The fallout of the economy and the ensuing layoffs in record numbers has produced an influx of entrepreneurs into small business start-ups. There are many challenges that these entrepreneurs face, from potentially learning new industries to properly forecasting and managing expenses. Small business owners often overlook the fact that the financial challenges they may be facing are a result of poor money management, rather than less than anticipated sales or revenue.
According to Industry Canada, there are over 2.3 million small businesses in Canada, of which more than 869,000 are in Ontario. Yet, in the fourth quarter of 2008, 1,788 companies filed for bankruptcy!
Financial institutions are a good resource to provide guidance and expertise, especially during the start-up phase.
Bank account considerations:
When opening a new account, a business will likely be asked for the following information by a credit union or a bank: Articles of incorporation, master business license, trade name registration and two pieces of identification from the designated signers. Ensuring that proper signing authority is awarded to the appropriate officers of the business is important when opening an account to make certain the credit union or bank has a proper reference person to make financial decisions on behalf of the company.
Many small businesses operate multiple accounts for cash management purposes, such as payroll, corporate taxes and general operations, which allows for more detailed tracking of finances. Funds can, therefore, be more easily transferred between accounts and viewed in one consolidated statement. Another consideration is whether the business requires separate accounts for licensing purposes.
A common question from business owners is: What is a comfortable recommended account balance? The answer is case specific. It is based on a business’ cash flow, seasonal requirements if applicable and other operational requirements. However, every business should examine their needs in terms of cash flow to ensure that in times of over extension they have a mechanism in place to deal with it, like a line of credit or overdraft protection.
Lines of credit:
A business line of credit should be a simple application process with a quick turnaround time. Check if the decision making for the line of credit is made at a local level. If so, this often guarantees faster reaction time and may also result in the financial institution better understanding the owner’s overall commercial banking needs.
There are numerous tax saving strategies for small businesses that can result in significant savings. Interest and bank charges are tax deductible. Most importantly, owners should consider life and disability insurance for their business. This is a tax deduction that could protect the long-term viability of a business and the welfare of the owner’s family. It is important that small business owners understand the tax implications on their operations. Engaging the services of a qualified accountant who understands the ins and outs of tax laws is always advisable.
The right questions:
Before opening a commercial account, consider the following questions:
1.What will be the company’s needs over the long term?
2.Will this be a highly transactional account? Often, the most economical accounts have a variety of packaged products offered under one low monthly fee.
3.What services will the business need? A business credit card, point of sale terminal, night depository services and general banking services are just a few to consider.
4.Will the business require lending facilities for long-term purchases (business loan) or cash flow management (business line of credit)?
Small businesses in northern Ontario are often set up to provide products or services that answer northern needs, industry and culture. Being a true financial partner means understanding this environment and applying this knowledge to support the objectives of the regional owner.
There are a variety of support programs for entrepreneurs, business start-ups and for business expansion that encourage small business investment. New start-ups can also look to their local community development corporation for small business resources. Your local credit union or bank can also provide a wealth of information about getting a new business started or successfully expanding on the existing one!
Terry McKnight is the Senior Manager Commercial Lending at Northern Credit Union,