Chapter 5 – Financing Your Business
You should now have a good idea of the amount of money you will need to start your business, including start-up costs and money set aside for emergencies (contingency allowances).
The first step in your search for financing is to understand the pros and cons of the two ways you can fund your business:
- Equity Capital – Also called equity financing, is the money provided by the owner(s) of the business.
- Debt Capital – Also called debt financing, is the money provided by outside funders. It is borrowed for a set period of time and is paid back with interest.
There are many sources of financing available for a small business in the NWT. Which type of financing is right for you will depend on the type of business, the amount of equity you have already contributed to the business and whether you can get funding from another source.
Your business plan is the most important piece of information you need to obtain financing. The main sources of financing are:
- Equity capital
- Private sources of funds
- Commercial loans
- Government and not-for-profit financial assistance
You will have to invest in the business you are starting. Your investment, also called ‘equity capital’, can take the form of money, other personal assets (land, buildings or equipment) or ‘sweat equity’ (your work in getting the business up and running).
If you cannot provide the entire amount required to start a business you will have to obtain additional funding from other sources.
Private sources of funds
Friends, family or business associates who might invest in your business or lend you money are all potential private sources of funds. It is important to give them the same information about your business that you would give a commercial, government or not-for-profit funder.
A common form of private financing is to share ownership of your business in return for an investment. Before you make this kind of an agreement, you should get advice from your lawyer and accountant. It is important that everybody involved in a private financing agreement is aware of the potential losses or obligations that could result from the operation of the company. It is also important that the written agreement is clear and protects everyone involved as much as possible.
Know how you will finance your business. Visit potential funders prior to seeking financing to gather information. Ask your funder what they will want to see before you apply for financing.
Banks generally offer a wide variety of loan programs. The interest rate they charge will depend on the risks they see in your business. When you are choosing a bank, shop around to pick the one that will best meet your needs. You may also want to ask others about their experience with different banks. Please refer to your local telephone directory for contact information for banks in your area.
Before you approach a funder for money for your business, you should have a very clear idea of exactly what you want the money for. Your business plan will help you explain your needs and plans to the funder.
Loans are either:
- Short-term – Debts that can be repaid in one year are considered short-term loans. Short-term loans are usually for financing inventory, accounts receivable or general operations. They are often done through a ‘line of credit’ and the amount of the loan changes depending on your needs. Shortterm loans are usually available from banks at current interest rates.
- Long-term – Debts that will not be paid off within one year are considered long-term loans. These loans are usually used for financing fixed assets, such as buildings or equipment. Long-term loans are also called ‘term loans’ because they are for a specific period of time. Interest rates for long-term loans are based on your particular circumstances.
Collateral accepted by a funder
To protect themselves, funders will require collateral. Collateral is something that you promise to give the funder if you cannot repay your debt. If, in the future, you are unable to pay back the money you owe, the funder would acquire your collateral in place of what you owe them.
Collateral can include:
- A written promise from somebody else to pay your debt if you cannot (called a personal guarantee)
- A life insurance policy that can be surrendered for cash
- Accounts receivable
- Investments that can be exchanged for cash, such as bonds or term deposits
- Other assets
Common restrictions for borrowers
To further protect themselves, funders may also set some rules about what you cannot do (restrictions) and what you must do (requirements) while you have a loan with them.
Requirements can include:
- Maintaining a minimum level of working capital
- Providing financial statements at regular times
Restrictions can include:
- Not being allowed to sell the company or any of its assets without the funder’s approval
- Not being allowed to get other loans without the funder’s approval
- Not being allowed to provide a personal guarantee for somebody else’s loan
- Limitations on the type of land, building or equipment you can buy
- Not being allowed to lend money or advance money to others
- Limitations on the dividends or other types of payments you can make to investors (shareholders)
Government financial assistance
Many governments and not-for-profit organizations offer financial assistance to small-medium sized businesses. Generally, the funding they offer falls into four categories:
Contributions and grants
Small amounts of money that you do not have to pay back. Each organization has specific types of projects they will fund. There may be limitations on who can apply for and receive funding.
