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?