POSITIVE BANKING and MONEY INSTITUTE and The Millennial Entrepreneur
Publicly traded businesses have a vast array of options when they want to capitalize working capital and growth. Small businesses in Canada are much more restricted and thus more vulnerable to death through too sudden or too much success and from a long term financial hardening sclerosis where they limp along, often under-capitalized for decades.
There are only three primary sources of growth capital for a small business:
- Equity capital from the founder(s) and/or outside investor(s); family, angels or venture capital.
- A combination of operating cash flow and profits left in the business, retained earnings, or through community based, lenders, offering project financing, sometimes at high interest rates.
- Borrowed funds, typically from a financial institution; bank or credit union.
Borrowed money is the significant small business source of capital, especially for young businesses and for the mature small business that has outgrown the owners asset base. Mature small business in Canada can hit a type of asset ceiling where they settle into a slow growth lethargy totally reliant on financing working capital financing through the ‘Unsecured Line of credit’, to finance operations on a month to month basis. A small business, living or dying, on the next sales cycle. Regardless of the bank and credit union terminology this is still asset lending but based upon current revolving sales receipts as collateral instead of a fixed collateral such as an owners home.
An American study, provides the following insight. In the US the sources open to small business financing were four; 1. Large National Banks, 2. Large Regional or State Banks, 3. Credit Unions and 4. Community Banks or private local banking sources. The question posed was as follows.
“In terms of using a loan to capitalize business growth, which of these four options are you (the small business) more likely to choose?”
“Those who said they would use a national or large regional bank represented 13% of our respondents. Independent community banks came in at 31%, followed by credit unions, at 22%. And those who chose the last option: “We don’t need no shtinking bank loan!” were 34% of our sample.
It’s not surprising that over half of our respondents would prefer a local capital source like an independent community bank or credit union.”
The financial crisis of 2008-9 as was also seen in the recession of 1985, illustrative of banks and credit union recurring actions, they pull money out of small business financing in a wholesale manner and flee to the real estate and the financial markets at every business turn down.
The 2008 crisis, nearly now two decades old, shines a bright light on at least one unfortunate truth: Banks that are beholden to Bay or Wall Street analysts and the computer-generated credit score are fair-weather friends to small businesses. It’s likely that the same poll taken pre-2008 would have produced more than 13% support for these banks.”
Those who chose the emphatic “no shtinking loan” option, representing the largest single group, and represent the small business community which have butted their heads against the too little asset ceiling. These business have settled into a comfortable middle or old age style of sclerotic business that provides a comfortable living and keeps the jobs for their employees. Most of these business will die when there owns retire or be sold off to a willing or desperate employee.
Many of the remaining small businesses are just not yet ready to use financial leverage to fund growth and in Canada they should not have to be forced to use this terrifically dangerous means of meeting growth opportunities or project financing.
This group is either among that two-thirds of small businesses that polls show are not experiencing growth, or are among the other third that are growing but have learned how to do so more organically, which is another way of saying, “We don’t need no shtinking loan.”
Every small business should have at least one banking relationship with a commercial bank or credit union. The prudent small business owner also needs to attempt to develop a relationship with local community independent or private banking/ lending sources. This is extremely difficult in Canada today.
The Positive Banking and Money Institute is bring a fourth source of financing to the small business financing market. PBM Institute is focused on bring alternative financing to small business in every community across the nation by providing a means for the many small community based private banks, lenders, to be more formal in providing small business financing and thus easier for them and the local small business to develop a banking relationship.
In addition, Canada’s first small business Investment Merchant Bank, Cynergyn Resources Capital, CRC, shall provide Non-invasive equity financing for working capital and growth project financing to small business nationally.