Cash Crunch Survival Guide - Part 3:
Funding, Debt Management and Tax for Cash-Strapped Businesses

Crowdfund: Tapping into the Power of the Crowd

Crowdfunding platforms like Kickstarter have become popular fundraising avenues. This is an approach where you present your business idea or product to the public and ask for small investments or donations.

Crowdfunding allows you to raise capital without giving up equity or incurring debt. It also lets you validate your business idea and build a community of passionate supporters. That said, successful crowdfunding requires an appealing pitch, an attractive rewards system, and an effective marketing strategy to reach a broad audience.

Small Business Grants and Government Assistance Programs

The government of Alberta and the Canadian Federal Government offer various grants and assistance programs for small businesses. These include the Canada Small Business Financing Program, Alberta Innovates grants, and the Canada Job Grant, among others.

While competition can be stiff for these programs, the upside is significant. Unlike loans, grants don't need to be paid back, making them a fantastic funding source. Government assistance programs often provide support in the form of tax credits, subsidies, or training grants, which can be highly beneficial for your business's growth.

Peer-to-Peer: Borrowing from Individuals or Other Businesses

Peer-to-peer (P2P) lending platforms connect borrowers with individuals or businesses willing to lend money. With generally less stringent requirements than traditional banks, P2P platforms can be an attractive option for businesses that may not qualify for standard bank loans.

Be aware that while P2P loans can be easier to get, they may come with higher interest rates. As with any financial decision, make sure to understand all terms and conditions before agreeing to a P2P loan.

Invoice Factoring and Merchant Cash Advances

Invoice factoring involves selling your outstanding invoices to a third party at a discount in exchange for immediate cash. This can be an effective way to manage cash flow if your business operates on long payment terms.

Merchant cash advances, on the other hand, are advances against your future credit or debit card sales. While these can be useful in a pinch, they can be expensive, so careful consideration is needed before utilizing this funding source.

Microloans

Microloans are small, short-term loans offered by specialized lenders. These loans can be particularly helpful for start-ups or businesses with limited credit history.

Find them through online search, but be very careful to understand lending terms and interest rates.

Assess and Prioritize Debts Based on Interest Rates and Terms

The first step towards effective debt management is understanding the nature and extent of your obligations. List all your debts, including short-term loans, credit card debts, long-term loans, and any outstanding payments to vendors or suppliers.

Once you have a comprehensive list, set priorities for them based on their interest rates and terms. Typically, high-interest debts should be paid off first since they grow rapidly and can become unmanageable if left unchecked. Similarly, any debts with shorter payment terms or those that could potentially harm your business relationships if left unpaid, should also be high on your priority list.

Negotiate with Creditors for Extended Payment Plans or Reduced Settlements

Remember, your creditors are interested in recovering their money, and most will be open to discussions about making this process more manageable for you. Negotiate with them for extended payment plans, lower interest rates, or even reduced settlements.

While negotiations may not always yield the results you desire, they can often lead to a more realistic and manageable repayment plan. Just ensure that any changes are formally documented to avoid future misunderstandings.

Consolidate High-Interest Debts into More Manageable Loans

Debt consolidation is a strategy that can help simplify your financial obligations and potentially lower your overall interest costs. This involves taking out a new, larger loan to pay off your existing high-interest debts, effectively combining them into a single debt with a lower interest rate and a longer repayment period.

By consolidating debts, you can streamline your payments and manage your cash flow more effectively.

Remember to conduct a thorough cost-benefit analysis before deciding to go ahead with debt consolidation. It's always wise to consult with a Zenally CPA to understand all the implications.

Implement a Disciplined Budgeting and Cash Allocation System

Managing debt effectively requires discipline and an understanding of your business's financial flows. By implementing a budgeting and cash allocation system, you can gain better control over your finances.

• Start by preparing a realistic budget that includes all your income and expenses. Then, allocate your available cash first to essential operational costs, followed by debt payments, and finally to growth initiatives. By doing this, you can ensure that your business continues to operate smoothly while you are paying off your debts.
• Use financial software and tools to automate your budgeting and cash allocation processes. This saves you valuable time and also provides a more accurate picture of your financial situation at any given point.
• Remember, a disciplined approach to budgeting and cash management can help you manage existing debts and prevent the accumulation of future debts.

Our Zenally CPA consultants are ideally suited to coach you through this process.

Reduce your installment payments

Your business (whether you are incorporated or self-employed) is generally required to pay income tax in installments if your net tax owing is more than $3,000.

Is your cash crunch caused by falling profits?

If so, you can project your profit for the current year, and base your installment payments on the projection.

Will your current year's profit be significantly lower than last year's?

Your installments will be reduced. If you've already made larger instalments than necessary, you can reduce the instalment amount for the rest of the year.

For example, say you paid 2 tax installments of 2,500 per quarter.

Then you projected a reduced profit for the year. Using the tax instalment calculator, you realize you only need to pay 6,000 total in instalments for the year.

Since you've already paid $5,000 (2 * 2,500), you only need to pay $500 in your next 2 quarterly instalments: $6,000 minus $5,000 paid = $1,000 over 2 instalments = $500 per instalment.

Have you already paid more in instalments than you project you will owe for the current year?

Stop making installment payments.

Will your business incur a loss in the current year?

Stop making installment payments.

Have you paid more in instalments than your anticipated tax bill for the current year?

Apply to have your tax instalment overpayment transferred to another remittance account. Then you won't need to use cash to pay that account. For example, you could use an instalment overpayment transfer to reduce the amount owing on your payroll source deductions or GST accounts. Be sure to make payments of payroll source deductions and GST until you receive notice the transfer has taken place.

If you still have a tax instalment overpayment when you file your taxes, you can expect a refund.

Carry Back Losses

At tax time, carry back losses for up to 3 years, into a year when you were profitable and paid tax. That will trigger a refund of tax paid in that former year.