Managing your savings: Cash is king

Experts suggest keeping a year’s supply on hand Bank loans, other credit are popular financial tools

Running your own business also means properly managing your personal wealth. Cash in hand, whether from savings, severance, inheritance, personal loans or from friends and relatives, remains the most readily available source of capital for Canada’s burgeoning entrepreneurial class, which is attracting women and young people in growing numbers.

Kristina Depencier, national manager for small business and women’s markets at RBC Royal Bank, said collateral requirements to secure business financing for women entrepreneurs are about the same as they are for men. She said women are approved for financing at a slighter higher rate, perhaps because they are more conservative in setting up their businesses’ capital structure — and they borrow less. She said the priorities of women entrepreneurs, whose numbers have tripled in the past decade, “ tend to be different” in that a life balance is given consideration along with efforts to expand the business.

While bank loans and more innovative mechanisms such as supplier credit are widely used for start- up, expansion or ongoing funding among entrepreneurs in general, collateral in the form of personal or business assets is essential to close any financing deal, experts say.

Arriving at the amount of personal commitment “ has always taken a bit of a negotiation,” said Brian Holt, Toronto- based director of small business at Bank of Nova Scotia. He added business owners are understandably reluctant to risk their homes and savings in order to backstop debt financing, but the banks and nontraditional lenders need to see a ponying up of personal resources as a show of faith in a proprietor’s commitment.

Statistics Canada research indicates that 49 per cent of the 2.5 million small- and mediumsized businesses in Canada rely on banks and other institutions to provide them with business financing, usually through terms loans and operating lines of credit. But personal savings account for 35 per cent of the funds used by small business and more than 70 per cent of owners use credit cards for at least some business financing, especially in the early going.

Other leading sources include personal lines of credit and loans, leasing arrangements and government agencies and programs, which may pay some or all of the costs of developing a new technology, for example.

“ Love money,” loans from employees, friends and relatives, represents about 12 per cent.

In general, you will need to commit cash and investments for business operating funds. And you may have to pledge at least part of the value of your residence as collateral.

It also helps to have a solid credit history, experience and expertise in the relevant area, a detailed business plan, a positive personal history with a financial institution, even a spouse with steady pay. One rule of thumb is that business owners should have enough cash to cover at least one year’s operating expense.

Jack Goldston, owner of Dartmouthbased welding and truck repair company TG Industries Ltd., said he has demonstrated his commitment to his business time and again — and at considerable personal risk.

“ I’ve put most of my assets into this from the beginning and I continue to do so to this day,” he said. The 55- year- old bought 50 per cent of the company in 1989 with $ 100,000 in borrowed cash secured by a personal guarantee that pledged his house and savings as collateral. He redeemed a block of retirement funds and continues to funnel bonus or other payments from his company back into the 44- employee business.

Goldston said his pledge overrides incorporation or other legal structures aimed at limiting liability, adding even federally backed loans require such a guarantee, at least against a portion of the principal.

Canadians are taking the small business plunge in increasing numbers. And many, whether through inheritance, buyouts or increased home equity, are getting started with sizable assets of their own.

“Canadians are more entrepreneurial than they are given credit for and that’s a good thing,” said Canadian Federation of Independent Business president Catherine Swift. She said business owners who have pledged assets against loans and commercial credit should be aware of what assets are on the line. They should negotiate to shift as great a portion as possible away from the collateral position as soon as business income warrants the move, she said.

Swift said entrepreneurs should use non- personal assets where possible and pledge those assets as the first line against foreclosures, adding she believes entrepreneurs depend too much on savings, personal assets and family support. But she said the reality is that most start-ups are primarily funded through individual wealth, which provides a well of operating cash in a businesses’ first year or two, as well as loan collateral. Generally speaking, of course, the more collateral, the lower the borrowing costs.

Kyla Eaglesham, a former Air Canada purser who used a buyout package to help provide operating capital for her bakery

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said she

has used

her own

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with support from her employed husband, to cover living and business expenses since she opened Madeleines Cherry Pie and Ice Cream in 2004.

Eaglesham, 34, also landed a $70,000 equipment purchase loan from the Business Development Bank of Canada, a commercial bank owned by the federal government that offers consulting along with long-term business financing, usually at terms less favourable than those offered by private- sector lenders. She said she was able to use the baking equipment as collateral for the loan. Other government funding sources include the Canada Small Business Financing Program that helps financial institutions and leasing companies make their financing available to small businesses. Under the program, a small business with estimated annual sales of less than $5 million can apply for a loan or capital lease of up to $250,000 from a bank, credit union, caisse populaire or a participating leasing company. If the loan or lease is granted, Ottawa reimburses 85 per cent of the lender’s or lessor’s losses in the event of default.

Vehicles and equipment are often leased to maximize cash flow and avoid tying up an entrepreneur’s own or borrowed capital. There is a strong tax benefit to leasing, since payments count as deductible operating expenses. Owning the asset may entitle the owner to deduct only depreciation costs.

Eaglesham’s arrangement is typical, according to statistics, with most owners using term loans from banks to fund startup capital costs — and commercial or personal operating lines of credit, business credit and supplier credit for expenses.