financial lenders look for is a business plan so it is imperative that you have one in place before approaching anyone. Palo Alto Business Plan Software is good place to start. A plan needs to demonstrate a financial model and knowledge of the market. You should also include how you plan to repay the investment regardless of the funding source. Take a look at the Business Plan episode of Real World Entrepreneur Training at AcceleratorU. The episode shows a young company presenting to, and receiving feedback from a business plan expert.
A Small Business Advisor with TD Canada Trust says that about 25% of entrepreneurs who approach them for financing are over the age of 50. Banks look at all types of businesses and use the 3 C’s of credit when making a decision whether to finance the business or not: Character (credit history), Capability (ability to service proposed debt) and Collateral (asset being financed and personal net worth). Quite possibly, seniorpreneurs might have an advantage over young entrepreneurs as they usually have a longer credit history, are more mature and generally have a net worth.
Banks offer Term Loans (such as Canada Small Business Financing Loans), Lines of Credit and Expense Cards. A personal guarantee and business assets are typically used as collateral. However, for amounts greater than $100K they most likely require a collateral mortgage on real estate as well. A secured collateral mortgage on real estate has a term of 25 years. Interest rates vary – starting from Prime + 1.00% to 21%, depending on the product and security pledged.
Angel Investors like to invest in people first and the business second. If they like you as a person and you show promise and dedication then you have made it past the first step. Angel Investors invest in all kinds of businesses – technology and non-technology; however, they like game changers – in other words, anything that has potential to change the landscape. There aren’t any set rules for the amount of money they will invest. Some will invest $5K while others will invest up to $250K. It is entirely up to the Angel Investor.
You will be askedif you have the drive, energy and ability to deliver. One reason people invest in younger entrepreneurs is that it takes a FULL time commitment and no distractions to be successful. They need to be hungry to succeed and if somebody came who already was successful and was not dependent on this business for success – would they be as driven?
Angel investors need to see potential to get an annualized 25% – 35% return on their investment. They will make several investments, knowing that some will go nowhere, some will be the “walking dead” and maybe 1 or 2 in 10 will go somewhere, of which 1 may be a home run. They can be equity (shares), convertible debt, straight debt (sometimes secured against receivables or property) or a “sales commission” model. There are no strict rules/models with Angel investors.
If you have non-registered investments you can consider using these investments as collateral for a loan issued by your financial institution or ask your investment advisor to convert your investment account to a margin account. If you borrow money for the purpose of earning income from a business, the interest that you pay is generally deductible as a carrying charge on your tax return. A call to CRA or to your accountant will confirm the extent to which you will be able to deduct the interest charges on your loan.
Although you cannot use a Tax Free Savings Account as collateral for a loan, you can access the funds without tax implications. Any funds withdrawn from a TFSA are tax free and you may recontribute the funds to your TFSA anytime after the year in which they were withdrawn.
What if your only investment assets are in a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF)? An investment advisor from a bank owned investment firm suggests anyone over 50 starting a business and thinking of using their registered investments to finance their new venture, should exhaust all other avenues before dipping into their retirement funds. Keep in mind that a withdrawal from a registered plan is fully taxed as income in the year that it is received. On the other hand, if you are in a low tax bracket, a withdrawal from your RRSP or RRIF may be a tax efficient way of funding your daily expenses while you are building your business.
Although Government funding is usually focused on youth entrepreneurship, there are ramblings of new funding becoming available in the near future that may help seniorpreneurs. I will keep my eyes and ears open for this and let you know what is available.