Alternative Financing Options for Small Businesses

7/29/2019 Alternative Financing Options for Small Businesses

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AlternativeFinancing

Options for SmallBusinesses

For more information, contact:

The Business Link

Edmonton:10160 103 Street NWEdmonton, Alberta T5J 0X6

Calgary:

120 8 Avenue SECalgary, Alberta T2G 0K6

Toll-free: 1 800 272-9675Fax: 780 422-0055 (Edmonton)

403 221-7817 (Calgary)Email: [email protected]: www.canadabusiness.ab.caA Member of the Canada Business Network

FINANCING
mailto:[email protected]:[email protected]://www.canadabusiness.ab.ca/http://www.canadabusiness.ab.ca/http://www.canadabusiness.ab.ca/mailto:[email protected]


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ALTERNATIVE FINANCING OPTIONS FOR SMALL BUSINESSES (09/2012)

The Business Link is a not-for-profit organization supported by theGovernments of Canada and Alberta, as well as other organizations committed

to serving Albertas small business community.

Disclaimer:

The information presented in this document is intended as a guide only, and while thought to be accurate, is providedstrictly "as is" and without warranty of any kind. The Business Link, its employees, its directors and members, its agentsor contractors will not be liable to you for any damages, direct or indirect, or lost profits arising out of your use ofinformation provided within this document, or information provided withinThe Business Link's websites.

This material may be used, reproduced, stored or transmitted for non-commercial purposes; however, The BusinessLink's copyright is to be acknowledged. You may not use, reproduce, store or transmit this material for commercialpurposes without prior written consent fromThe Business Link.

2011 The Business Link


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ContentContent ........................................................................................................................ 1Purpose........................................................................................................................ 1Introduction .................................................................................................................. 21. Personal Financing .................................................................................................... 22. Family and Friends .................................................................................................... 23. Unsecured Personal/Business Lines of Credit .............................................................. 24. Credit Cards .............................................................................................................. 25. Crowd Funding Sites and Peer-to-Peer Lending ........................................................... 36. Factoring .................................................................................................................. 37. Leasing as a Financial Tool ........................................................................................ 48. Other financing options .............................................................................................. 48.1. Business Development Canada (BDC) ........................................................................................... 48.2. Agriculture Financial Services Corporation (AFSC) ....................................................................... 48.3. Canadian Youth Business Foundation (CYBF)............................................................................... 58.4. Alberta Women Entrepreneurs (AWE) ............................................................................................ 58.5. Community Futures Loans for Rural Alberta Entrepreneurs (CF) ................................................. 68.6. Alberta Entrepreneurs with Disabilities Program ............................................................................ 68.7. Canada Small Business Financing Program (CSBFP) .................................................................. 69. Grants, Subsidies and Rebate Programs ...................................................................... 710. Contests and Awards ............................................................................................... 711. Angel Investors ........................................................................................................ 812. Venture Capitalists ................................................................................................... 813. Issuing shares ......................................................................................................... 814. Life Insurance Loan .................................................................................................. 914.1. Whole Life Insurance Policy ........................................................................................................... 914.2. Universal Life Insurance Policy ...................................................................................................... 915. Home equity Loan .................................................................................................... 9


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Purpose

Financing is often one of the most challenging and frequent concerns faced by entrepreneurs and

small business owners. Whether you are thinking about starting a business or expanding yourexisting operations, money will be a key requirement to help you achieve your goals.

When most people think of financing, traditional lending sources such as banks are usually what

comes to mind. Financial institutions are definitely a viable option for many business owners, but in

some circumstances, conventional lending may not be possible. Getting a loan from the bank

requires many factors including a good credit rating, collateral, a personal guarantee, and a

comprehensive business plan.

New businesses without a sales history and those operating in higher risk areas will especially be

more challenged to access a loan through a traditional lending system.

Alternative options to raise capital and expand operations do exist. This guide will explore what youcan do in case your business doesnt qualify for a traditional business loan from a bank or financial

institution.


