Showing you the money: Where to turn to for investment
By Kim LaudrumBusiness Operations Industry Manufacturing Business financial investment manufacuring
The business incentives marketplace is worth $300 billion to Canadian companies.
Manufacturers, especially small ones, are challenged when it comes to investing in their businesses. The PLANT Manufacturers’ Outlook 2019 survey shows 70% use internally generated cash, followed by 32% who are financing with bankers and 16% who are funding through private investors (16%). Each method has its pros and cons.
Meanwhile, emerging service providers are helping manufacturers access what’s dubbed the business incentives marketplace, worth close to $300 billion in grants, contributions, and interest-free loans to Canadian companies.
Reinvesting profits offers autonomy. There are no interest rates to pay, as with a bank loan. No one outside needs to know details of the company. And there’s no equity in the business to concede, as private investors often demand. But could that money be better placed somewhere else? As a manufacturer, you may be an expert in making widgets, but how much do you know about turning your business into a growing concern?
“It’s great if your company is one of those that generates enough cash flow to finance capital expenditures,” says Dan Leslie, senior vice-president and head of corporate banking (Canada) at HSBC Bank Canada. “But sometimes you need to look at the mix of capital and the balance sheet to see how deploying capital will affect your overall business.”
Leslie asks manufacturers to consider if spending hard-earned cash is the best idea when they could be leveraging financing from the bank. What’s the opportunity cost of that expenditure? When the business is in growth mode, principal payments can be deferred while the company gears up cash flow. Also consider new demands on cash flow for other payments, such as wages and overtime.
The bank can help mitigate risk, especially when purchasing machinery and equipment offshore. “The currency could move against you. A bank can help lock in foreign exchange rates. We’re primarily a relationship bank, not a transaction-based bank. We are there for the long-term view. We are there to provide advice,” Leslie says.
That includes where to find support you can leverage such as funding from the National Research Council’s Industrial Research Assistance Program (IRAP), which provides money for innovation. Or Export Development Canada (EDC), which helps insure receivables.
“If you wind up with a banker familiar with manufacturing, generally speaking, it’s a pretty good experience for companies,” says Al Diggins, chair of the Excellence in Manufacturing Consortium, the Owen Sound, Ont.-based non-profit that helps manufacturers attain excellence. But, he cautions, not all lenders have manufacturing exposure.
“Manufacturing is a lot more complicated now than it once was,” Diggins says. He should know. Years ago he opened one of the first commercial lending centres for Royal Bank. “Banks today won’t take on a manufacturer at risk.”
Today, there is much more to consider when calculating risk, including equipment, technology, cybersecurity, foreign rates and regulations, he says. Investing profits into the business is important. “That’s a clear indication you believe in the business, which is a good indicator to other investors should you need them down the road.”
For good or for bad, typically if a company is in growth mode, there are gobs of money available through angel investor groups, Diggins says. “That’s a very good source of funding and sometimes they offer expertise in management along with it. They can be structured so that some (angel investors) are hardly involved. They just want a place to park their money. Or, they are very much involved. That can be a good thing or not. It depends on how well everyone gets along.”
The caveat is you have to do your due diligence to ensure you are attracting the right investor. Often, if it’s not a good fit for the bank, it will refer the manufacturer to angel investors. Diggins mentions Bluewater Investors in Ontario and others that can be found through the Ontario Network of Entrepreneurs.
Even if you do find a willing angel investor, negotiate terms you can live with. How much equity are you willing to part with? How much control over operations are you willing to give up? What if they don’t share your values?
Diggins describes one entrepreneur he knows who went the angel investor route. A few years down the road the new investor wanted to take the company in a different direction, one that didn’t match his values. In the end, the angel investor bought the company but it was a gut-wrenching decision.
There are options for manufacturers turned down by the bank. One entrepreneur Diggins knows had a contract with a Big Three automaker. He needed to purchase a $500,000 piece of equipment. When the banks turned him down, the federal Business Development Corp. (BDC) helped him out.
In Canada there is about $26 billion per year in funding available to companies. “That’s larger than our venture marketplace,” says Teri Kirk, CEO and president of Fundingportal.com. Many Canadian companies also qualify for opportunities in the UK and the US where there is $250 billion available. That’s just under $300 billion in grants and incentives looking for an entrepreneurial match.
While there is a lot of money available, it’s difficult both to identify the appropriate programs and to successfully apply for them, according to findings from both the Ontario Drummond Report and the federal Jenkins Report, Kirk says.
The good news is that many of these programs are targeted to manufacturing, R&D, innovation and growth for manufacturers. “That isn’t always the case in the venture marketplace, which is more targeted to sciences,” she says.
Fundingportal.com writes programs that help companies carry out those pre-steps to find the right programs.
It aggregates the data on all of the programs, then matches companies in seconds to the right programs. “We can pre-qualify them. We can help them better understand which programs they are not going to get funded for,” Kirk points out. “We can give them an idea of how much money they’re likely to get, which is a really important consideration. That you don’t want to be applying for $20 million when what you are more likely to get is $2 million.”
The average amount an SME is likely to access is between $100,000 to $1 million, mainly for micro-projects. Larger companies can access these funds, too, for small projects, such as wage subsidies. Or, they can access level three funding for projects worth under $10 million or the highest level for projects worth more than $10 million. Kirk says governments typically fund one-third to one-half of a project.
It’s quite the task to stay up to speed on all the government grants a manufacturer can access.
“The funding is always changing. Only a handful of programs are over five years old,” says Igor Chigrin, author of a book on the subject (Get Funded) and a government-funding expert at Fair Grant Writing in the Greater Toronto Area.
“Funding is often limited by changes in government budgets and the government is not that good at communicating changes, but it’s absolutely worthwhile,” Chigrin says. “Government funding can give manufacturers the cash they need, and often it’s not repayable.”
There are six main categories targeted for government funding:
1. Equipment purchasing
2. Skills training
3. Export marketing
4. Research & Development
He suggests identifying the programs you qualify for and make note of the deadlines, the eligibility requirements and the availability of the grants, details that unsuccessful applicants overlook. It’s mandatory to call the programs to ensure funding is available. “It’s always a good idea to establish a relationship with a funding agency early on.”
It could take two to six weeks or six to eight months for approval, depending on the requirements.
“Before you actually get your money you have to submit claims and demonstrate two things: you have expenses, and you have accomplishments. The main benefit to the manufacturer is productivity improvement. Chances are you will get more funding if this is the case.”
Chigrin offers this advice to manufacturers looking to invest access grants and contributions: “If this is the road they want to take, it requires patience.”
Finding adequate funding to invest in your business can be challenging, but there are sources to tap and resources available that point to the best way forward.
Grants, loans, private and public sector financing. Includes financing for a new business, innovation, small business; Canada Job Grant; Futurpreneur Canada Start-Up Program; BDC small business loans.
Services and software for grants and incentives management processes for applicants, funders and advisors.
The National Research Council of Canada Industrial Research Assistance Program (NRC IRAP) helps SMEs build innovation capacity and take their ideas to market.
A collaborative network built to help Ontario businesses succeed, including starting, growing and financing.
A comprehensive list of Canadian banks.
Canada’s export credit agency, provides insurance and financial services, bonding products and small business solutions to Canadian exporters and investors and their international buyers. Also supports Canadian direct investment abroad and investment into Canada.
Kim Laudrum is a Toronto-based business writer and regular contributor to PLANT. E-mail firstname.lastname@example.org.
This article appears in the May-June 2019 print issue of PLANT Magazine.