Capital and financing for Aboriginal small business owners

By Samantha Garner | May 21, 2016

Capital and financing for Aboriginal small business ownersOne of the biggest challenges small business owners face is access to capital. Banks are a popular place to get financial assistance, but did you know there are options specifically for Aboriginal communities as well?

First Nations Bank of Canada is a chartered bank that’s over 80% Aboriginal-owned. It focuses on providing progressive and relationship-based financial services to Aboriginal people, including small business owners. First Nations Bank has several locations around Canada, with three on reserve.

Aboriginals who are members of a First Nation and are living on a reserve in Canada generally don’t own their homes, and the reserve land where the homes are located is governed by the Indian Act, which prohibits the use of the land as collateral for loans.

The Government of Canada, in attempting to meet the obligations under treaties signed with First Nations, provides economic development funding in different forms which may be accessed by reserve members to overcome the possible lack of capital and collateral.

The Government of Canada, through Aboriginal Affairs and Northern Development Canada (AANDC), offers annual economic development funding for each First Nations community, for use in promoting local economic development initiatives, including business and labour force development.

These initiatives may include offering loans or grant funding to a member to help in developing a or expanding a business. At the community level, there may also be an Economic Development Officer to help members with the development of business plans. This may be the first place a reserve member would turn to access guidance and/or additional capital.

The Government of Canada has also provided funding to create local and regional economic development agencies, referred to as Community Futures Development Corporations and National Aboriginal Capital Corporations Association. The objectives of these agencies are to provide entrepreneurial services and access to capital through business development loans, assist with business development/expansion plans and give referrals to other sources of financing.

AANDC has also developed the Aboriginal Business Canada program that, according to its website, “maximizes Aboriginal people’s participation in the economy through business development. We do this by working with aboriginal entrepreneurs and businesses [providing] support to Aboriginal entrepreneurs for a range of activities including business planning, start-up, expansion and marketing.”

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How to use corporate credit cards for small business financing

By Samantha Garner | May 14, 2016

corporate credit cardNeed financing to buy inventory or fixed assets, or to help your business get through a shortfall of cash? Debt financing is money loaned to you or your business, usually by a commercial bank or credit union, for which the lender has a right to earn interest.

Today, we’ll look at how you can use a corporate credit card to finance your small business’ needs.

Using a personal or corporate credit card in a small business

Financial institutions in Canada extend credit to small businesses and their owners in the form of credit cards. Credit cards offer the convenience of a line of credit — the credit is there when you need it, and it’s also handy for separating personal purchases from business purchases.

Be aware of the personal and corporate credit card terms — business credit cards have higher interest rates. If your business fails, you as the owner are likely responsible for full repayment of any outstanding credit card balances. Yikes!

Know your credit score

Let’s say you have a personal credit card with an unused credit limit of $30,000. If you visit the bank for a business loan, you may be surprised to learn that that unused credit of $30,000 will be considered debt that you’ve already incurred. This will increase your debt to equity ratio — used by banks to determine the current proportion of debt you have to the equity you hold.

Why does that happen with credit cards? Their rationale is: although you haven’t used that $30,000 available credit, you could.

Always be on top of your credit rating. Make sure to cancel credit cards you don’t need anymore, which will reduce the revolving credit debt that the banks see when they review your credit history. A better credit rating means better interest rates and loan terms.

Contact Equifax Canada or TransUnion Canada to get instant access to your personal credit score. Check your report closely. Look for credit cards you may have cancelled but which still show up on your credit report, and which are affecting your debt to equity ratio. Look for errors in your report — loans you don’t have, employers you no longer work for, etc.

It’s your responsibility to check your credit report annually. Do this well before you need a loan, corporate credit card, or mortgage. Notify the credit company of any errors so your credit score will be as high as it can be when you meet with your banker.

Further reading:

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Using a mortgage to finance a small business

By Samantha Garner | May 7, 2016

small business mortgage financingNeed money to buy inventory or fixed assets, or to help your business get through a shortfall of cash? Debt financing is money loaned to you or your business, usually by a commercial bank or credit union, for which the lender has a right to earn interest. In order to get debt capital you may have to secure that debt with other assets.