Have to be repaid with interest, the same as with a commercial lender. Each organization will have limits on how much they can lend you. These organizations are usually trying to support small businesses or economic development, so they have different requirements and restrictions than commercial lenders.
A long-term source of funding that is exchanged for shares in your company. When you receive a equity investment, you usually agree to pay dividends to the investor and to buy back your shares from the investor at specific times. Some organizations may expect to have a say in how you run your business in exchange for their investment.
Standby Letters of Credit
Documents that commit the organization to pay your debt to a supplier if you are not able to do so. They allow you to buy inventory on credit, rather than having to pay up front. Standby Letters of Credit can also be used for contract security on construction projects and in other similar situations. If you are not able to meet your commitment and the organization has to pay for something for you, the amount paid usually becomes a loan that you will have to pay back over time.
Small Business Funding
It is important to look at your cash forecasts and decide whether you will have enough resources, or whether you will need to raise more. Don’t forget to build in a contingency fund for unforeseen circumstances.
Northwest Territories Funding
Industry, Tourism and Investment (ITI)
The Department of Industry, Tourism and Investment (ITI) has focused on finding ways to promote diversification of the northern economy while continuing to promote and support development opportunities in all communities.
SEED Policy Elements
The Sector Support available for individual NWT Businesses, NWT Business Associations, Aboriginal Organizations, or Municipalities within the sectors: E-commerce, Energy and Environmental Sustainability, Industry focused on Import Replacement, and Tourism. There are two categories of Sector Support: Capital Expansion and Sector Research.
The purpose of the Capital Expansion Incentive is to offset loan interest associated with new capital purchases for the expansion of a business.
The Sector Research Support provides contribution to support product research and investment attractions such as: product development and packaging in sector approved business.
The Micro-Business category of the SEED policy supports individuals or small business where revenues are not likely to exceed $50 000. Funding is generally used for equipment, raw materials, and other necessary expenses.
Business Intelligence and Networking
Networking category of the SEED policy can offset the costs associated with attending seminars and trade shows to access information regarding new technologies or business opportunities. Where business trip costs exceed $1,500, assistance may be provided to a maximum of $3,000 per annum for up to two individuals per business. In order to receive this funding, you must contribute a minimum of $1,000 towards eligible costs of each trip.
Business Support Applicants
Under this category applicants are eligible for up to $15,000. This category is for start-up funding, asset acquisitions (level two communities only), operational support, and market and product development.
Programs for Business Support Applicants
For planning, engineering, start-up capital or other developmental costs, start-up funding may be available.
Capital assistance is available for residents of small communities to purchase capital items for operations of the business and/or to help with loan leverage where assistance is not otherwise available.
This assistance must support the continuation or creation of employment directly, improve efficiency or capacity of a business required to stay competitive or access new markets.
Market and Product Development
The purpose of the Market Development and Product Promotion program is to assist businesses selling new or existing products from the Northwest Territories; and/or to improve and assist product development that would increase sales of Northwest Territories products to new markets. Tourism, arts and crafts, and renewable resource-based business may apply for marketing assistance. Products can take the form of almost any item or service. Funds can be used to take part in trade shows.
Operational support is provided:
- to increase business skills and capacity
- to identify and address problems faced by the business
- to develop a recovery or restructuring plan
- to provide emergency relief for business recovery
- to assist with the cost of orderly “winding down” of a business.
Eligibility for the SEED Policy
To determine your eligibility for SEED funding, Community Economic Development Officers or ITI Regional Offices will be able to answer questions about the programs available and what you need to meet application requirements.
