Questions About Starting a Business (potentially)...Financing

[Derek Sutton]

So I've recently been working at starting my own business, I have a fairly solid business plan (so I've been told) with finances projected for the first three years. As I am an amateur at this I obviously have a ton of questions, for now they primarily surround financing. And finding a (retail) lease/ location.

Regarding Financing, how much cash and assets is commonly required to put down? Some say 25% but does that vary on the principle? If I need 250k does 10% get it done? If I have that much in savings am I expected to risk all my own money? and what sort of term am I looking at? Much of the initial cost would be for equipment which should be considered assets, does that play a part? And how is the best way to keep my personal assets separate such as home, rrsps, car etc.. from the financial side of the business. I've been looking through the CSBFP but would like some more information before I make an appointment to speak with some bank people. I'm also gonna set up an appointment with a Business Advisor from my local Community Futures branch, I have also registered for a 6 week long course in setting up a business with another not for profit organization in July which I will qualify for should I still be unemployed.

About a lease, any and all information is appreciated. I firmly believe I have an excellent plan, in a huge market with current and long term demand. Of course if you open where nobody will visit, that poses a problem. Another huge problem is that in any new developments, the anchor tenants can pretty much veto anything they want, that and lease pricing are two of my biggest hold ups right now.

Thank you all in advance.

[OMG!WTF!]

Cool. I'm in. It's great to see someone going for it. You have a few options. In all scenarios though, you should avoid questions like...Do I have to use all the money I have saved personally? You need to at least project the confidence that says you have no problem using every cent you have. You need to be all in or no one in the private equity market at least is going to believe you.

You could raise money by basically selling shares in the business. There are rules about raising money this way and unless you have a majorly attractive plan you need some track record. But if it's a great idea someone might go in with you.

You can explore grants, special small business loan programs and other specialized options. I don't know much about them but they are there and people get them. And there are lots of them.

If you need equipment, there is usually a way to finance each piece, even if it is through the vendor. I can get a dump truck for about 10% down. Not sure what you need but there is basically a lease arrangement for just about anything.

Your lease is also a huge way to gain operating capital. You should be able to get some rent deferred to the end of the lease, all the improvements you want and maybe a small operating line if the holder is a financial company. But I don't know what you're after here.

It's usually pretty hard to get financing without a hard asset backing it up. I can loan money on real estate and make 12% with 75% loan to value. There really isn't a secondary market for unsecured business loans. A personal guarantee is almost mandatory.

[Bend it like Bourgeois]

Business finance is tough to generalize.

I'd start with a few questions
Are you creating something (tech, product, service, method)
How fast do the business/finance needs scale?
What industry is it in (obviously some retail presence but a pet food store and a fitness studio are very different)

There are no wrong answers, but it changes who might be interesting in financing it and how.

With no time in business access to bank capital will be tricky. A lot will depend on the capital you can put in to the business and your personal financial situation. A bank can't use some of your personal assets as any kind of security, and really doesn't want any of them, but with no track record they will probably want to make sure walking away is not easy.

Equity can work if there is someone close to you or who understands the biz to help stake you. You might need that anyway for the initial capital to have a decent balance sheet. Getting outsiders money is harder if you can't dangle a carrot of big growth or returns.

Leasing equipment will depend on what kind it is. OMGs dump truck is a great example of where it works because finance guys can understand what it costs, how it generates cash, what it's worth over time etc. Anything specialized, or smaller, or more like furnishings can be harder without existing cash flow or a vendor lease.

There are definitely grant and loan programs that can help, depending on your circumstance. Futureprenuer has good terms for younger startups, for example. Alberta has a voucher program for tech, and a new investment tax credit for equity investors in certain industries, and community futures which you know. There are more if you are in ag related business or manufacturing or exports. Crowdfunding can sometimes be an option too.

Don't be afraid to talk to been there done that entrepreneurs. If you are competing they might not be as friendly, but most are happy to share what they have learned the hard way.
Also talk to some lawyers and accountants who work with businesses like you hope to build. Good ones are worth every penny, and again many are happy to chat. They will have seen the outcome of lots of smart, and not so smart, ways companies got started.

[Frequitude]

Far and away the number one rule is to get your burn rate (your personal spend) down to the absolute minimum.

Second rule IMO is avoid giving away equity. Sure it may sound like a cheap source of money right now but when you hopefully later go on to grow via private equity type financing you won't have enough equity to sell to be interesting while still having some for your own.

Do not be afraid of debt right now.

[Ace]

Basically you start up a corporation and that will operate separately from your personal assets, go open a numbered company now to get started...however if you're just starting out you're pretty much going to need to sign personal guarantees to get any kind of financing, which almost negates the point.

If possible you might be better off accessing equity you might have in any property, and personally loaning it to your numbered company as a way to set up some initial equity. Banks like shareholders loans, they treat it like retained earnings. At that point you may be able to get financing based on your cash already being in the company. They may still push for personal guarantees though since you can technically withdraw those funds when you want. If you need to do a personal guarantee then put a dollar limit on it to protect your personal assets (i.e. yes for $100,000).

[Harry Lime]

Thanks for starting this thread.

After a couple of hard years, I've been looking at putting up my own shingle as well. I've been working on a business plan that could function at a low initial investment between 75K and as low as 50K (if need be). I've made the initial cost, cash flow projections and operations as detailed as humanly possible to dissuade any fear on the part of a lender.

Recently the option of purchasing an existing business has also arisen, only this one also includes ownership of the bay in which the business is housed, making it simultaneously significantly more expensive, as well as a solid asset (and history) to entice a lender.

My major issue has been that because of my recent employment history, I am heavy in knowledge and ability to make this work, but very short on personal funds. I've been looking at alternative methods of financing, but am trying to avoid taking on too many partners. Losing much equity would diminish the possibility of a reasonable return.

[OMG!WTF!]

You can also take on equity partners with an eventuality of paying them out. So they get shares of the company, they get a dividend return, a return on their capital and a final return of the capital in one, two or however many years. Occasionally a royalty or continued dividend might follow for longer. But it's normal to pay investors out and retain your shares. If you fail along the way, they take over.

I'm a total amateur at this but I've dabbled in business lending for two years. I've looked at a bunch of businesses, funded four of them. Two have been very successful. One is plodding along. One totally failed. The rest quite honestly didn't need the money. Sometimes a cash infusion is the worst thing for a starting company.

What I've noticed is that the person/people involved are the most important factor and sadly the last thing most banks look at. The business that failed was the one I thought couldn't lose. But it was helmed by a barely functioning group of nitwits. The successful ones were managed by smart, experienced, humble, confident, and most importantly, generous people....people who are actually more interested in winning the game than in becoming millionaires and buying yachts. Money needs to be secondary to a commitment to business practices that work. Ironically, they are now the ones with the most money.