Page 59 - Business Basics for Alberta Food Processors

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Financing Your Business
It is said that there is really no such thing as risk
capital from a bank. Although banks are concerned
with the high risks of new businesses, they are still
the chief source of debt financing for small and
medium size businesses in Canada.
Be prepared to invest most, if not all, of your
personal assets in your business. You can not expect
a bank to assume a risk that you are not willing to
undertake. Your projected income statement, along
with your financial needs, indicates the size of your
loan and ability to repay the funds.
Your projected income statement should detail your
projected revenue and expenses. You must prove to
investors or lenders that your proposed statement is
realistic and obtainable. Many numbers for this
statement can be acquired through market research
and analysis. Projections should be for three years.
Along with your projected income statement, detail
your cash needs for fixed asset purchase, inventory
and associated start-up costs.
Banks usually request business resumes and personal
net worth statements from all business principals.
When applying for any loan, be prepared to sign an
unlimited guarantee form. Should your company
default on repayment, this commits your personal
Sources of Financing
There are a number of sources of financing for a
business venture. Funding sources generally fall into
three categories
1. Equity Capital
Equity capital is the amount of money that you and/
or your partners put into the business, or raise from
other investors. Equity capital is not debt. While
investors share in the profit and losses of the
business, their investment is not a loan.
• Personal Investment
Personal savings, securities, real estate and other
personal assets are the most obvious source of
cash for equity financing. Friends and relatives
may provide additional sources of funds. Personal
investment demonstrates a faith in and
commitment to your business. This is important to
other potential investors and lenders.
• Partnership Investment
Obtaining a partner means that ownership of the
business, including profits and liabilities, is
normally shared.
• Shared Investment
A business may be incorporated as a private or
public corporation. A private corporation can have
up to 50 shareholders, but it cannot sell shares to
the general public. Public corporations can sell
their share to anyone. They provide the greatest
opportunity for raising equity capital. However,
offering shares to the public can be a long,
complicated and expensive procedure.
• Venture Capital Firms
These firms provide equity financing, usually for
high risk enterprises with potential. As a general
rule, venture capitalists plan to liquidate all or part
of their investment in a business for a substantial
profit within five to ten years.