Chartered accountants have advice on financing your small business

Whether you already have an established small business or are just starting one, you may someday require financing. Here are answers to some frequently asked questions about business financing.

Why do I need

financing?

"You may need extra working capital for the business, in order to fund the interim period between making cash payments for purchases and expenses, and collecting cash on goods or services sold on credit," commented Chartered Accountant Paul Rhodes, a partner with Soberman LLP in Toronto. "Long-term financing may also be required to purchase capital assets and equipment."

How will I know how

much I need?

"The key is to have a good business plan," said Chartered Accountant Steve Rose, a partner with Shore, Newman and Rose in North York. "Any lender will request a business plan to determine if your business is viable and whether you can afford the payments on the amount you are requesting."

Should I use my own

savings?

"If you choose not to invest in your business, outside investors would ask why they should put their funds at risk if you aren't willing to do the same," observed Rhodes. "Using your own savings may incur costs, such as an income tax liability on withdrawals from your Registered Retirement Savings Plan."

It is strongly advised to consider the risks associated with using personal retirement savings to fund business ventures as opposed to savings that are unregistered and more readily available.

Should I get a bank loan

or line of credit?

"A term bank loan would be used for such purposes as buying an asset for your business," Rose said. "A line of credit would be established for operating purposes, and you would expect it to fluctuate on a cyclical basis, as your business brings in revenues and pays expenses. You may require both a term loan and a line of credit at the same time."

Should I pursue a government grant or loan?

"If there are government grants or loans available for your type of business, by all means pursue them," Rose commented. "You may also be eligible for certain tax credits, depending on the nature of your business."

What about an angel

investor?

"Outside investors can be great, except they often come with strings attached," observed Rhodes. "The most common string sees the small business owner accountable to the investor. On the other hand, the investor may become a valuable advisor. In any case, make sure the relationship is set out in a formal legal agreement."

How can I improve my

chances of getting

financing?

"A well-developed and professionally written business plan, setting out your business goals and objectives, creates a good impression when applying for financing," Rhodes said.

How can a CA help?

"A CA can help you prepare your business plan, review it and provide valuable comments," Rose stated. "CAs can also arrange contacts with financial institutions or other investors."

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