GERRY’S BLOG

 I applied for a business loan but my bank says first I need a business plan ... do I need to hire a consultant to write it?

No, you do not. But let me qualify that.

In most cases, the bank does not care who writes the plan, they just need to be convinced that you can carry out the plan and that they will get their money back.

Think of it this way ... the bank may have used the term "business plan" but what they really want to know is "if we loan you this money, how do you plan to pay us back?".

The larger the loan, the more detail they will require. This is because larger loans carry greater risk for the bank. And I can tell you ... banks don't like to take risks.

For example, if you want to borrow less than, say, $10,000 and you already have a good credit history with the bank, your business plan may be as simple as the draft business plan I discussed a previous blog, with a projection of the first three year's of income and expenses thrown in. If you want to borrow more than that and you do not have a credit history with this bank ... the business plan has gotta be a lot more detailed (and convincing).

So, do you think you can write the business plan yourself?

Many people can. Many people cannot. Most people could - if they had some help.

The good news is that there is lots of help available for people who wish to write their own business plan. This web site offers an excellent business planning framework that you can use for free. There are also many web sites that offer essentially a "fill in the blank" type of format to follow. The choices are endless so this is going to take a bit of research. Is this how you want to spend your time and effort?

Another option is to hire a consultant and give them a small pile of money to write the business plan for you. Perhaps, you think, you should just pay the money and get it done.

Well ... this isn't always the best option either.

I have seen plans that were written totally by consultants. They are generally things of beauty. They have scads of charts and graphs, lots of pictures, and pages and pages of industry stuff. Most have amazingly detailed spread sheets, sometimes covering up to ten years of sales. And to cap them off, they are usually printed by laser on high quality paper and bound using only the best of cover stock.

So, what's the problem? Unfortunately, all too often the entrepreneur does not understand what is in the plan and "where the numbers come from". This can lead to disaster if the banker asks any questions. Trust me ... the banker will ask some questions.

Don't get discouraged. There is a straight forward option for those who feel they need some outside expertise.

I find that a good process is for the entrepreneur to write what they can, using the business plan framework previously noted. The entrepreneur can then meet with a consultant to work through a collaborative process that leads to a business plan that meets the needs of the entrepreneur (and the bank).

Writing the plan is an iterative process. It develops over time as you meet with the consultant. The consultant asks the questions ... you provide the answers.

Now, this might sound like you are still doing a lot of the work. Well of course. It's your plan. Did you really think you could simply hand it off to someone else? Do you really want to?

Don't get me wrong. A consultant can bring huge value to the process. Asking the right questions is far more valuable that answering the wrong questions. A good consultant will also challenge your thinking.

In the end you will have a business plan that fully articulates your business concept. It should help you to assess the viability of your business idea and it should also help to convince the bank!

FAQ: I would like to apply for the New Brunswick Small Business Investor Tax Credit Program but it looks complicated. Is it really worth the effort?

The purpose of the New Brunswick Small Business Investor Tax Credit (SBITC) program is to help small businesses raise equity capital by encouraging New Brunswick residents to invest in them.

This blog is specifically about the New Brunswick program, but some of you may be interested to know that Nova Scotia has a somewhat similar program called “Innovation Equity Tax Credit” program and Prince Edward Island has a program called “Share Purchase Tax Credit” program.

My purpose in this blog is to give you some sense of what the New Brunswick program is about and hopefully encourage you to follow up for more details. You can find the complete description of the program, as well as the various forms (all 10 of them) that you will need, on the NB Department of Finance web site.

The program allows for investment in private corporations and in economic develop corporations. It allows for investors to be individuals, corporations or trusts. However, in this blog I am only going to consider investors who are individuals and who are investing in private corporations.

I will be discussing some of the major requirements but first you should know that if you apply on behalf of your business (which must be incorporated), and are successful, then investors (and you could be one of them) are eligible for a 50% tax rebate on their New Brunswick personal income taxes. This is huge. Frankly, this is very huge!

Another exciting thing about the SBITC program is that all sectors are eligible, so most likely your small business would qualify.

Still, there are 9 specific “Applicant Corporation Eligibility Criteria” that your business must meet. Your corporation probably meets all 9 criteria, but you do need to go through each one just to make sure. Don’t let some of the business jargon throw you off – call or e-mail me if there is something you do not understand.

Once you determine that your corporation is eligible (the 9 criteria) then you need to provide information on 8 specific “Corporation Application Requirements”. The first of these is an investment plan (i.e. how much money you plan to raise, from whom, for what purpose, and what type of shares you will be giving the investors in return). The rest of the 8 requirements mostly deal with financial and corporate documents. This is stuff you should already have.

So, once you know that your corporation is eligible and have met the application requirements, you need to make sure that the “Investor Eligibility” and “Investment Eligibility” requirements are met.

Don’t worry. This is the easy part. This just sets out some of the boundaries.

For example, investors must reside in New Brunswick, be at least 19, must invest at least $1,000 and hold the investment (the shares you get for the investment) for at least four years – this type of thing. The applicant corporation (your company) must raise at least $10,000, have at least three investors and only use the investment money raised to do the things that you put in your investment plan, stuff like that.