Today, we’ll look at how you can use a mortgage to finance your small business’ needs.

How to use a mortgage as small business financing

A mortgage is a type of loan that is secured by real estate (real estate mortgage) or movable property (chattel mortgage). A mortgage is a method of using property (real estate or personal property) as collateral for the payment of a debt. The term “mortgage” refers to the legal device used for this purpose, but it’s also commonly used to refer to the debt secured by the mortgage, the mortgage loan.

Arranging a mortgage is the most common way you or your business can buy residential and commercial real estate, or other personal or business assets, without the need to pay the full value right away. With a mortgage, you keep the title to the property, but you’ll need to get the lender’s consent to sell it.

A lien — a formal legal claim or “hold” on the title of the asset secured by the mortgage — will appear on the title until the mortgage loan is repaid and written confirmation has been forwarded to you by the lender. Liens keep the business owner from selling the property or transferring its title before the mortgage is repaid.

If you’re considering purchasing used equipment, vehicles, or real estate property, make sure your lawyer searches the title of the asset for registered liens. If you buy and take title to an asset with a registered lien, the lien and the associated debt become your obligation to repay. Buyer beware!

Further reading:

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All about term loans to finance a small business

By Samantha Garner | April 30, 2016

small_business_financingDebt financing is money loaned to you or your business, for which the lender has a right to earn interest. Institutions, usually commercial banks and credit unions, lend a portion of the value of your business’ fixed assets. You can use this financing to buy inventory or additional fixed assets, or to help your business through a cash shortfall.

Today, let’s look at using term loans to finance your small business’ needs.

What is a term loan?

With a term loan, you will be lent money on a short-term (months to two years) or long-term (two to 10 years) basis.

The terms and conditions for repayment of a term loan, including the finance charge or interest rate, are specified in the loan agreement. A loan may be payable on demand (a demand loan), in equal monthly instalments (an instalment loan), or it may be good until further notice or due at maturity (a time loan).

The term of the loan should depend on the useful life, in years, of the assets that the loan is secured with. Term loans are usually used to finance equipment, where the term of the loan is matched to the useful life of the asset.

For example, you shouldn’t agree to a six-month term loan for a piece of equipment that’s expected to last for 10 years. Instead, tie the loan payment term to the expected life of cash inflows from your equipment, and then take your time repaying the loan.

This is synchronizing cash inflows and loan payment terms if cash is tight — and it usually is when you’re first starting your business.

Remember that cash mismanagement is a common cause of small business failure. Be sharp when you’re negotiating your term loan!

Further reading:

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Using a line of credit to finance a small business

By Samantha Garner | April 23, 2016

small-business-debt-financingDebt financing is money loaned to you or your business, for which the lender has a right to earn interest. Many small business turn to debt financing through commercial banks and credit unions. These institutions will lend a portion of the value of your business’ fixed assets. You can then use this financing to buy inventory or additional fixed assets, or to help your business through a cash shortfall.

Today, let’s look at the line of credit to finance your small business’ needs.

What is a line of credit?

A line of credit is a loan used by the borrower when needed and is usually secured by an asset. For example, a home equity line of credit (HELOC) is secured by the equity in the borrower’s home. A commercial line of credit (CLOC) is a business line of credit secured by company assets like inventory or equipment.

Lenders will usually advance between 50–80% of the value of your accounts receivable plus 50% of the value of inventory — known as a margin formula. There is an agreement between the borrower and the lender on the amount of line of credit, interest rate, and terms of repayment.

Why use a line of credit for small business financing?

Many small business owners turn to lines of credit because they’re convenient. They can be used in emergencies without having to go to the lender to ask for a new loan.

One word of warning: always arrange for a line of credit before you actually need it. Trying to get a loan when you’re already in a cash flow crisis is usually a dead end.

Further reading:

Debt sources of financing for small business

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