Financing questions

Q. What is the average going rate on a simple e-commerce enabled website (for example, less than 100 products for sale). What are the best payment gateways in Canada that do US and CDN funds?

A. Canadian businesses are steadily climbing aboard the e-commerce train. Statistics Canada estimates that about $6.7 billion worth of e-commerce was conducted in Canada in 2004

Here are some general principles that should be reviewed.

1. You'll need a hosting service that puts your website online. These are readily available from many Web-hosting services that operate in every Canadian city. When purchasing such services, remember that cheaper isn't necessarily better. Be cautious about opting for a free or very low-cost hosting service: they are usually thin on support, especially for e-commerce applications.
2. A common method for most e-commerce operations is to buy an all-in-one package of Web hosting, site design and e-commerce applications. These can be American, Canadian, or local. Each has its pluses and minuses and usually depends on the need of the buyer.
3. Increased use of the Web has given rise to the web-based hosting service, which often features a variety of e-commerce website templates that the buyer (who pays a monthly fee) can customize for a specific business. These Canadian and American services also allow users to easily manage their content and websites online, eliminating the need to understand complex web design or web writing language.

These packages often offer a better and lower-cost alternative to doing or contracting everything yourself: after all, your business isn't likely Web design, and you can pay a specialist a lot of money to do it for you. Similarly, e-commerce tools can be costly if they are bought off the shelf.

When purchasing such services, be sure to comparison shop because rates can vary widely. Generally, however, for a full e-commerce site offering less than 1,000 products, you can expect to pay between $25 and $120 per month, with the average being between $50 and $75.

To find a host – who most also have payment systems included in their packages -- you should perform an Internet search, using one of the many Internet search engines for your specific region. A local Canada Business Services Centre can also supply you with a list of hosting operations for comparison purposes.

If you are new to the e-commerce world, why not test the waters by selling on eBay Canada? This former auction site is now the world's largest e-commerce provider and can serve as a tool for market research and learning. Before going to the expense of building an online store, find out if your business idea is viable and if people will really spend money for your product. Consider test marketing your concept through the eBay sales channel, which offers a global testing ground that will cost you next to nothing and will have you up-and-running within a few hours. Hundreds of thousands of online businesses have started this way.

Q. My experience is that e-business initiatives must be financed from working capital. They are viewed as current expense and charged against earnings for the year. They don't show up on the balance sheet. Even if creative accounting gets them on the balance sheet, lenders tend to ignores this value, calling it intangible. Nonetheless, e-business is a longer-term investment, where cash gets spent early in the process and the returns are generated down the road. This makes such initiatives difficult to finance. The amount of upfront investment can be quite significant for an SME. How would an SME go about financing e-business?

A. A few preliminary issues that surround your question: understand that there is a fundamental difference between an investment and a loan (debt financing).
In a loan (debt financing), a financial institution must have reasonable confidence that the company will be able to start the loan repayment months after obtaining the financing. For example, a manufacturing business would receive a loan to purchase a piece of equipment to start production and shortly after reach a break-even point.

In an investment, the investor is fully aware of the fact that the time required to reach the break-even point might be longer and the investor itself is willing to wait for its return, even a few years, if so is required by the nature of the business. Knowledge-based industry is a typical example. Firms involved in biotechnology or software development would go through extensive R&D costs and might be ready to enter the marketplace only after a few years and several thousands of dollars spent in R&D. A venture capitalist investing in a "development stage company" usually expects 60% return on the investment.

From a holistic perspective, if we consider all the elements that make up a company we notice that the gap between a business from the "old economy" and a business from the "new economy" is not as wide as we may think. Essentially, what makes a company is still the same and can be summarized into these 3 elements:

• People
• Resources
• Way people use resources

The above holds for all types of businesses. However, over the last few years, in e-business, we have witnessed a change in the companies' cost structure. Costs in certain areas have increased while other overhead costs, such as building costs, have decreased.

In other words, companies from the old economy and new economy still need long-term debt financing and short-term debt financing. Both an e-business and an old economy business are long-term investments. BDC looks at a company as a going concern and not as an entity that will eventually undergo liquidation.
A business in the start-up phase could reduce costs of expensive technologies by outsourcing. Pros and cons can be summarized as follows:

Pros:

• Flexibility in costs
• Reduced risk of obsolescence
• Ability to obtain professional and experience consulting
  

Cons:

• Loss of control
• Danger of losing proprietary information
• Dependency on fir providing the service

Q. Is there an advantage to incorporating when the business is primarily online?

A. Since whether to incorporate or not is primarily a tax question, how the business is conducted – online or offline – is largely irrelevant. The only time it might be meaningful is if your business is registered out of your home province or country – in the U.S., for example. Many online businesses are operated globally by Canadians who derive most of their income from outside the country.

Whenever a business considers incorporation, it should be concerned with two issues:

1. After a certain income level is reached, it is more tax advantageous to incorporate because tax rates are lower, and many expenses can be deducted.
2. Incorporation creates a business entity that is separate from the owner. So if the business involves the possibility of liability issues, a financial advice business, for example, incorporation is often chosen. This is because it puts the business owner at a more arms-length distance from anyone who might make a legal liability claim.

Generally because of the cross-border implications involved in conducting business online, it is probably worth it to eventually incorporate an online business. Currency exchange issues, customs situations, the multiple-country locations of virtual staff, and other issues common in the online world can severely complicate business operation; it is probably preferable to separate the business' tax situation from the operator's personal tax situation.