Most of us who operate a business need financing from time to time. That financing can be for several reasons. For many of us, upfront cash is needed to fund operations. In a product sale business, cash is needed for inventory, for example. In a services business, salaries and other expenses are due before the bills are collected to pay for them. Finally, the start of a business may involve improvements for a place that you intend to rent or the purchase of necessary equipment for the operation of the business. So, where and how do you get the money? Most of what is set out below is relevant for an incorporated business but can apply in some respects to a sole proprietorship or partnership.
Self-funding
You may choose to fund some or all of the cash needs yourself. This would normally be done by a loan you make to the business, with no interest, which is repayable whenever you feel the cash flow allows it. You can loan the company money it needs all at once, or from time to time as the needs of the business and your ability to fund the loan develop. As you become the ‘bank’ for your company, it is important that you consult with a lawyer about how to protect your investment through the grant of ‘security’ by the company to you, and for other issues involved in such a loan.
Bank Funding
Banks are in the business of lending money and are happy to do so, provided that they receive sufficient security from you to protect them. In all likelihood, they will look for security against the assets of the business, but will also likely look for a personal guarantee from you as well as security against your personal assets, such as your house. If you are married or in a common-law relationship, the requirements of the bank may include a personal guarantee from your spouse or partner, as well as security against his/her personal assets (such as, for example, his/her ownership interest in the property he/she owns jointly with you). There are government programs which can provide benefits to a borrower when borrowing from a bank – such as the Canada Small Business Financing Program – that may reduce your exposure on a personal guarantee and/or in other respects make a bank loan more feasible. Once again, legal advice is important not only in understanding what the bank is asking for but also in understanding the complicated documentation that they ask you to sign.
Private Funding
You may find a private lender – it could be family, a friend, or even a professional private lender who is in the business of private lending money. The loans from family and friends tend to be informal, but it remains very important for both borrower and lender to be clear as to the nature of the loan: Is there interest? When is the loan due? Is the loan to the company or you personally? These and other important facts regarding the loan terms should be sorted out up front, and of course, a lawyer can help you to ensure that all issues are covered. With a professional lender, it is important to obtain legal advice in relation to the terms of the loan, as well as the meaning of the documentation which the professional lender will have you sign.
Whether your own money or that of a bank or private lender, getting legal advice is a key part of determining and carrying out your financing strategy.
This blog post was written by Ted Mann, a Partner in the Wills and Estates, Real Estate, Business and Bankruptcy teams. He can be reached at 613-369-0368 or at ted.mann@mannlawyers.com.
