Canada’s Small Businesses Are Worthy of Respect AND Funding

Canada’s small business owners take the risks and provide the imagination, the capital, and the energy that drives the economy, jobs and wealth in Canada.

But they don’t get the respect they deserve, especially when it comes to funding for acquisition and growth.

It is a common misconception that banks provide loans for small business acquisitions. They do not. Business Development Canada (BDC) financing does not address the needs. Neither does the Canada Small Business Financing Program (CSBFP).

A Canada Small Business Loan (CSBL), which is limited to 75% to 90% of the certified value of Furniture Fixtures and Equipment (FFE) with an upper limit of $350,000, is only for the purchase of assets.

Over the many years I’ve been in business I’ve done my share of lobbying for new funding models. The Federal government listens politely to the proposals and does nothing. They prefer to continue supporting CSBFP- and BDC-financing, for which the vast majority of small businesses do not qualify.

The situation is quite different in the United States, where the Small Business Administration (SBA) will lend small businesses up to 70% of the purchase price providing the business has sufficient cash flow AND the government guarantees the loans.More recently in the U.S., crowdfunding is being talked about as an alternative financing vehicle.

An article in the October 2012 issue of Profit magazine tells the story of two Canadian entrepreneurs who used Kickstarter, a popular U.S.-based crowdfunding site to secure money for their start-up projects.

So what is crowdfunding and how does it apply to businesses here?

Crowdfunding: for everyday people

The Profit magazine explanation of crowdfunding is “a business or individual using a web platform to raise big money in small increments from regular people” . Their article profiles how one Vancouver-based entrepreneur raised more than US $58,000 in 27 days from 207 backers and another exceeded his goals in two separate ventures. Both entrepreneurs partnered with U.S.-based companies for their projects.

Crowdfunding may gain more ground in 2013 when the US Jumpstart our Business Startups (JOBS) Act will allow companies to offer equity in exchange for backers’ money. Profit magazine notes that “Canadian entrepreneurs will be permitted to fundraise through U.S. sites, but will be restricted to 2,000 or fewer investors who must be accredited to the U.S. or Canada.”

Under current Canadian securities laws it is illegal for a company to sell equity in a project or company through crowdfunding. The Canadian Advanced Technology Alliance (CATA) is currently engaged in a lobbying campaign in an effort to have the 13 provincial and territorial securities regulators change the securities regulations to permit crowdfunding.

The Canada Media Fund (CMF) has recently published an impressive study on crowdfunding.

They note that “the new form of crowdsourced private financing has lowered the barriers to entry not only for financing projects, but also for the average citizen to play the role of investor.”

The study suggests “a classification of various crowdfunding models based on the relationship between the promoter or parent company of a given project and the contributors. There would be a grants model (based on an outright award), a loan model (based on pre-sales) and an investment model (based on the sale of equity).”

One of the risks and barriers they identified was a public fear of abuse:

“Amongst the investors and venture capitalists that we interviewed, there was a shared concern that without a regulatory framework, the likelihood of a scam or abuse of funds was quite high. This valid concern could become a barrier to public engagement and funding if the regulatory framework in Canada does not quickly address the addition of crowdfunding financing in a non-accredited investor context.”

Exactly.

Crowdfunding has much potential but it needs to be safe for everyday people to put money into projects they believe in, keeping in mind that these opportunities are not risk free.

Existing funding opportunities

Canada needs a different business model than what the banks and other lenders are used to.

As mentioned, a CBSL is only for the purchase of assets. But with a bit of tweaking, the program could be applied to the purchase of shares and the limits increased. And this could help grow the small business sector in Canada.

To prevent abuse, a business valuation would be required and evidence of purchase, even a personal guarantee on behalf of purchasers.

The federal government encourages Canadian businesses of all sizes to conduct research and development that it supports through its Scientific Research and Experimental Development Tax Incentive Program (SR&ED).

While the program is good, it is complex to qualify and apply for. Most businesses who want to invest in IT projects such as training programs, sales systems, marketing programs, licenses, intellectual property and patents don’t meet the criteria. Take a consulting firm in Human Resource Management, for example. The company has little investment in their office but is big in sales and marketing. They want to streamline and automate delivery of their processes and services, to make them cost effective. Where can they or any other such business in Canada get access to capital?

Bruce Firestone has some suggestions – 70, in fact. Executive Director of not-for-profit Exploriem.org dedicated to assisting entrepreneurs and intrapreneurs everywhere, Bruce has launched or helped launch more than 168 startups, writes a blog about entrepreneurship, urban issues and life at EQJournal.org and moderates a lively @ProfBruce community on Twitter. And that’s just a sliver of his accomplishments.

His 70 ways to raise bootstrap capital shares techniques to raise cheap/free capital, aka bootstrap capital.

While I’ve used some of these techniques over my career there are many I would stay away from – the risk is too high for clients who want a bright future and a profitable present.

One that I like is to offer potential investors future discounts on your product or service. It’s how I raised a quarter million for a training program that I planned to market at Data Logic. I presold product that we hadn’t yet developed and used this advanced money to build it.

You might also want to:

  • Get advances for work-in-progress.
  • Engage strategic partners.
  • Distribute products for other companies.
  • Use barter to get going.
  • Make deals with suppliers, to promote their products for extended product terms.
  • Bundle someone else’s product with your sale.
  • Sell assets of the business to a leasing company then lease them back.

How have you raised capital? What changes would you like to see to our national funding programs?

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Gregory Kells
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