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Financing Solutions in a Challenging Environment: Taking the next step with confidence,
by Gary A. Fitchett, CA
THE CANADIAN BUSINESS FINANCING HANDBOOK
• Professional reference service
• Published by CICA
• Updated half-yearly
• Published in 1992
• 2,500 pages
FINANCING OVERVIEW
• How to arrange financing
• Where to go
• How to go
IMPACT OF GLOBAL ENVIRONMENT
• Shortage of credit
• High uncertainty
• Interest rates
• High prices
• Recession
• Stock market crash
• Unstable currency
• Unemployment
AUTO SECTOR
• Shrinkage of sales
• Inefficient operations
• Labour and legacy costs
• Impact on supply base
• Consequences to infrastructure
IMPACT THROUGHOUT SECTOR
• Financing for auto purchases
• Incentives diluted market
• Guarantee warranties
• Support parts sector
• All “stakeholders” support
LOOK INSIDE FIRST…
• Accounts Receivable
• Inventories
• Redundant Assets
• Accounts Payable
• Operating Costs
• Restructuring (Proposals)
• Cash Flow Planning
EXTERNAL FINANCING OPTIONS
• Bank
• Term Loans
• Mezzanine Debt
• Equity
• Government Funding
• Leasing
• Factoring
• Trade Finance
OTHER BANKING ALTERNATIVES
• Schedule 2 banks
• Credit Unions
BUSINESS IMPROVEMENT LOAN
• Canada Small Business Financing Act
• For every business, up to $5 million in sales
• Maximum loan $250,000
• Government guarantee – 85%
• High ratio capital – 90% of cost of fixed assets
• Limited personal guarantees
MEZZANINE DEBT
• Quasi-equity
• Sometimes called:• Subordinate debt
• Participating debt
• Junior debt
• Suited to predictable cash flow
• Compensate by:• Royalty• Fee• Share of profit• Options/ warrants
BUSINESS DEVELOPMENT BANK
• One-stop shop
• Working capital
• Conventional term loan
• Mezzanine debt
• Guarantees
• Venture capital
• Consulting
GOVERNMENT SUPPORT
• Assistance vs. Incentive
• Every tough deal
• Focus on jobs
• National Research Council
FACTORING
• “ Invoice Discounting ”
• Sell Accounts Receivable
• Costly, but allows to achieve objectives
• Average cost – 6% of invoice
• Complementary to bank
EQUITY
• Key foundation for business
• Reflects personal commitment
• People Power:
EARLY STAGE FINANCING MODEL
TAPPING PEOPLE POWER
• Royalty Units for leasehold alterations
• Preferred shares for ladies wear shop
• Angels invest profit sharing bonuses
• Royalty units for art production
OTHER KEY SOURCES
• Employees (ESOPs)
• Customers
• Suppliers
• “Angels”
FIVE C’S OF CREDIT
Character
Capacity
Collateral
Capital
Conditions
FIVE IMPORTANT QUESTIONS TO ANSWER
• How much do you want?
• How long do you want the money for ?
• What are you going to do with the money ?
• How are you going to repay the money ?
• What are the alternative sources of repayment in the event of something going wrong ?
THE BUSINESS PLAN
• Executive summary
• Business description
• Products or services
• Market analysis
• Marketing strategy
• Operations
• Management and organization
• Timing schedule
• Financial information
• Funds required
HOW TO DEAL WITH DIFFICULT CIRCUMSTANCES ?
• Litigation
• Bankruptcy
• Bad credit history
• Divorce
• Medical problems
• History of poor decisions
• Flashy taste
RESPONDING TO THE LENDER’S OBJECTIONS
• The business is under-capitalized…
• The business has not earned a profit yet…
• The proposed loan is too much money…
• The business is too risky…
• Your business strategy is not sound…
• Not enough collateral…
• The financial forecasts are unreliable…
REJECTION !
• No, but ...”
• “No, unless ...”
• “I cannot say yes, because ...”
• “Not yet ...”
• “No, because the bank ...”
• “Hell no…”
QUESTIONS?