Eric Dufour
Vice-President, Partner | FCPA | Management consulting

There comes a time in the life of any business when it needs financing. Some hints on how to structure your approach and improve your chances of getting the necessary financing, be it at the start up phase, during an expansion or for an acquisition are presented below.

1. Be realistic about the possibility of getting subsidies

While business owners may dream of getting partly or fully non-refundable contributions to finance their business, this option is not available to everyone. It might look like some businesses have a knack for easily finding subsidies, but, often, it’s a matter of circumstances.

It’s unlikely, for example, that you can get major subsidy financing to open a restaurant. On the other hand, in some cases, over 80% of the research and development activities of a biotechnology company could be financed. Generally, the agri-food (other than restaurants), culture, high tech and industrial manufacturing sectors are more likely to qualify for subsidies than retail or service businesses. Nevertheless, regardless of the type of business you operate, you should look into the programs available, particularly in the areas of labour training or product development.

2. Don’t start your business without having planned the financing

Believe it or not, some entrepreneurs start their business plan without validating all the costs beforehand and ensuring that they have the necessary financing. Most of the time, they quickly find themselves short of funds and unable to finish their project. That’s when they turn to their financial institution for financing and end up having to deal with complex and endless processes.

Other than the lack of funds, what makes creditors reluctant in such a situation is the manager’s attitude. Entrepreneurs who launch a project without first validating the costs and their ability to cover them show a decided inability to plan and manage. A potential investor could view this as risky behaviour.

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3. Make sure you have sufficient guarantees

Investors always want to protect their investment, so asking for a guarantee is an essential step. It’s not surprising that your financial institution will want to use the equipment you’re about the purchase as collateral. People often forget, though, that a business’s financial health is a far more important guarantee than a mortgage. Your financial institution will not automatically grant a loan simply because you can provide the equipment as security. The lender generally has no interest in realizing the guarantee if the business is not doing well. Creditors rarely come out ahead by seizing a client’s property and having a bankruptcy trustee sell it. However, they will be on the winning side if their client is successful and wants to borrow again for a future expansion phase.

When financing a business, common practices include requiring a mortgage and personal guarantee and sometimes, other guarantees may be required. This may be the case, for example, if your financial institution requires a universal hypothec on all of the business’s present and future property. This is not necessarily a problem provided you have a good business relationship with your bank and know your projects will be supported. It could become a burden though if you don’t have your creditor’s support.

4. Consider alternative financing sources

Business owners sometimes forget that banks are not the only sources of financing. There is a considerable range of organizations that provide funding, such as government departments, business development banks, local organizations and specific funds. In fact, there are so many potential sources that financial institutions and organizations are developing increasingly persuasive strategies to attract new clients. What they all have in common is the will to finance a project with minimal risk on their part. If your financial situation is precarious and your project quite risky, you may not find anyone willing to lend you the funds. In some cases, you could consider having several creditors share the risk. In others, you could resort to more costly strategies, such as lease financing for equipment. This option should not be considered without first having examined all other possibilities.

5. Build a relationship of trust with your creditors

Getting financing can depend on the relationship of trust you are able to develop with your lender. There is nothing to be gained trying to gloss over any financial difficulties your business may be experiencing or even trying to hide a bankruptcy that dates back 20 years. In any event, this will likely come to light anyway. Your honesty in dealing with your lender will certainly be a factor should you need additional financing because of difficulties. A poor manager will almost certainly fail, even with a good project, but a good one finds a way to pull through, even during difficult times. It’s up to you to show your lender what type of entrepreneur you are.

6. Plan your working capital requirements appropriately

In most business projects, you need to plan properly so you have sufficient working capital to see you through until you start earning some income. Usually, it’s not easy to accurately predict when and how much money will be needed. Not only must you avoid underestimating what’s needed, you also have to provide for enough manoeuvrability in the event sales are not as high as anticipated. It’s better to have some excess cash at the beginning rather than having to ask for a new loan, which could be seen as an inability to assess your needs and your business project’s potential profitability.

One of the most complex aspects of working capital is being able to convince your lender to inject significant cash from the outset, even if you don’t think you’ll really need it. This requires preparing sufficiently optimistic financial forecasts to convince the lender that are also just pessimistic enough to justify the need for considerable working capital. It’s a very fine line that divides the two.

7. Consider your lender as a business partner

When lenders refuse a loan application, it’s not necessarily because they don’t fully understand the project. On the contrary, they may have understood it very well. Lenders generally have extensive business experience and a wide range of clients. They know which businesses are profitable and which are not. They are in an excellent position to grasp your project’s potential, especially if you are newcomer to the business world.