Of course, there are some other details you need to be aware of, and some things you need to do each year to keep the government informed. There is significant government involvement here – there has to be a paper trail.

So, is it really worth the effort?  

Look at it this way – you have to produce a product that you plan to sell to a bunch of people you probably don’t know and you intend on being successful. Isn’t it worth a few hours of your time to look further into a program that could substantially reduce your financial risk and provide the capital needed to take your business to the next level?

As they say – you owe it to yourself.

FAQ: How do I decide if I should incorporate my business?

First of all there are three types of business structures - sole proprietorship, partnership and corporation. In my view most entrepreneurs should steer clear of a partnership - just too many pitfalls, relative to any perceived benefits.

Therefore the choice is really between a sole proprietorship and forming a corporation. If it is just you in the business you have the choice; if there are others, then the only real choice is a corporation.

So, let's look at some reasons for you to be a sole proprietor.

To begin with, a sole proprietorship is more easily formed (basically register a name and obtain any licenses required); the financial records are simpler (but still lots of records to keep); the income taxes are simpler to file (but still complicated and convoluted for sure); and if you have a loss from the business you can likely claim it on your personal income tax return (if you have taxable income of course).

I bet that last sentence got your attention.

But hold it a minute. Don't get the idea that you are going to turn your interest in tennis into a sole proprietorship so you can claim your losses against your personal taxes - it doesn't work that way.

There is something called the REOP (Reasonable Expectation of Profit) that will likely prevent this, but this is a topic for another blog.

OK, back to your question. How do you decide?

In my opinion, in most situations, incorporating is the overall better alternative. The corporate tax rate on the "active business income" of a small business is lower than personal taxes; you have more flexibility on how to pay yourself (wages or dividends for example) and there are more tax advantages with a corporation (the lifetime capital gains deduction and certain investment tax credits, for a start).

Since a corporation is a separate legal entity, any business related lawsuits (by creditors or others) would be against the corporation, not you personally - at least in theory. In practice, there are exceptions and often creditors will require your personal guarantees on loans. Still, incorporation can provide some protection to you.

So, am I suggesting that you should incorporate?

Well, it depends. There are other considerations.

If the investment in your business is relatively small and you do not want to spend any more money than absolutely necessary, you likely should operate as a sole proprietor, at least until you get a sense of how successful your venture might be. If need be, you can always incorporate later.

However, if you have just quit your job and invested most of your savings in your new business, then incorporation may be in order, especially if you think you may need additional venture capital to grow your business.

The fact is, incorporating is often a personal decision. Certainly size matters and larger companies are just about always incorporated.

However, when I started Peters & Associates Ltd. (PAL) some 17 years ago I chose to incorporate right at the start: I liked the idea that PAL was a separate legal entity from myself; I thought "Ltd." was kinda cool; I knew that I was in this for the long term; and I also knew that I did not need to hire a lawyer to fill out the paperwork to incorporate.

For me it just seemed right. It still seems right.

But enough about me ... what about you?

If you are still not sure, a sole proprietorship is likely the right decision for you, at least in the early stage. As I said, you can always incorporate later on. Don't worry; most of the benefits of incorporation won't be lost just because your business started out as a sole proprietorship.

My next blog will consider the question "I would like to apply for the New Brunswick Small Business Investor Tax Credit Program, but it looks complicated.  Is it really worth the effort?"  Stay tuned!

FAQ: I am in the very early stage of considering starting my own business; do I need a business plan?

Let me be really clear about this.

Yes you do.

OK, I'm a consultant so you likely expected that answer. Let me explain.

But first let's rephrase the question to "how detailed should the business plan be?". Quite plainly it needs to serve the needs of the person for whom it is written. If it is just for your use then details are less important, concentrate on the big picture.

I would suggest you begin by writing down the concept as if you were describing it to a friend (one who is not a banker!). What would you tell him; what do you think he would like to know?

I think he would like to hear about the product. Describe it to him. Don't worry about all the stuff experts say that should be in "the plan" - just describe the darn thing! Its your idea ... you probably have lots to say about it. Tell your story. Write until you can't think of anything more to say (at least for now). Then go back and read what you have written. Did you capture the essence of what your business concept is all about? Does it get you excited?

Go ahead and do a bit of editing. If you did not talk about the price you will be charging for your product add something about it now. Hopefully you described how you were going to place (distribute) your product in the market and how you were going to promote it to potential customers.

Congratulations! You have just completed the first draft of your first business plan. Still excited?

Reality check. I said first draft. A business plan is a living document and needs to evolve as it develops. What you have written is more accurately described as a draft marketing plan; the marketing plan is the fundamental building block of a business plan. At this stage you are more interested in describing the concept ... let others read your plan ... get their feedback. Continue to add to the plan as you answer their questions. 

If you are still convinced that the business idea is sound you are ready to move to the next phase of putting your plan in a more formalized form. The questions get harder and the answers are longer but now your entrepreneurial adrenalin should be kicking in. Check this website under business planning for a business plan framework that will help guide you.  

The key message of this blog is that business planning is essential but if you start in smaller steps you will be ready when it comes time to run.

My next blog will take a look at the question "I asked my bank for a business loan but they want to see my business plan first ... do I need to hire a consultant to write it?".

My answer may surprise you. Stay tuned.