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The worst ways to raise cash as an entrepreneur

If you own a young company, chances are you’re familiar with the issue of raising cash to grow your business. Maybe you have limited savings or can’t borrow the money you need. “Debt financing can be challenging for startup/young companies to access due to typically not having a sufficient or regular cash flow to support repayment,” says business advisor Jenifer Bartman. Although entrepreneurs can choose from a variety of financing sources, some are worse than others. Learn what to avoid and what to try instead to raise cash for your business.

Credit card cash advance

Some entrepreneurs take credit card cash advances from personal or business credit cards when they need cash. True, it’s a fast and easy method to finance your business, but relatively high-interest rates (the national average credit card rate was 17.84% at the time of writing this) make them an expensive choice, says Bartman. “High-cost debt, such as credit cards, should be avoided or used on a limited basis.”

What to do instead

Bartman suggests looking for lower interest finance options, including business loans secured by assets, such as buildings or equipment, through a mortgage or asset financing. “Entrepreneurs should consider both the 'cost' of the debt — in terms of interest charges — as well as the terms, such as repayment, security and lender rights, such as in the event of default,” she says. “Regardless, debt or other financing should only be taken on as part of a well-developed business plan, including a financial forecast for a period of three to five years.”

RRSP withdrawal

Making a Registered Retirement Savings Plan (RRSP) withdrawal to raise business funds is a bad idea for several reasons.

  1. Your financial institution withholds tax on these amounts, so you don’t get access to the total withdrawal:
    • 10 per cent on amounts up to $5,000
    • 15 per cent between $5,001 and $15,000
    • 30 per cent on anything over $15,000
  2. If the RRSP withholding tax rate is lower than your personal tax rate, you’ll owe additional money at tax time.
  3. Since the withdrawal gets added to your personal income for the year, it could push you into a higher tax bracket.
  4. Once you make an RRSP withdrawal you can’t recontribute that amount unless you have contribution room remaining.
  5. As an entrepreneur, your RRSP may be your only retirement savings as you won’t have a company pension.

What to do instead

Rather than an RRSP withdrawal, consider branching out to offer new products or services that could quickly increase cash flow. Bartman says entrepreneurs may become hyper-focused on their “ultimate product,” resulting in a situation where little to no revenue is generated until the development process is complete. “Instead, look for opportunities to generate cash flow along the way, such as identifying a partial solution that is saleable or providing consulting or diagnostic services,” she adds.

Tapping into your home equity

Entrepreneurs with good personal credit scores and home equity may borrow against their home as a lower cost financing option. However, if you can’t make the payments, you could lose your home.

“Entrepreneurs that opt to use personal or home credit lines to obtain a lower interest rate should only do so when their business plan demonstrates viability,” says Bartman.

What to do instead

Before you put your home on the line, explore other options, including grants or startup loan sources. You might also consider taking on investors. “Bringing on partners who bring capital can also be helpful,” says Bartman.

Whichever option you choose, start planning now, and consider getting professional advice.

“It can also take longer to access capital or financing than expected and a current and complete business plan is a must,” says Bartman. “Entrepreneurs should understand the requirements to access financing in advance; working with a qualified advisor can help.”

 

About the author: Sarita Harbour is a business and personal finance writer who comes from a long line of business owners. When Sarita isn't writing, she's homeschooling her younger kids and encouraging her older children as they continue the entrepreneurial family tradition.