Good lenders will consider themselves to be a business partner. Unless they see serious problems in your business, they won’t tell you how to manage it, but they will help you find ways to improve your management if necessary. As with any business partner, they’ll support you during difficult times, but not at any cost. When you’re earning income, they are as well, but if you’re losing money, oftentimes, they are also. They may be prepared to inject more funds in your business when you need some, but they will expect you to be prepared to do the same. Business managers who consider their lenders as their business partner significantly increase the chances of building attitudes that contribute to obtaining financing when they need it.

04 May 2017  |  Written by :

Éric Dufour is a management consulting expert at Raymond Chabot Grant Thornton.

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Technology plays a key role in a company’s growth and efficiency; in fact it is essential to maintain one’s competitive edge. Yet, rapid technological change is constantly creating new threats. Companies therefore need to adapt and adjust their security measures in order to keep pace with the changes.

Guarding against cyber attack is a major challenge

No company is immune to cyber attacks. According to the International Business Report (IBR) published by Grant Thornton International in the fall of 2016, one out of five companies around the world (21%) were victims of a cyber attack in the 12 preceding months, as compared to 15% in 2015. A total of 2,500 business leaders based in 36 countries were surveyed for the study.

The explosion of data generated by digital technology, now exacerbated by Internet of Things (IoT) devices, combined with the high level of connectivity among organizations, creates many opportunities for cyber criminals to do some damage. In the manufacturing sector, for example, all data production, acquisition and management systems are inter-connected and companies work with a network of suppliers and distributors. These are all areas of vulnerability for a company.

Cyber crime is very costly for the global economy. According to the IBR, cyber attacks cost a total of US$280 billion each year.  The attacks are carried out by criminals who often are well organized, some even acting as mercenary hackers on behalf of governments and organized crime groups. These hackers use increasingly sophisticated methods to penetrate an organization’s defences.

Canada is not immune to cyber attack!

Unfortunately, Canada is not immune to the problem. Almost 19% of companies surveyed for the IBR study reported that they had been the victim of an attack in the previous year. The aim of these attacks was primarily to damage infrastructure (IT systems, databases, etc.) or to steal money by making fraudulent requests or threatening to hack the company’s computer systems (e.g., Ransomware attacks).

Financial losses are not the greatest fear. In fact, 31.6% of organizations surveyed consider that the main consequence of a cyber attack would be the amount of time spent dealing with the aftermath. Other consequences include damage to the company’s reputation (29.2%), the loss of clients (10.2%) and lost revenues (9.8%).

Exemplary cyber security practices are therefore essential to reassure and attract customers, who want a secure environment for their electronic transactions. They also demand that personal information be adequately safeguarded. Companies must pay especially close attention to this matter and ensure that they are well versed in, and adhere to, federal and provincial legislation.

Safeguarding measures that are part of the corporate strategy

Cyber security is more than a set of binding measures to protect a company’s data and systems. Such measures must be a part of the company’s strategic approach in order to ensure that its operations are more efficient and secure.  To be truly effective, cyber security must become part of a company’s ethos and fully adopted and implemented by all company employees at all levels and strictly monitored for adherence by connected partners.

Prevention and preparedness remains the best way to deal with cyber attacks, knowing full well that no defensive measures are perfect.

The first step consists in calling upon experts to assess the risk factors—both within the company and in its broader network—in addition to its cyber security weaknesses. This information can then be used as the basis for developing and implementing a policy, as well as security procedures and mechanisms (such as penetration tests), to reduce these risks as much as possible and react quickly in the event of an attack.

Since every organization is different, tailored solutions must be developed according to the company’s area of activity, structure, dependence on technology, supply chain, network and sales methods, etc.

Finally, it is important to remember that cyber security is everyone’s business and must be part of the corporate culture. As soon as new employees are hired, they must learn about the policies and procedures that must be followed and then be reminded of these policies and procedures in different ways on a recurring basis. For example, it could be ensured that each person is acting responsibly by discussing cyber security during annual performance appraisals.

For more information, as well as some cyber security tips, do not hesitate to contact our experts, Garry Blaney and Greg Jenson.

This article was written following a study conducted by Grant Thornton International. To access the original content, consult the study.

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Tax legislation contains only a few paragraphs regarding SR&ED tax credits. Over the years, case law has completed the legislation by interpreting particular cases where the taxpayer opposed the Crown.

One of the greatest cases in the history of SR&ED is Northwest Hydraulic Consultants Limited v. The Queen, in 1997. One of the arguments bore on what did or did not constitute an eligible SR&ED project. Justice Bowman rendered a decision based on the three criteria (five-question approach) defining SR&ED activity:  scientific/technological uncertainty, scientific/technological advancement and the presence of a systematic investigation. This definition of SR&ED, subsequently reused and reconfirmed, has become a cornerstone of the program. Not all cases however have had as much impact as the Northwest Hydraulics case.