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Introduction

The following alternative financing options are meant to give you some ideas as to the non-traditional

and creative ways that you can finance or bootstrap your business.

1. Personal Financing

Financing your business with personal savings will strengthen your ownership in the business and

give you more incentive to make your business work. As well, it will provide you with the freedom and

flexibility to operate your business as you choose too, and makes your business more appealing to

potential investors.

Consider the following ways you can raise capital to start a business:

Use your personal savings

Increase your income For instance you can get a part-time job, ask for more hours at work

or ask for a raise, or rent out a room in your house Sell non-essential personal assets Think high value assets such as your second vehicle,

property, recreation equipment, furniture and artwork/collectibles

Cut expenses or save money Budget accordingly and reduce expenses/debt by sacrificing

premium products for budget products or lessen the frequency of luxury or incidental

purchases. Daily changes can make a big difference in the long run. You can also ask for

lower interest rates with your credit cards.

2. Family and Friends

Family and friends can be a credible option to consider when looking for business funding. This type

of funding offers some advantages such as the absence of impact on your credit history, service fees,

and no interest or very low interest rates. However, this funding option can be a potential source ofconflict within relationships.

3. Unsecured Personal/Business Lines of Credit

An unsecured line of credit allows business owners to access cash whenever its needed. It will help

you to resolve (short) cash flow challenges, business expansion or other business expenditures. The

interest rate and repayment terms on lines of credit are generally negotiable. Good relationships with

your bank and having a good credit history will play an important role in the negotiation of favorable

interest rates and repayment terms.

4. Credit Cards

Credit cards can help your business financially in two ways: by providing access to cash when

needed; and in building credit history. Credit card providers also offer loyalty programs that can

benefit your business such reward programs, 0% or low introductory interest rates, balance transfer

options, travel rewards, among many others. Use credit cards with caution as they can have very high

interest rates and using them for longer-term funding can cost you significant money in the end.


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5. Crowd Funding Sites and Peer-to-Peer Lending

Crowd funding or Peer-to-Peer lending (also known as crowd sourcing or crowd financing) is an

online platform that helps borrowers to access loans via small amounts donated by a large number of

people (individual investors). The great thing about crowd funding is that anyone may be a potentiallender.

Some of the factors that make a crowd funding campaign successful:

Attractive and engaging story: tell your story in a manner that capture the potential individual

lenders attention, show them your passion, and convince them to take part in your venture.

Use videos, images, and photos to attract potential lenders attention.

Network: Crowdfunding is built around relationships and therefore online campaigns can play

a significant role in getting the word out.

Recognition for lenders: in return for their involvement in your venture, individual investors

expect some recognition such as being given the opportunity to participate in the design of a

product/service or to be the first ones to gain access to the product/service before the general

public. Plan time every day to connect with potential lenders by answering their questions.Remember to thank those who donate!

Some of the most popular websites specializing in matching borrowers with lenders online include

www.kickstarter.com,www.indiegogo.com, andwww.rockethub.com

Be aware that you will potentially be sharing your business idea with a very large audience.

6. Factoring

Factoring is an option which applies mostly to established businesses that already have a sales

history. It refers to the selling of accounts receivables to lenders (also known as factors) who

purchase outstanding invoices as collateral for funding.

Borrowers have two options:

To sell the outstanding invoices to lenders (factors) against a short-term loan at a ratenormally ranging from 65% and 85% of the invoice amount. With this option, the borrowersare still responsible for receivable collection.

To sell the outstanding invoices to lenders (factors) against a short term loan generally

ranging between 70% and 90% of the invoice total value. In this option, the lenders (factors)

are responsible for debts collection.
http://www.kickstarter.com/http://www.kickstarter.com/http://www.indiegogo.com/http://www.indiegogo.com/http://www.indiegogo.com/http://www.rockethub.com/http://www.rockethub.com/http://www.rockethub.com/http://www.rockethub.com/http://www.indiegogo.com/http://www.kickstarter.com/


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7. Leasing as a Financial Tool

Leasing equipment or property rather than purchasing can be a cheaper option for many business

owners. Leasing is attractive because it involves a much lower initial investment. Factors that

influence lease rates include the leasees credit rating and the value and life-span of the asset. It isadvised to compare the offerings of different companies rates, conditions, and type of assets before

entering into a lease agreement.

