Step 7: Financing the Business
Sources of Financing
Will you need to borrow money to start your business? Most new business owners do. They approach banks, credit unions and other financial institutions for a loan or line of credit. In Nunavut, where there are only a few banks in the regional centres, government and Inuit organizations also provide lending services, and in some circumstances, will provide a new business a small financial contribution that does not have to be repaid.
No lender will provide you with all the money you need. You will be expected to show that you are willing to risk your own money, too. This money will be your personal savings, or money that friends and family may be able to lend to you. Some new business owners “keep their day job,” and work for wages for someone else so they don’t have to take a salary from their business. They may even use their earnings from regular employment to subsidize their new business
Most lenders are looking for a safe investment.
Lending institutions make their money by charging interest on their loans, so they want to be sure that the borrower will be able to repay the money. They will look at your history as a borrower – have you repaid loans in the past? They will want to review your business plan before they will approve a loan.
Here are some other considerations:
- Do you have a good “character” and reputation in your community?
- Will you be able to repay the loan? The lender will want know your current and projected income and cash flow.
- How much money do you want to borrow? Does the loan request make sense according to your projected cash flow?
- What collateral can you offer to secure the loan? Usually you must show that you can provide 10 to 30 per cent equity.
- How much are you investing?
The Federal and Nunavut Governments and various Inuit organizations offer funding assistance programs for Inuit and Nunavut-owned businesses. Appendix D provides details on some of these programs.
The importance of savings
When business people in our communities are asked to list their biggest problems they almost always include “access to capital.” But what is capital and where does it come from? Capital is the term we use in the “money economy” for the money a business needs to get started and to grow.
There are only three sources of capital: loans, contributions, and savings. Loans are difficult to get, must be repaid on schedule, and they will never provide all the capital a business needs.
Contributions from government or Inuit organizations usually are provided only once, and for small amounts of money that can be used for specific purposes only. Savings, on the other hand, is your money, that you can use any way you wish. It is the most important source of capital for your business.
How to create savings?
In business, savings are produced by earning a profit – what is left over from your earnings through sales after you have paid for labour (your salary) and production costs (materials and operating expenses). Most of your profit must be set aside and saved, to provide the capital your business will need to grow, or, in some cases, to help you in the future when sales may be slow or you have to deal with an unexpected cost.
In the traditional economy, what you “earn,” or make, or harvest, is almost always consumed immediately. In the money economy, however, using all your money right away is called “living hand to mouth” and you cannot run a business this way. You need to put some money aside as savings, to survive. You always need access to capital.
Tips
Here are some concepts you need to understand when thinking about financing your business.
Working Capital is the money that is used to operate your business day-to-day. Most businesses use a line of credit from a bank for this purpose.
Debt is the money that your business owes to others. (Remember that debt also includes the interest charged on the debt).
Equity is how much your business is worth after you’ve paid all your debts. It includes any of the business assets and money earned and saved over the years by your business.
Leverage is the ability of your business to use its equity to get more financing. To leverage your business or personal property is to risk that you could lose one or both if your business fails – so be careful and do your homework!