Further cases have recently enabled the tax authorities to clarify or confirm certain aspects of the scientific/technological point. We will take a brief look at one of these cases to illustrate the lessons to be learned from case law:

Joel Theatrical Rigging (JTR) Contractors (1980) Ltd. v. The Queen

Reference: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/218140/index.do

In this case settled in July 2016, the company contested the CRA’s refusal of its SR&ED projects on the basis that the claims did not meet the scientific eligibility criteria.

One of the projects involved the development of a device comprising a motor that would activate a hydraulic system to control the rate of descent of a theatre’s fire curtain. Current practice in the field consisted in using counterweights to achieve the same function.

The Judge agreed with the CRA’s decision, which stated that the problems involved in attaining the objectives could be resolved by “routine engineering”; the term typically “describes techniques, procedures and data that are generally accessible to competent professionals in the field”.

When analyzing a case, the reasoning and the process used by the Judge are just as important as the ruling itself. From the arguments of this ruling, the following points should be taken into consideration when determining the eligibility of SR&ED activities:

  • It was not clear whether the project was carried out by competent professionals in the field: the employees who worked on this project did not have a technical diploma or experience in mechanical or hydraulic design. They also did not have recourse to specialized external resources. “(…) the research teams did not include any professional engineers or researchers who held a university degree in engineering, and as none of the researchers with limited engineering training were called as witnesses (…)”.
  • There was no correct formulation of hypotheses on the basis of several tests in the process. The Judge provided a number of definitions taken from various sources and retained a simple one stating that a hypothesis should be formulated as a statement to be tested: “In other words, a hypothesis is a statement to be tested by an experiment or a trial.”
  • There was a lack of thoroughness in the experimental process. For example, during trials, the rate of the curtain’s descent was not measured: “It seems to me that, if the scientific method had been used (i.e., if there had been systematic observation, measurement and experiment), Mr. Marineau and his colleagues would have determined the precise weight used in the experiments and would have precisely measured the duration of the descent in each experiment so that they could determine whether, as they moved from one experiment to the next, the duration of the descent was increasing or decreasing.”

With regard to Point 2, it could be assumed that these hypotheses could be implicit for each design iteration, but it is still possible to be able to reconstitute them from the facts and they must be specific and innovative. A good hypothesis at the basis of a trial is what mainly distinguishes a systematic investigation from a “trial and error” process.

Point 3 is an argument rarely used in case law to refute the presence of SR&ED. Note however that, in this particular case, the Judge does not set the bar very high in terms of scientific thoroughness.

Nonetheless, there is a positive aspect resulting from the comments of this ruling: the Judge reiterates that contemporaneous documentation, while beneficial, is not essential for demonstrating the existence of SR&ED: “Although Northwest Hydraulic indicated that one of the criteria of SR&ED is a detailed record of hypotheses, tests and results, some cases have suggested that this particular criterion may not be absolutely essential.”

This case constitutes another situation where SR&ED projects in applied mechanics are difficult to defend. The current practice in this field is quite vague and arguments must be convincing. Also, work must be performed by personnel at the cutting-edge of technology and a thorough development process must be adopted.

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Federal Minister of Finance, Bill Morneau, presented his budget on March 22, 2017. The government is continuing with its planned focus on building a strong middle class through innovation, skills, partnership and fairness. Budget 2017 focuses on giving talented people the skills they need to drive our most successful industries and high-growth companies forward, while investing in Canadians’ well-being through a focus on mental health, home care and indigenous health care.

Forecasted deficits

As widely anticipated, the budget projects significant deficits over the next several years. The government forecasts a deficit of $23 billion for 2016–17 and $28.5 million in 2017–18. Over the next four years, deficits are expected to decline gradually from $27.4 billion in 2018–19 to $18.8 billion in 2021–22.

Canada continues to have the lowest total government net debt-to-GDP ratio of all G7 countries. The federal debt-to-GDP ratio is projected to decline gradually after 2018–19 reaching 30.9 percent in 2021–22.

Investing in priorities

The government is committed to making smart, necessary investments in the economy to ensure a thriving middle class, and remains committed to a responsible approach to fiscal management.

The government will initiate three new expenditure management initiatives:

  • A comprehensive review of at least three federal departments (to be determined), with the aim to eliminate poorly targeted and inefficient programs, wasteful spending and inefficient programs, and ineffective and obsolete government initiatives.
  • Initiate a three-year review of federal fixed assets to identify ways to enhance or generate greater value from government assets.
  • Initiate a review of all federal innovation and clean technology programs across all departments, as federal programs are dispersed to simplify programming and better align resources to improve the effectiveness of innovation programs.

The government will report on the progress of these reviews in Budget 2018.

The government will also introduce legislative changes to improve the organization and efficiency of government operations, as needed.

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