Funding SME’s – Is there a shortage of money?
by Joseph Batty, CPA, CA
What a conundrum, enigma, riddle or dichotomy; call it whatever you want, but the problem of getting investment capital directed to starving local small and medium enterprises (SME’s) is a real poser.
The most common belief is that there is a shortage of money (capital), and that is the reason SME’s are starving for capital. A deep look into this issue will show that this common belief is untrue. As an example, in Alberta alone, there are over 700,000 Albertans who have opened Tax Free Savings Accounts (TFSA) and have placed over $12 Billion into these accounts. Despite the fact this plan was designed to be an investment fund for early stage technology, a Royal Bank study (updated in May 2018) revealed that about 65% of these savings were sitting idle in savings accounts and GIC’s.
With over 40 years of experience in finance and accounting, Mr. Batty demonstrates a proven track record of helping business – large and small – set up financial systems in support of their strategic goals and objectives. The work Joe has done over the past many years has made him an authority on the identification, evaluation, valuation and (where appropriate) capitalization of “Intangible Assets”. His specialty is quite unique and rare. Every financial manager today needs to know and understand these principles: the success of their businesses depends on it. Joe currently sits on the board for TechInvest Alberta.
For the average Albertan, what does this actually mean?
- Financial advisors would say this type of investment is not keeping up with inflation!
- In general it means these savings are being wasted as a possible source of investment capital for Alberta’s SME’s.
The second most common belief is that an investment into SME’s is very risky, particularly if the SME is an early stage new technology. This belief is more difficult to dissect. There are multiple examples of individuals who have placed investments into an SME and lost their capital. A deep look into this issue will show that such investments were generally made with little or no due diligence. A lot of these investments were made on the basis of emotion and not on the basis of acceptable business practices.
The third most common belief is that you have to invest large amounts of your savings in order to be eligible. This belief has a lot of merit. Since it is so difficult and time consuming to raise equity capital for an SME, it is common to see a minimum investment offering of $25,000 or $50,000 or even $100,000+. That means the investor is putting that large amount at risk. Considering the most common cause of failures in SME’s is insufficient capital, and whereby capital is so difficult to raise, the loss experiences for this type and size of investment is very high.
So, what is the problem?
- Obviously it is not a shortage of money.
- One might expect that banks and other financial institutions that attract money into the registered savings plans (TFSA/RRSP, etc.) would enable investment into SME’s. They have not responded to the need.
- As far as we can determine, no one has tried to assemble an Alberta team to develop an organized plan to overcome the issues of high risk and underfunded equity.
- A more disciplined approach must be designed so that the idle money in these registered savings plans can be accessed and mobilized.
What is the solution?
Alberta needs an intermediary entity to bridge the gap between the investment capital that is sitting idle in TFSA’s, RRSP’s, etc. and a strategy to overcome the existing problems of risk and capital shortages.
ABCtech has joined a Joint Venture with an Alberta Credit Union and an Alberta private corporation to create TechInvest Alberta Inc.
This new entity (TechInvest Alberta Inc.) has assembled a team of skilled and experienced people with a specific mandate to create the bridge between the idle capital and the SME investment opportunities.
This team and the corporation that is created (TechInvest Alberta Inc.) will soon be asking for your support.
The next article in this series will explain how we intend to achieve this goal.