Beware of creditors… more than debts! Part 2

Financial obligations can become heavy burdens

It is important to properly plan for fixed costs such as salaries and rent. Add a little more to this estimate, because there will always be unforeseen expenses. The idea is to get the maximum each time you have access to financing, but also to choose the most advantageous financing (by always considering the administrative fees, repayment terms and interest rates) before moving on to the most expensive financing … In my case, I opted for a loan from BDC to finance setting up my new factory.

Nevertheless, I had incorrectly anticipated the forecasts of expenses and I thought I was going to be able to function for a certain amount of time with the sum I had been granted. However, anticipating the need for money is very complex. Understanding and anticipating my burn rate, getting familiar with the gap between the time of purchase of materials and the collection of payments, payment terms that are often not respected… In short, you need money to deal with all these uncertainties and to fund your working capital (in the form of a loan or a line of credit).

So, I had to opt for risk financing. It really is the last option. I learned this at my own expense when I incurred a very expensive debt administered by a community support organization… yes, it was aimed at community development! This type of credit is extremely expensive as the interest rates (very high) do not adjust to the risk associated with your business activities (which is the case with a loan from the BDC, for example), but ends up financing the (many) failures of other projects funded by these organizations. In addition, when I had enough money and I wanted to repay my loan in advance, severe penalties were imposed on me. I was not happy.

I am still wondering how this type of financing is meant to support the community when my precious start-up cash was dedicated to paying the administration fees, the abusive interests and the penalties for the prepayment of my loan. Is it really helpful for start-up/vulnerable companies to offer such expensive financing?

After that, no bank wanted to finance me because my debt ratios were saturated. If you think a banker will finance you because he has confidence in your project, you’ve got that wrong! All that matters are your financial statements and your personal assets to use as collateral.

I met and got rejected by so many bankers! My business contacts suggested that I go to this or that bank, meet with this or that person. In the end, you will often face robots with zero flexibility. It was a real waste of time for me, in addition to being quite demoralizing. Being repeatedly refused for funding hurts the ego and lowers the confidence that we have in the viability of our business.

The Angel who comes to save the entrepreneur

So, I was forced to consider other forms of financing that made me quite nervous: venture capital funds (VCs) or private investors. Indeed, I met several creditors, investment funds and private investors on my professional path. But I was always afraid of losing my autonomy, of being accountable for high-growth objectives, or that my business would be under-valued. But when the right situation presented itself, at the right moment, I finally accepted the offer of an Angel Investor. It was the right moment indeed, as the deal was sealed in July 2008, just before the financial crisis of September 2008…

He strongly suggested that I start paying myself a decent salary with a portion of his investment: he recognized the importance of caring for the entrepreneur who chooses to invest everything, often at the expense of his own financial situation. This is an important topic, as it is often difficult to pay yourself when you are an entrepreneur. How much should I pay myself? How can I not feel guilty? This will be the subject of an upcoming article…

Breaking the vicious circle

I was tired of this extremely stressful and vicious circle of saturated debt. To have to retain my paycheck or payments, make last-minute transfers, feel that I was on the verge of bankruptcy all the time, to have to hide the situation from my staff and partners, the feelings of incompetency… It is certainly a situation that you may experience when you start your business with very little means. I then understood that I needed to use the money from my Angel Investor as leverage to seek other forms of financing

This is the true secret of corporate finance! Get financing and look for debt with money that is kept in the business as an asset to guarantee the loans. Especially when you don’t need money and the health of your business is good: that’s the best time to get the maximum line of credit you can. This will serve as a financial cushion to deal with the unexpected events like sudden growth spurts. Today, I am much more selective with my funding. I always make sure I can repay without penalties. I try to get the administrative fees waived and I always make it a priority to look for debt when I don’t need money, or to buy equipment with loans, and thus keep a healthy cashflow.

The reality is that you will probably carry the burden of the financial obligations of your business for a very long time, regardless of your business revenues (until you reach a certain threshold) and the types of partnerships you will make along the journey. You will always remain a risk in the eyes of bankers. In the end, debt is an indispensable ally for growth. You still have to use common sense and measure your debt capacity. Be respectful of your resources and vary the sources of your funding.

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