On 23 September 2020, the WE EMPOWER - G7 Programme hosted the "#WeLearn: Financial Fundamentals" learning session. The objective was to get equipped with the basic financial knowledge and skills one need to manage she/her business’s finances and make sound decisions to guide her/his company’s growth.

There were several questions which we did not succeed to take during the event and Laura Didyk: Vice President and National Lead Women Entrepreneurs, Business Development Bank of Canada kindly agreed to respond in writing.

Question 1: I own a small hosting business, as you know with COVID 19 tourism activity is stopped. I have money to keep the business for a year, do you recommend using that money or taking a loan to keep the business open for this year? I’m afraid of taking a loan when with the virus there is no warranty, we will operate at all in the next months.

Laura Didyk:

Thank you for your question.  

They are several important factors to consider and that may influence your decision:

• How much debt your business is carrying right now
• What your sales and cash flow were before the pandemic
• How quickly you expect your sales to get back up to profitability when you can reopen (it sounds like you are still not operating) and what costs must you incur to reopen (PPE? Etc).  

I would suggest you speak to your accountant to discuss your situation and expected ability to repay any financing you would quality for.

Question 2: How about the 5 C of Credit?

Laura Didyk:

Thank you for your question.  

The 5 Cs of credit were covered in the last part of the presentation, although I did not always refer to them by the same name.  

They refer to Character, Capacity, Collateral, Capital, and Conditions and describe the five major factors used to determine a potential borrower’s creditworthiness. In a nutshell, entrepreneurs who want to get a business loan will need to satisfy the 5 “Cs’ of lending.

The 5 Cs of lending are:

1. Character - of the business owner and management team including experience as an owner and previous repayment history are important.

2. Capacity - the business’s ability to repay the loan.   The most important question to answer when you are looking to finance your project is: 

• Do you have the capacity to reimburse your loan? This capacity is established by analyzing:
• Your current financial statements
• Your financial projections (current operations + benefits of the project)

• The banker will also need to know how you are going to use the money. The viability of your project will be assessed in terms of the strengths, the opportunities and the risks presented in your business plan, including financial forecasts, the management team’s experience and the marketing and sales strategy.

3.  Capital - While analyzing your present and past financial performance, your banker will evaluate your business’s liquidity, growth, profitability and cash flow

You should be ready to answer:

• What is your participation as a shareholder in the risk of this project?
• How much equity do you have in the business?
• How much are you personally investing in the project?

4. Collateral - While evaluating your loan request, the bank will review the assets you are willing to provide as collateral to secure the loan.

• What do you have to offer as a collateral for the financing?
• Your personal guarantee will show that you are sharing the risk with your banker.
• Tangible assets can lower the cost of borrowing and lengthen the payback period.

It’s important to know that businesses without tangible assets such as equipment or a building can also obtain financing, especially when they have good cash flow.

5. Conditions - While evaluating your loan request, the bank will review the assets you are willing to provide as collateral to secure the loan.

It’s especially important to know what you expect in the details of the loan.

• People are often focused on the interest rate.  But that’s only one element of the equation. You risk losing flexibility if you put too much emphasis on the interest rate.  Compare the benefits of the project you want to finance (ROI) with the interest rates to get a better perspective.  Also, don’t forget that interest payments are tax deductible.
• The length of the loan.  You have to account for your ability to pay back the loan, but also the useful life of the asset you are financing.  Maximize the length of your payment to gain flexibility and protect your cash flow.  Also keep a financial cushion. It’s often easier to speed up your repayment in the future than it is to extend your payments in case of an unforeseen event.
• Collateral - what collateral is the lender wanting?  Do they want a full or limited personal guarantee?  
• Repayment flexibility.  Do you have important seasonal variations in your cash flow?  You might want to adapt your payments so they match your cash flow cycles (for example, payments for a new initiative could increase over a 48-month period as the project generates more and more cash flow).  Are you able to easily extend your repayment terms in case of an unforeseen event?

And remember that a banker will take an objective look at your business and his or her opinion might not align with your vision. And do not think of your banker only as a source of money, but also as source of advice. A banker sees several businesses plans a week, so it is safe to say that he or she often has plenty of experience in evaluating the viability of projects.

Question 3: Do banks care if you've only bootstrapped?

Laura Didyk:

Thank you for your question.  

Bootstrapping is a hard choice faced by many entrepreneurs. Bootstrapping is building a business off-the-ground without using outside capital. It is desired and expected by the outside lenders that the owner has invested their own investment into the business, especially in the early stages. 

However, business growth can be difficult if the owner does not have enough financial resources to invest to meet the demand and growth curve.  Banks will measure the company’s debt to equity when a company is applying for financing. This ratio measures how much debt your business is carrying as compared to the amount invested by its owners. It indicates the amount of liabilities the business has for every dollar of shareholders' equity.  Bankers watch this indicator closely as a measure of your capacity to repay your debts. The higher the ratio, the higher the risk your company carries. In general, a company's ratio is benchmarked to a specific industry standard. 

If you are considering the scenario of bringing in an investor into your business or want to know about the pros and cons of debt and equity, we suggest you read this article.

Question 4: As a new small business owner, Business wise is it normal to spend additional maybe personal funds to purchase inventory if cash is not coming in as expected? And how does one differentiate or separate the two funding streams? And get back these funds if any? Hope this makes sense.

Laura Didyk:

Thank you for your question.  

