Small Business Financing in Canada: Show Me the Money!
By Julie King | September 30, 2009
It was a classic moment in movie history.
Jerry McQuire, played by Tom Cruise, listens in obvious discomfort as Ron Tidwell, a football player played by Cuba Gooding Junior, rants about his problems.
McQuire desperately needs to keep this one client, but things do not look good. Then comes the moment of hope. Tidwell says his wife likes McQuire. He will stay with him. He just needs Cruise to do one very personal, important thing - it's a family motto.
"Show me the money," says Tidwell. Quietly at first and then with unbridled enthusiasm.
The rest is cinematography history.
While Hollywood movies often make tough times look easy, the stark reality of business start-ups is that struggles can be difficult to overcome. To help we are going to show you the money by outling some of the most important sources of financing for start-up and growing businesses.
When you start a business, you will need money. Your first point of contact should be the people who know you best: your friends, your family, yourself.
Who better, after all, to recognize your potential and be willing to risk capital on your chance of success?
One advantage of borrowing from family and friends is that they are usually more patient in waiting for their funds to be repaid. They will want their money back, but will probably offer modest interest rates and generous payment terms.
A common mistake made by start-up businesses is that they look to the banks for financing.
Banks are risk-adverse institutions. When they lend you funds, they will look for hard proof that you are a good investment and can service the requested debt. As such they are more likely to finance a business with a track-record that can demonstrate sales and predictable revenue. Expect to put up your own capital and assets like your home to secure financing as an early stage venture.
There is a lot of confusion about availability of government grants and loans. Government financing exists, but usually in the form of highly targeted programs.
There are hiring programs and tax credit programs that will give you back a portion of the money you spend on things like salaries, technical hardware and marketing expenses. There are also two crown corporations, the Business Development Bank of Canada (BDC) and Export Development Canada, which provide financing to businesses that meet their criteria.
Here are some of the key starting points to consider when evaluating your government financing opportunities.
Business Credit Availability Program
The Business Credit Availability Program is a new program introduced by the federal government to make it easier for businesses to obtain credit while the economy emerges from the recession.
It is estimated that the program will invest roughly $5 billion dollars in new loans and credit support through a partnership between the BDC, EDC and financial institutions. Businesses are encouraged to contact the BDC and EDC websites to learn more about the program.The Business Development Bank of Canada (BDC)
The BDC is mandated to build the capacity of Canadian entrepreneurs, with a special focus on small and medium-sized businesses. The bank still looks for a solid business case when extending financing, but has a higher tolerance for risk than traditional banking lenders.
If you secure financing through the BDC, the bank will likely require that you accept consulting services as part of your loan agreement.
This does increase your effective borrowing costs, but can also improve your chance of long-term success. A recent Statistics Canada survey showed that BDC-supported businesses had higher revenues, higher employment growth and survived in business longer.Equipment Financing: the Canada Small Business Financing Program
If you are looking to purchase or improve equipment, make leasehold improvements or buy property you can look into the government supported Canada Small Business Financing (CSBF) program.
Businesses with less than $5 million in gross revenues can apply for up to $500,000 in financing under the program, in which the government encourages financial institutions to make loans to small business through loan guarantees.The SR&ED Tax Credits Program
The biggest tax credit programs in Canada is the Science Research & Experimental Development (SR&ED) - pronounced "shred" by those familiar with it.
In 2007 the SR&ED program put an estimated $4 billion back into Canadian companies that undertook eligible research and development. Under the SR&ED program, qualifying corporations can earn an investment tax credit (ITC) of 35% up to the first $2 million of qualified expenditures for SR&ED carried out in Canada, and 20% on any excess amount. Eligible expenses include wages, materials, machinery, equipment, some overhead, and SR&ED contracts.
Many businesses mistakenly believe that the SR&ED tax credit program is only open to companies focused on science and engineering. In practice, any business that advances science or technology, addresses a scientific or technological uncertainty, or that undertakes a systematic investigation conducted by qualified personnel may qualify.
If you are looking at using the SR&ED program, watch for potential changes in the near to mid term. The federal government recently signaled that it may narrow the program to "research-oriented" firms, which could further suppress innovation in Canada.
Provincial & Regional Tax Credit Programs
There are many regional tax credit programs as well, especially in the area of media arts like film, writing and new media development.
For example, businesses in Ontario can secure up to $100,000 in tax credits a year for the development of interactive digital media or video games.
Managed by the Ontario New Media Development Corporation (OMDC), these tax credit programs will often cover up to 30% of salary costs for eligible expense. Under the OMDC umbrella alone there are tax credits for book publishing, digital media, animation, film & television, production and sound recording.
When looking for regional programs, it pays to do your research. Visit appropriate government sites, contact local government offices and track industry association websites to stay on top of the different programs being offered.
Programs to help you hire staff
When it comes to hiring, HRSDC plays a strong role as well. There are a wide gamut of programs designed to help move people from unemployment to self-employment. Programs are available for seasonal hires, recent graduates looking to secure their first jobs, immigrants looking to establish work experience in Canada and others.
Again, your best option is to contact your local HRSDC office to find out what is being offered.
The final word ...
There are very few Jerry McQuires in the world. For most business starting up financing will be one of the most difficult challenges. Expect to work hard when looking for financing. But also keep an open, optimistic mindset.
Money may not be easy to find, but it exists -- and in more places than you might expect.