May 22, 2009
Whether you are young and just out of school, have worked in big businesses and are planning to take the plunge into entrepreneurship, or you are an entrepreneur and need more money to grow your business, your financial needs are similar. Aside from needing a great idea, a bundle of confidence, and the risk tolerance of fighter pilot, you will also need some basic financial tools:
1. Capital – necessary for a variety of purposes but most importantly to survive, both personally and professionally. Staying power is important in any entrepreneurial venture but with that being said, do not falsely anticipate that you will make money on your first day, your first month or even in your first year. So where can you source capital? You should start with personal savings, thereafter, your best bet is to turn to family and friends. If that still won’t do and you are fortunate enough to be a homeowner, you can dip into the remaining equity of your home to finance an investment in your business. Executing a refinance, or more specifically an Equity Take Out (ETO) like this requires some expertise. Due to your unique set of entrepreneurial circumstances, your local bank will likely be unable to assist, especially if you don’t have a steady stream of income because you have left your job or because your business isn’t generating enough cash. Visiting a professional mortgage broker, preferably one that carries the AMP (Accredited Mortgage Professional) designation is best. They will be able to match your borrowing needs with a lender that will overlook the absence of adequate income to support the mortgage payments. What the lender will focus on is the equity you have in your home as security for the loan. In today’s uncertain economic times, and more importantly with home prices in Canada likely to decline, (eroding the equity you do have in your home) the time to act on this opportunity as a source of funding is now! If you need money and this is your only option, don’t delay, arrange for ETO financing today. The same strategy applies if you need debt consolidation – get it done before your equity is eroded by falling home prices in Canada.
2. An exit strategy (from your employer that is) – If you are fortunate enough to be fully employed while at the same time dreaming of starting your own business sometime down the road, you will want to consider the impact leaving your employer will have on your insurance plan. Canadians overly rely on their employers to provide the health, dental, life, disability and illness insurance benefits they covet. What most do not realize is that the moment they are no longer employed, they lose all coverage. Even worse is the fact that many entrepreneurs find themselves replacing their lost coverage at mid-life, when the cost of such policies may be prohibitive. Further still, there’s a chance that they could be uninsurable or the coverage could limited due to a medical condition such as diabetes, high blood pressure, etc. The point is, do your best to plan ahead and keep your costs down. The younger you are, the less expensive this part of your financial plan is. If you arrange the right plans, your cost will be locked in for life. So act early when you know you are healthy. Insurance companies are of little help to you when you have serious medical conditions ailing you. With specific reference to disability insurance, it is important for you to apply when you have at least a two-year record of salary behind you, are still employed and don’t anticipate leaving in the near future. If you leave your job and apply, you will be declined because you do not have any income to insure. Even if your new business starts to pay you, you will normally have to wait at least two years before purchasing the better policies in the marketplace. To summarize, think ahead, plan, implement these components of your financial plan early, and do so with the assistance of an independent financial planner. Plan for continuity so you can focus on your new endeavor. Be weary of big shops and brands that do not give you access to the entire insurance marketplace. Email me (add link or include his email address) for more details as to who these are.
3. An investment plan that creditor proofs your assets and protects your principal – If you have any money left after investing in your business or with any luck, your business begins returning cash to you in spades, you need an investment plan that caters to your needs as an entrepreneur. As you embark in starting or growing your business, you must keep in mind that you will expose yourself to many legal risks, and that the chances of you being sued will likely increase. With everything on the line already, would it not make sense to choose investment products that offer creditor protection? Of course it does; hence the incentive for you to look for the segregated fund label on your mutual fund investments. Segregated funds are offered by insurance companies in Canada and offer all the benefits of a mutual fund and more. Segregated funds offer the investor the added luxury of creditor protection, not to mention a guarantee to return at least 75% of your principal investment over a ten year period no matter what the market does. You already take enough risk investing in your business, so look to reduce risk with these types of mutual funds. Take note that you won’t find segregate funds offered at your local bank, but an independent financial advisor will steer you in the right direction.
As you start, or grow, your business I hope that the above tips will help shed some light on the type of pre-planning exercises you should undertake to create a strong financial foundation.
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Paolo Abate, BBA, RHU, PFP is Director of Financial Services and Partner at FC Financial Group Ltd. FC Financial Group Ltd. is a full-service financial planning organization that specializes in the needs of small to medium sized business. |
