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Starting a Business

Working with RBC

 

Borrowing and Credit

Once you know how much money you need, you will need to make some decisions about where the money will come from.

You can finance your business with equity and debt:

Equity

Equity is usually required to be eligible to get debt. Lenders like it when owners have a strong personal investment in a business’s success. Equity includes:

  • Personal savings and investments
  • Property
  • Money from friends and family
  • Angel investors: individuals who invest in startups
  • Employees who buy in or work for shares

Why Put In Your Own Money?

Using your own holdings to finance a business idea may seem risky. But there may be good reasons to consider it.

  • Least costly source: your own capital is the cheapest form of financing you will find.
  • You’re a better credit risk: Your investment makes you more likely to get a loan.
  • You don’t need to sell your asset: A second mortgage, home equity or other investments can be used as security for a business loan, earning you a lower interest rate.

Debt

Debt comes from banks, government agencies, suppliers and individuals willing to lend you money. Debt gives you leverage – the opportunity to use other people’s capital to expand your business or cover cash shortfalls when you need it.

Borrowing is a good choice. RBC small business advisors will help you use different types of financing to meet different needs.

Operating Line of Credit
If you need money to cover short-term expenses like supplies, payroll or rent, get through your business’s start up phase or weather seasonal slow downs, consider an operating line of credit.

Business Credit Cards
If you need to cover and track short-term expenses for large purchases or everyday business expenses like office supplies, business travel and utility payments consider a business credit card.

Term Loan
If you need money to buy hard assets including buildings, vehicles and equipment necessary to operate your business, consider a term loan.

Supplier Credit
Don’t overlook supplier credit. When an invoice from a supplier says “net 30,” it means the supplier is giving you 30 days to pay. That gives you a chance to make, sell and get payment for your product or service before you have to pay.

Being a Good Credit Risk

Since a new business may not have a credit history, a bank will often look at the credit history of the owner. Your credit history is your personal history of repaying loans and credit cards on time. Here’s what you can do to create a good credit history:

What should you do? How?
Make sure your credit history is accurate. Request your credit history from one of Canada's two major credit bureaus, Equifax (www.equifax.ca) or TransUnion (www.transunion.ca).

Check for errors and file dispute form if you wish to challenge any of the information it contains.
Build a good credit history if you don't have one. Take out a small loan or apply for a credit card. Keep balances small enough that you can make regular payments.

Ask a family member or a relative with a good credit history co-sign loan for you. Again, pay it off with regular payments over a few months.
Maintain a good credit history. Pay all your debts on time, even if it is just the minimum payment.

Consolidate debts to make payments simple.

Pay credit card debts promptly to avoid high interest charges.
Take action to fix a poor credit rating. Review your spending habits to identify the main problem area(s).

Eliminate some credit cards or consolidate debt to make monthly payments more manageable.

Contact reputable credit-counselling service to help you and your creditors establish a workable payment plan. Most services providing free counselling are not-for-profit.
Establish a credit history for your business. Apply for a business loan or business credit card to establish a credit history for the business, apart from your personal credit record. Build a track rrecord of responsible credit management.

If you are turned down for a loan, look at your application and see what you can do to improve it. Talk to your banker, consider making changes and, if you can, resubmit it.


Banking That's Right for You


Our small business advisors are experienced in helping businesses at every stage of development. Come in and talk with us.

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05/01/2012 15:14:52