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Finding The Money

Karen Murphy
Express Gift Baskets Inc.

"Start up and expansion are expensive. I had to spend money to develop our website, design a catalogue and hire staff. I had to present myself as a big business before I was one."

Eight years ago, Karen Murphy needed a small loan to set up a home-based business. Three years later, she moved into office space. In 2002, she got a third loan to cover the costs of expanding into an even larger space.

"My business plan looked good from the growth perspective, but the bank didn't think I could pull off that growth. I was projecting hundreds of thousands of dollars. Banks look at bottom line of what you did last year, but my business is growth oriented. I keep looking at next year, when I've added these new corporate clients."

So Karen looked to other business lenders – Community Futures and the Women's Enterprise Society of BC. She got herfirst loan with a minimum of fuss, and returned to Women's Enterprise Society of BC for expansion loans.

"I have a great track record with them," she says. "I've met every target, and my financials rose every month.

"My best advice to anyone starting out is to spend a lot of time on your business plan. Make sure your numbers are as concrete as possible. Put as much information into your business plan as you can get."

These days, Express Gift Baskets is an unqualified success. Karen ships baskets all over the world, and even Oprah Winfrey has ordered on-line. In fact, Karen expects that she will have to expand once again ... but this time, hopes to finance that move from her own revenues.

How much is enough?

When you are figuring out how much money you will need, work out both business and personal budgets. Then calculate how much revenue your business needs to generate to cover both. You might want to take a course in financial management to learn how your business finances and personal finances relate to each other.

Be realistic. If you underestimate your costs and overestimate your revenue – a common mistake of start-up businesses – you will run into problems almost immediately.

You will need to develop and understand key financial statements and tools, especially if you apply for a loan. You can put these together with the assistance of an accountant or bookkeeper, or use templates from some of the business plan resources. For the first year or two, you will have to rely on estimates.

Key Financial Tools

Generally, there are two sources of money:

investment (equity financing from people who expect to share in the eventual benefits of your business; and

debt financing (loans) from people and institutions who expect the money, plus interest, repaid according to an agreed-upon schedule.

Income Statement: A financial performance report lays out how much you expect to earn (revenue), and the expenses you will incur during a specific timeframe. It is typically developed along with a Balance Sheet.

Balance Sheet: A status report, or 'snapshot' of the financial state of your business at a given point in time. It shows what your company owns (assets), what is owed (liabilities)and what is left over for you (equity).

Cash Flow Statement: Shows the flow of cash into and out of your business during a specific time frame. This includes when and where you will get your money and what you will spend it on. This is the most realistic picture of your business, as it indicates how much cash you will have available at any given time to keep your business running.

Break-even Analysis: This is the volume of sales you need to cover your costs. At the break-even point, there is no loss or profit to your business.

Getting the money

Once you've completed your business plan and financial statements, you will have a clear picture of how much money you need to start and operate your business for the first critical year.

Most new businesses rely on a combination of personal savings, investments from friends and family, and loans to get up and running. Ask other business people about their experiences, and consult an accountant, bookkeeper or financial manager to learn more about the types and sources of financing that will work best for your situation.

Overdraft protection: Covers shortfalls in your business account up to an approved limit. Interest is charged only on the amount you borrow and the rates are competitive. Monthly administration fees usually apply.

Credit cards: Personal and small-business credit cards provide short-term loans for smaller purchases, and they can be approved with little or no security. The interest rates are usually higher than traditional loans, but there's no interest if you pay off the balance every month. But be careful: if you can't pay off the outstanding balance, interest costs will accumulate quickly.

Operating line of credit: A loan with a set limit; you can draw on it when needed. Interest rates are lower than most credit cards and some loans, and you only pay interest on the outstanding balance. There are no fixed payments, except for a monthly fee and interest, meaning you have the option of paying down the loan as you can afford it. It is usually secured by your house or other assets.

Term loans are longer-term, used to cover expensive items such as capital equipment, real estate or renovations. They have established monthly payments, so it's easy to budget. The lender will ask you for security for the loan (equity in your home, cash, equipment, etc. ). Shop around for competitive interest rates for term loans. If you miss a payment, the lender has a right to demand immediate repayment.

Equity investors provide financing in exchange for a share of ownership, or equity, in your business, or simply a repayment of their investment. They can be public or private, and are often family or close personal contacts. Because of that, interest is often nominal or non-existent, and they may also be flexible in the repayment schedule. However, borrowing money from friends and family can sometimes put a strain on the relationship. Public equity investors generally only consider very large investments with large returns.

Venture capital comes from a pool of investors who are looking for a higher return. While they are usually interested in more established companies, they will consider start-ups if the potential is good. They generally seek a very high rate of return for their investment.

Angel investors look for higher risk investments with good growth potential. They can be difficult to find, are generally attracted to technology-related companies and often have very specific requirements that must be met. Angel investors usually are interested in long-term, high-return investments.

What Does it Mean?

Collateral or Security: Property or goods you pledge to the lender until the loan is repaid, e.g. equity in your house, car, savings, equipment.

Asset: Any item of value owned by your business, e.g. , cash, stock, equipment, inventory, property, goodwill.

Liability: Money your business owes to other parties, which could include suppliers, lenders, employees.

Equity: The value of your business with liabilities deducted from your assets. Also refers to the ownership interest of shareholders in your business.

Credit: Repayment arrangement between your business and your lenders or suppliers, and maximum amounts they will extend to you.

Credit Rating: Your history of repaying loans, credit cards and other financial obligations on schedule.

Grants do not require repayment. The criteria are usually very specific, and the application procedure can be long and time-consuming. Grants are more readily available for specialized and high-tech industries.

Your credit rating

If you have a limited or poor credit history, you may not be able to get a loan without a co-signer. Some women find that they have an insufficient credit history because mortgages and loans are written up in their partner's name, or they have always used cash – instead of debt – to pay for their purchases.

Resources

To check your credit rating, you can call Equifax Canada at 1-800-465-7166 to order a free credit assessment or visit www.equifax.com/EFX_Canada/consumer_information_centre. This link leaves our Web site

Budgets and Bookkeeping
Sources of Financing

Financial institutions: chartered banks, credit unions and trust companies.

Government-sponsored loan programs: industry, economic and regional development loans, and loans for specific populations.

Private capital sources: including angel investors.

Corporate sources: Some corporations offer grants or awards for entrepreneurs.

Grants and tax credits: These can help reduce the cost of operating your business.
  • "Simply Essential Personal Budgeting," Sylvia S. Lim, CFP, CGA. Self-Counsel Press, 2002.
  • "Balancing act: a Canadian woman's financial success guide" (revised and updated), Joanne Thomas Yaccato. Penguin, 2003.
  • "Basic Bookkeeping," Canada Business ServiceCentres, www.cbsc.org. This link leaves our Web site Select "Popular Business Topics," then "General Management."
  • "Bookkeepers' Boot Camp: : Get a Grip on Accounting Basics," Angie Mohr. Self-Counsel Press, 2003.
  • "Financial Understanding for Small Business" Self Study Guide, www.bbtb.ca. This link leaves our Web site
Financing

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