8. Other financing options

8.1. Business Development Canada (BDC)

Business Development Bank of Canada is a federal crown corporation that provides

financing, venture capital, and consulting services to businesses of all industries with a focus

on small and medium sized businesses. BDC provides financing to businesses operating in

Canada or in international markets. BDC offers financing for:

Commercial real estate Equipment line to purchase new or used equipment

Buy an existing business

Information communications technology (ICT)

Working capital

Start-up financing

Business succession

Domestic or foreign Market expansion

Projects without tangible assets, and

Aboriginal banking

For more information on Business Development Bank of Canada and their financial services,

visitwww.bdc.ca

8.2. Agriculture Financial Services Corporation (AFSC)

AFSC is a provincial crown corporation providing small business loans, crop insurance, and

farm income disaster assistance to farmers and agribusinesses. AFSC allows farmers and

agribusinesses to access capital via different products and services:

Alberta Farm Loan Program to support start-up, development, and growth of farming

operations

Revolving Loan Programs to assist farmers and agribusinesses with working capital

needs

Commercial Loan Program as an alternative source of financing for Alberta

individuals and commercial businesses

Value- Added Agribusiness Program to assist clients with start-up, development, and

growth of their agribusiness or value-added businesses

Capital Sourcing Program to motivate the expansion of agriculture, agribusiness, and

commercial businesses
http://www.bdc.ca/http://www.bdc.ca/http://www.bdc.ca/http://www.bdc.ca/


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Specific Loan Guarantee Program which allows AFSCs clients to access business loans

from other lenders via a guarantee from AFSC.

For more information on AFSC and their financial products and services, visitwww.afsc.ca

8.3. Canadian Youth Business Foundation (CYBF)

Canadian Youth Business Foundation provides up to $15,000 of funding for young

entrepreneurs between 18 and 39 years old. Successful applicants who need more than the

CYBF loan ceiling may qualify for up to an additional $30,000 of financing through the

Business Development Bank of Canada matching program

CYBF also provides business support to a specific niche of clients. These include young

newcomers who do not meet credit score requirements; and recently retired or transitioning

Canadian Forces members interested in entrepreneurship.

CYBFs basic eligibility criteria are: Be between the ages of 18-39

Canadian citizen or a permanent resident of Canada

Not a full-time student

Show a minimum investment of 10% of total value of the project

For more information, visitwww.cybf.ca

8.4. Alberta Women Entrepreneurs (AWE)

Alberta Women Entrepreneurs (AWE) finances qualifying women s ventures up to $150,000

no matter their business stage. AWE offers flexible repayment options and terms up to 5

years. They also work with their partners to increase funding for borrowers seeking more thatthe AWE loan ceiling. Some of the requirements to qualify for a business loan from AWE are:

Being a women who controls a minimum of 51% of shares

Operating a for-profit business

Being Canadian citizen or permanent resident living in Alberta

The business must operate, be headquartered, and pay taxes in Alberta

For more information, visitwww.awebusiness.com
http://www.afsc.ca/http://www.afsc.ca/http://www.afsc.ca/http://www.cybf.ca/http://www.cybf.ca/http://www.cybf.ca/http://www.awebusiness.com/http://www.awebusiness.com/http://www.awebusiness.com/http://www.awebusiness.com/http://www.cybf.ca/http://www.afsc.ca/


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8.5. Community Futures (CF) Loans for Rural Alberta Entrepreneurs

Community Futures manage loans of up to $150,000 to support rural Alberta entrepreneurs

business start-ups or expansions.

You may qualify for a Community Futures business loan if:

You are a rural Alberta entrepreneur

You have a viable business idea

Your business has the potential to assist with the economic growth and diversification of the

community.

