August 23, 2008 Saturday Morning Show with Guest Dave McKerlie, Account Manager, Small Business, ScotiaBank London Main Branch

Today I'd like to talk about some creative financing ideas when it comes to finding money for new start up of small businesses. First it's important to briefly define what exactly constitutes a "small" business. Small business is defined by the government and hence the banking world as any business with the gross annual revenue of no more than $5 million. The bank further describes a small business as having less than $5 million in sales and credit needs of $500,000 or less. If the business in question exceeds the sales or borrowing amounts, it is no longer considered a small business by definition.

In this segment, we are going to be talking about start-up businesses as well so, while we are at it, let's define what exactly a start up business is. The bank definition of a start up business is a business in operation and generating income, for a 24 month period. Some customers have made the argument that the business they are purchasing has been operating for 10-15 years so the start up label shouldn't apply to them. If the purchaser of the business has been employed by that business and has a wide range of experience in this business, sometimes we are able to make an exception but generally, when the ownership of the business changes hands, the clock starts over.

Jeff:
So why is the 2 year mark so important?

Dave:
If a business is going to fail, statistics show that it's most likely going to be in the first 2 years. Banks are not high risk lenders. As a result, banks generally like to finance small businesses that have at least a 2 year track record.

Jeff:
If banks only like to finance small operations in business for 2 years or more, what options are available for start up businesses?

Dave:
That's a great question Jeff. You know, at the bank we warned about using a lot of acronyms that not everybody would understand. There is one acronym that every small business owner should know however and that is CSBFA.

CSBFA stands for Canada Small Business Financing Act. This is more commonly referred to as a government guaranteed loan.

Jeff:
So tell us some more about this government loan

Dave:
Some years ago, the federal government saw a need to come up with a loan to encourage the entrepreneurial spirit in Canada. The loan is approved through all chartered banks and secured or guaranteed by the government of Canada.

Here are some of the details. Through the government guaranteed loan you can finance equipment purchases, leasehold improvements and building purchases. The figure to keep in mind here is 90%. That means that you can finance 90% of the cost through the loan.

Jeff:
That's interesting Dave, is there anything that can't be financed through this loan?

Dave:
There are a few things Jeff. Inventory, because of it's liquidity can't be financed and goodwill because of it's nature can't be financed but virtually all fixed assets and improvements can be financed.

Jeff:
Can used equipment be financed through the loan?

Dave:
Great question. Actually used equipment can be financed through the loan if the equipment is purchased through a reputable equipment dealer. If the equipment is being purchased privately, an appraisal will have to be ocmpleted by an accredited appraiser.

Jeff:
Dave are there any fees associated with this loan?

Dave:
There is a 2% fee charged to the customer on the total amount of the loan used so on a loan of $100,000 the fee would be $2,000. The customer has the choice of either paying the fee themselves or adding the fee to the loan.

Jeff:
What is the toal amount of loan that a customer could apply for Dave?

Dave:
The maximum amount that any one customer can apply for is $250,000.

Jeff:
What kind of pricing can a customer expect to see on a CSBFA loan?

Dave:
Pricing is set by government guidelines and generally, the customer will be paying Prime + 2.5%. Bank Prim at present is 4.75% so the loan rate will be approximately 7.25%. For a start up business, this is a fairly attractive rate.

Jeff:
Can a customer fainance either GST or PST taxes throught the loan?

Dave:
No taxes can't be pain by the loan. The loan is strictly for the purchase of the asset and not for the financing of the taxes associated with the purchase which quite often is recoverable to the customer.

Jeff:
Are there any additional features of the loan that our listeners should be aware of Dave?

Dave:
There is one unique feature that i haven't covered yet. For start up businesses who are approved for a CSBFA governemnt guaranteed loan, make sure you ask up front about the intereste only period. The government has provided that you may be approved for up to 11 months interset only payements, before you start paying back the loan. This is a huge feature for start up businesses when cash flow is tight, especially in the first few months.

Jeff:
Dave, we've covered alot of information about the CSBFA governemnt guaranteed loan program, i wonder if you might review the main components of this loan to refresh our memories.

Dave:
Sure, i'd be glad to. CSBFA stands for Canada Small Business Financing Act. The maximum amount is $250,000. It can be used to finance the purchase new or used equipment, finance leasehold improvements or to finance the purchase of a building. The interest rate is usually Prime + 2.5% and there is a 2% application fee which can be financed throught the loan. And, don't forget that you can get up to 11 months interst only period for start up businesses. The bank usually has to control funds for the loan which means that you supply the bank with the invoices to be paid and we will pay them directly. You can apply for this loan through any major chartered bank. Before applying for the loan, i would suggest you visit their website. Just type in CSBFA and follow the link.

Jeff:
That's great Dave. Do you have any advice for start up business owners who are looking for financing for their new buiness? Specifically Dave, what would you suggest a business owner bring with them when they meet their banker to apply for a small business loan?

Dave:
Small business owners in the past have had a love/hate relationship and in my opinion, neither one of them have given enough respect to the other one. As a former small business owner i can tell you that i was extremely guarded with the informaiton about my small business. Small businesses to their owners are like their children, they are a part of their personal information when meeting with a banker for financing. In order to secure financing, small business owners need to open themselves up to their banker. On the other side, banker's need to appreciate the small business owners are special people. They work extemely hard and long hours at their business. They are proud of the business they are building and rightfully so.

Having said all that, there are some things that the small business owner can do to increase their odds of securing financing for their business. When they meet with their banker they should be prepared and have the following:
1. Articles of Incorporation or Master Business Licence showing the legal name
of the company.
2. Personal Notice of Assessment for each of the owners.
3. Financial statments, prepared by a Chartered Accountant for the last 2 years
if possible
4. If this is a start up business, you should have a 2 year projected income
statment and an opening balance sheet.
5. Prepare a quick net worth statment and take along with you
6. If you are purchasing a franchise, take along the franchise agreement
7. Take along the quote for the equipment you are wishing to buy
8. Take along details of your lease or a copy of your lease if possible

Do your homework and be prepared. Meeting with you banker should be a scarey experience. You can make it less scarey by beeing properly prepared.

If you would like to talk over your financing needs, Dave can be reached at 519-642-0308 or his email address is dave.mckerlie@scotiabank.com