Department of Industry, Tourism and Investment (ITI)
North Slave Region
2nd Floor, YK Centre
P.O. Box 1320
Yellowknife, NT X1A 2L9
Tel: (867) 767-9212
Fax: (867) 873-6109
1st Floor, Nishikhon Building
P.O. Box 70
Behchokò˛, NT X0E 0Y0
Tel: (867) 392-6119
Fax: (867) 392-6339
South Slave Region
Highway #5 Regional Office
P.O. Box 231
Fort Smith, NT X0E 0P0
Tel: (867) 872-6430
Fax: (867) 872-4628
#156 Miron Drive
Hay River, NT X0E 0R2
Tel: (867) 875-5570
Fax: (867) 875-5551
P.O. Bag 1
Inuvik, NT X0E 0T0
Tel: (867) 777-7196
Fax: (867) 777-7321
9902 – 105th Ave
P.O. Box 240
Fort Simpson, NT X0E 0N0
Tel: (867) 695-7500
Fax: (867) 695-7501
Edward G. Hodgson Building
P.O. Box 149
Norman Wells, NT X0E 0V0
Tel: (867) 587-7171
Fax: (867) 587-3018
NWT Business Development and Investment Corporation (BDIC)
The BDIC supports the economic objectives of the GNWT by encouraging the creation and development of businesses, providing financial assistance and directly investing in businesses.
The BDIC also provides information to businesses and members of the public. Financial programs include: short and long-term loans, Standby Letters of Credit, working capital guarantees, venture investments, contributions and subsidiary companies.
The BDIC lends to viable businesses that are unable to obtain financing elsewhere.
If your business requires customized or non-standard repayment terms, the BDIC can customize the repayment schedule to meet your needs.
Standby Letters of Credit
The BDIC may provide Standby Letters of Credit for contract bids, performance security on contracts or to pay for goods and services.
There is an annual charge for this service that varies from 2% to 4%, depending on the borrower’s risk.
Working Capital Guarantee
The BDIC can help your business obtain working capital financing (i.e. operating lines of credit or overdraft) by guaranteeing a working capital arrangement with your bank.
Business Development Project Fund
The Business Development Project Fund (BDPF) is a contribution program to help fund start-up expenses, expansion, raw materials (for arts and crafts production) and short-term projects that create employment. The maximum in any 5 year period is $20,000 ($10,000 for businesses in level I communities).
BDPF Aftercare Funding
The BDPF Aftercare Funding can provide businesses with contribution funding for accounting and bookkeeping software and services, taking a business training program, succession planning or website software or services. The lifetime maximum for BDPF Aftercare Funding is $5,000 ($3,000 for businesses in level I communities).
The BDIC may provide subsidies and capital investments to northern companies that generate revenue and employment in communities. In return for the investment, the BDIC
owns more than 50 percent of these companies.
The BDIC invests in businesses in return for preferred shares carrying annual dividends. The amount of the dividend reflects the risk of the investment. These investments are long term.
NWT Business Development and Investment Corporation (BDIC)
701, 5201 – 50th Ave.
Yellowknife, NT X1A 3S9
Tel: (867) 767-9075
Fax: (867) 765-0652
Toll Free: 1-800-661-0599
Level I and Level II Communities
Level I: Yellowknife (including N’Dilo), Hay River, Fort Smith & Inuvik
Level II: All other communities in the NWT
Community Futures Organizations
The Community Futures Program is a community-based economic development initiative delivered in each region by Community Futures Development Corporations.
These Corporations operate independent of government as non-profit organizations and are overseen by volunteer Boards of Directors representative of the regions and communities that they serve.
While each Corporation has some flexibility to set its own priorities for economic development in its respective region, they each offer a core set of services including:
- Business loans and loan guarantees
- Counselling and assistance for entrepreneurs beginning or expanding a business
- Wage subsidies for those who are unemployed and want to start a new business
- Access to Canada Business NWT internet sites and business information services
All 33 NWT communities have access to the Community Futures Program. Seven organizations deliver Community Futures Programs in the Northwest Territories. They are represented by the Community Futures Association.
Northwest Territories Community Futures Association
Tel: (867) 920-2502
Deh Cho Business Development Centre
Tel: (867) 695-2441
Thebacha Business Development Services
Tel: (867) 872-2795
Western Arctic Business Development Corporation
Tel: (867) 777-2836
Tel: (867) 874-2510
Sahtu Business Development Centre
Tel: (867) 587-2016
Dogrib Area Community Futures
Tel: (867) 573-3140
Métis Dene Development Fund
The Métis Dene Development Fund (MDDF) was originally mandated to provide loans for Dene and Métis businesses and now the fund supports all businesses across the NWT.