The Community Futures business loan can be used to start or expand a business, to apply

new technology, to upgrade businesss facilities and/or equipment, to cover costs related to

the development of new products and markets for the business, to commercialize a product

or service; and to access working or patient capital necessary to fund business growth.

For more information, visithttp://www.cfna.ca/entrepreneurship.php

8.6. Alberta Entrepreneurs with Disabilities Program

People living with a documented disability may qualify for a business loan to start a new

business, to expand or upgrade an established business, or to purchase an existing business

through Disability Employment Counselling Services of Alberta (DECSA) in Edmonton,

Momentum in Calgary, and Community Futures in rural Alberta.

The Alberta Entrepreneurs with disability program is funded by the federal government

through Western Economic Diversification Canada (WED).

For more information, visithttp://www.wd.gc.ca/eng/13643.asp

8.7. Canada Small Business Financing Program (CSBFP)

The Canada Small Business Financing Program is a federal government initiative

administered by Industry Canada and managed by most banks and credit unions. Through

CSBFP, small businesses or start-ups operating for profit in Canada, with gross annual

revenues of $5 million or less may qualify for up to $500,000 to finance eligible fixed assets.

The interest rates, which may be variable (lenders prime rate + 3%) or fixed rate (lenders

single family residential mortgage rate plus 3%) are determined by financial institutions.Loans can be used to finance up to 90% of the cost of:

Purchasing or improving land, real property or immovable

Purchasing new or existing leasehold improvements

Purchasing or improving new or used equipment
http://www.cfna.ca/entrepreneurship.phphttp://www.cfna.ca/entrepreneurship.phphttp://www.cfna.ca/entrepreneurship.phphttp://www.wd.gc.ca/eng/13643.asphttp://www.wd.gc.ca/eng/13643.asphttp://www.wd.gc.ca/eng/13643.asphttp://www.wd.gc.ca/eng/13643.asphttp://www.cfna.ca/entrepreneurship.php


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Personal guarantees are required but are limited to a maximum of 25% of the loan. A one

time up front government registration fee of 2% of the loan amount is payable to the

government and can be added to the loan principal.

For more information on CSBFP, contact your local bank or financial institution or visithttp://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02855.html

9. Grants, Subsidies and Rebate Programs

Grants are non-repayable financing provided by government, nonprofits or other organizations(grantor) to eligible applicants called grantees. There are no generic small business grants andindividuals looking to apply for a grant will need to review each grant qualification criteria first to see ifthey are eligible to apply.

Grants are targeted to specific industry sectors (e.g. non-profits, arts/culture, research &development, agriculture, etc.), are highly competitive, and you need to provide extensive reportingand tracking how funds are being used.

Grants may be available in the form of cash, a reimbursement of eligible expenses, or a type of taxcredit.

To learn more about Federal and Provincial grants, visitwww.canadabusiness.ab.ca/index.php/financing/46-grant-programs-

10. Contests and Awards

Contests and award programs are competitions for entrepreneurs and small businesses organized by

nonprofit organizations, business corporations or government bodies. They usually take the form of

business plan competitions but can also be for other specific achievements (e.g. environmental

stewardship, innovation, etc.). Prizes may include cash, recognition, or in-kind support.

Some of the benefits of winning an award contest include:

Marketing

Technology tools

Increase of credibility of the winners business

Cash prizes associated with many award programs

Mentoring and coaching to help entrepreneurs grow their businesses.

Business contests happen throughout all times of the year and come from many different places.Ways to find about them include:

Subscribing to The Business Links E-News and social media pages

Becoming a member of a business or industry association Scanning periodical (magazines targeted towards small business)

Magazines or business sections of the newspaper

Educational and post-secondary institutions

Searching on the internet or news websites
http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02855.htmlhttp://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02855.htmlhttp://c/Users/mitakarj/AppData/User%20Files/mitakarj/My%20Documents/www.canadabusiness.ab.ca/index.php/financing/46-grant-programs-http://c/Users/mitakarj/AppData/User%20Files/mitakarj/My%20Documents/www.canadabusiness.ab.ca/index.php/financing/46-grant-programs-http://c/Users/mitakarj/AppData/User%20Files/mitakarj/My%20Documents/www.canadabusiness.ab.ca/index.php/financing/46-grant-programs-http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02855.html