Under normal circumstances, a Bank would expect you to use your personal funds (or other form of equity investment), to cover the losses of your business.  It is difficult to answer your question without knowing why the cash is not coming in as expected and what the inventory is (i.e.; is it perishable, time sensitive or does it have a long shelf life?).

The two funding streams are different in that equity/shareholder investment is more patient (your personal investment into the company is not repayable on specific terms, usually is interest free and the owner normally does not attach collateral to it).  A loan comes with terms and conditions, required collateral and is repayable at agreeable repayment schedule.

Question 5: Are there specific tips and guidance for consulting. I am a gender and environment consultant and entrepreneur.

Laura Didyk:

Thank you for your question.

I would say no. The business resources, tools and advice are the same whether you are a consultant or an entrepreneur in any type of business or industry. Chances are you provide guidance to other entrepreneurs to help them understand the realities of running a business and have helped some of them pull through challenging periods and plan their recovery.  Plus, as a business owner, you’ve also had to adapt your delivery mode and implement solutions remotely since the pandemic.

No matter what type of business or what industry, you should be able to find great tips and advice on our Entrepreneur’s Toolkit page. I hope this answers your question

Question 6: Do you think that Women have less success in being entrepreneurs because they are not as well financially prepared ? or are there other aspects that affect us, such as confidence, not having stems studies or something more?

Laura Didyk:

Thank you for your question. Not an easy one to answer. However, the Women Entrepreneur Knowledge Hub (WEKH) recently did a study and found some great insights which I am happy to share. More information here.  

• Women are majority owners of about 15.6 percent of Small Medium Enterprises (SMEs) with one or more employees – about 114,000 companies (2017). But women account for over 37 percent of self-employed Canadians or 1,050,000 (2019).  
• Women entrepreneurs are more likely to be in services, social, health and beauty, and food sectors than in manufacturing and technology. 
• Women are less likely to seek and receive financing than men (32.6 percent vs. 38 percent) and firms owned by men are more likely to receive venture capital or angel funding, and other forms of leverage such as trade credit or capital leasing.  
• SMEs with under 20 employees have been the hardest hit during the pandemic and women are more likely to own newer and smaller businesses, making them the most affected. 
• During the pandemic, the percentage of women-owned businesses that laid off staff, 40.6 percent, is about equal to the percentage of men-owned businesses overall (40.5 percent). However, the percentage of women-owned businesses that have laid off 80 percent or more of their employees is substantially greater than that of businesses overall (62.1 percent vs. 45.2 percent)

   

  *The State of Women’s Entrepreneurship in Canada, 2020.

   

  Question 7: What are the differences between women entrepreneurs and men entrepreneurs?

   

  Laura Didyk:

   

  Thank you for your question. That’s a difficult question to answer.  I say every entrepreneur is different. It is hard to generalize and put people in various kind of boxes.  But at the same times we kind of writ large, talk about stereotypes. Women entrepreneurs are this, that and the other.

  There are definitely some myths about women entrepreneurs that need clarification or “debunking”.

  I did a video two years ago with our CEO Michael Denham to “debunk” the myths around women entrepreneurs. I invite you to have a listen.

   

  As well, the Women Entrepreneur Knowledge Hub (WEKH) recently did a study and found some great insights which I am happy to share. You can also find a lot of great information by visiting their website at https://wekh.ca/

   

• Women are majority owners of about 15.6 percent of Small Medium Enterprises (SMEs) with one or more employees – about 114,000 companies (2017). But women account for over 37 percent of self-employed Canadians or 1,050,000 (2019).  
• Women entrepreneurs are more likely to be in services, social, health and beauty, and food sectors than in manufacturing and technology. 
• Women are less likely to seek and receive financing than men (32.6 percent vs. 38 percent) and firms owned by men are more likely to receive venture capital or angel funding, and other forms of leverage such as trade credit or capital leasing.  
• SMEs with under 20 employees have been the hardest hit during the pandemic and women are more likely to own newer and smaller businesses, making them the most affected. 
• During the pandemic, the percentage of women-owned businesses that laid off staff, 40.6 percent, is about equal to the percentage of men-owned businesses overall (40.5 percent). However, the percentage of women-owned businesses that have laid off 80 percent or more of their employees is substantially greater than that of businesses overall (62.1 percent vs. 45.2 percent)

*The State of Women’s Entrepreneurship in Canada, 2020.

Statistics Canada also published a portrait of women-owned business in Canada in 2019, which you may find helpful.

Question 8: So, a balance sheet is similar to a financial statement?

Laura Didyk:

Thank you for your question.

The balance sheet can also be called the Statement of Financial Position.  It is one statement in the financial statements.  The financial statements usually include an Income Statement, A Balance Sheet and a Statement of Changes in Financial Statement along with the notes to the financial statements.

For more information, find out why a balance sheet is an important financial statement for entrepreneurs to use and understand.

Additional resources

BDC, is happy to share some free online resources and tools which you may find useful, whether you are looking to start a business or wanting to keep your business running smoothly, both in good times and bad. And please take advantage of all the available resources, whether it’s BDC or other supporting organizations from our Canadian women entrepreneurs’ ecosystem. We know it can be hard to know who to turn to with questions about your business. BDC can help you find the people and the partners who can help.

• Resources Guide for Women Entrepreneurs: rely on these trusted resources
• Money and Finance
• Cash flow quiz for entrepreneurs: Test your financial management knowledge
• Get financing: Learn how to improve your chances of getting financing
• Entrepreneur’s Toolkit: Free and low-cost apps, eLearning Centre and Templates and Business Guides

If you have further questions, we have experts across Canada who can help.
Feel free to contact BDC.