Métis Dene Development Fund
4908 50th Street
Government of Canada Funding
The Business Development Bank of Canada (BDC)
The BDC offers financial,investment and consulting services for Canadian small and medium sized enterprises. Below are a few of the BDC’s funding programs. Contact BDC for more details.
Commercial Real Estate Financing
The BDC can help you relocate your business to a location that accommodate future growth, by financing:
- Purchase of land and buildings
- Construction of new premises
- Expansion or renovation of existing premises
- Replenishment of working capital depleted by real estate costs
The BDC can finance a high percentage of the cost to help you purchase new or used equipment, including:
- Production line machinery and equipment
- Specialized technology, such as lab equipment
- Commercial vehicles
Financing for working capital
- Boosting inventory to meet demand
- Taking advantage of suppliers’ discounts
- Complementing your line of credit
Financing for starting a business
- Working capital to supplement an existing line of credit
- Acquiring fixed assets
- Marketing and start-up fees
- Buying a franchise
- Consulting services
Business transition financing
When it’s time to retire or move on to other ventures, the buyers of your business may need financing so you can get your equity out. BDC can help finance the transition of your business, which may include:
- Passing the business along to children or other family members
- Selling the business to management and/or other employees
- Selling the business to an outside buyer
Invest in Technology
Flexible, easy-to-access financing to purchase or upgrade information and communications technology.
With a technology loan, you could obtain capital to invest in:
Servers, networks, telephone equipment, computers and accessories
Customer relationship management (CRM), human resources, supply chain, finance and accounting applications
IT planning, strategy, security, online sales, Internet marketing and social media
The Business Development Bank of Canada (BDC)
4912 – 49th Street
Yellowknife, NT X1A 1P3
Tel: (867) 873-3565
Fax: (867) 873-3501
The Canada Small Business Financing Program (CSBFP)
CSBFP seeks to increase the availability of loans for establishing, expanding, modernizing and improving small businesses. It does this by encouraging financial institutions to make their financing available to small businesses. The program helps you secure up to $1 million from your financial institution by backing your loan with a government guarantee.
Industrial Research Assistance Program
Through the Industrial Research Assistance Program, the National Research Council of Canada supports small and medium businesses that are developing technology-driven products, services or processes.
Canadian Northern Development Agency (CANNOR)
The Strategic Investments in Northern Economic Development (SINED)
The Strategic Investments in Northern Economic Development (SINED) focuses on strengthening the driver sectors of the economy in the territories, economic diversification, and encouraging the participation of Northerners in the economy.
The Northern Aboriginal Economic Opportunities Program (NAEOP)
The Northern Aboriginal Economic Opportunities Program (NAEOP) is intended to increase the participation of northern aboriginal communities and businesses in economic opportunities. Within the program, the Entrepreneurship and Business Development (EBD) fund provides financial supports to Aboriginal entrepreneurs, business and commercial entities.
Small Business Financing Directorate
Industrial Research Assistance Program
CANNOR – Northwest Territories Region
Other funding sources
Futurpreneur Canada supports aspiring entrepreneurs aged 18-39 to launch their business. The help can take the form of mentoring, entrepreneurial bootcamps and financing.
A final word
Most funders, whether they are banks, private investors or government organizations, require the same kind of information to make their decision. In most cases, the more information you provide, the better the chance that you will obtain financing quickly, which can be crucial in making the most of a business opportunity. If you have
completed a business plan, you will be able to meet the requirements of most funders.
When making your proposal to potential funders, consider the following tips:
- The funder should be given plenty of time for decision-making.
- When presenting your proposal for financing, briefly introduce yourself, your business and the purpose of your presentation. Outline your financial requirements and how the financing will be used. The funder will ask questions based on your proposal and confirm the facts with you.
- If your proposal is rejected, find out why. What were the weaknesses? What was lacking? This should provide you with valuable information for reworking the proposal before approaching another source.
133 Richmond Street West
Toronto ON, M5H 2L3
Fax: 1-877-408 3234
Develop realistic financial forecasts for income statements, cash flow and balance sheets for three years. Forecast monthly for the first year.