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11. Angel Investors

Angels are private investors that provide financing to eligible early-stage start-up businesses. In

addition to their goal of recovering their investment, angel investors are interested in helping new

ventures to get off ground and succeed. Angel investors use different approaches to minimize the riskof failure: they mostly invest in businesses they have previous experience working with and require

some equity control in terms of ownership; they bring their expertise and network of contacts on the

service of the businesses they finance, and provide them with advice to help them succeed.

For more information on angel investors, visit the websites of the National Angel Capital Organization

atwww.angelinvestor.ca

12. Venture Capitalists

Unlike angel investors, venture capitalists are open to investing large amounts of money as long as

they believe the venture has high-growth potential and can receive a high rate of return oninvestment. Since they are willing to take more risk and to invest large amount, venture capitalists will

expect to be more involved in the businesses they finance in terms of making decisions until they

recover their money.

Some key considerations venture capitalists consider to invest in a business:

Management skills

Market size

Product with competitive edge

Awareness of risk

Venture capitalists usually invest other peoples money and are professional investors.

For more information on venture capitalists, visit the websites of the Canadian Venture Capital &

Private Equity Association atwww.cvca.caand the National Angel Capital Organization at

www.angelinvestor.ca

13. Issuing shares

If you have an incorporated business, you may be able to raise capital by issuing shares (ownership

in the corporation). You can issue either voting or non-voting shares which means that some

shareholders may or may not have a say in how the corporation is run. Issuing shares will require you

to lose a percentage of ownership in your business (and potentially control), but will help to increase

capital. You should have a shareholder agreement and a lawyer can help in working out the

arrangements and creating one for you.
http://www.angelinvestor.ca/http://www.angelinvestor.ca/http://www.angelinvestor.ca/http://www.cvca.ca/http://www.cvca.ca/http://www.cvca.ca/http://www.angelinvestor.ca/http://www.angelinvestor.ca/http://www.angelinvestor.ca/http://www.cvca.ca/http://www.angelinvestor.ca/


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14. Life Insurance Loan

14.1. Whole Life Insurance Policy

Whole life insurance policy provides the insured lifetime coverage and also builds cash value. Wholelife insurance allows their holders to build equity (cash value) through monthly premiums and to

borrow against their value by using it as collateral for the loan.

This highlights the importance of making an informed choice when you first purchase a life insurance.

If you plan to borrow against your life insurance in the future, buy a whole life insurance policy that

provides both a death benefit and cash value. If you build enough equity, you will be allowed to

borrow up to 90% of your policys cash value. Although a life insurance loan is repayable with

interest, the rates are more favorable than regular loans and there are no credit check prior to

approval as they use the life insurance as a collateral, meaning that the death benefit will be reduced

by the outstanding loan amount.

14.2. Universal Life Insurance Policy

Universal life insurance policy also provides the insured lifetime coverage and contains a policy fund.

The policy fund is built by extra contributions above the monthly cost of insurance. The money in the

policy fund is invested and can grow significantly. Withdrawing money from the policy fund is subject

to tax on any growth that the policy fund sees, but there is no interest on the amount borrowed from

the policy fund.

15. Home equity Loan

A mortgage allows the mortgagor (mortgage holder) to build up equity through payments and

appreciation of the property. The equity is therefore the current market value of a home minus the

outstanding mortgage balance.

There are two types of home equity loans:

Fixed rate loans: the loan is repaid over an agreed-upon period of time and fixed interest rate

over the lifetime of the loan.

Home-equity lines of credit which is a variable rate loan that allows borrowers to access apre-approved spending limit and to withdraw cash when they need it via credit cards or

special cheques. This type of loan has also a lifetime at the end of which the borrowers must

pay the outstanding loan amount.

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