Business Expert FAQ
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We have collected the most frequently asked questions regarding Business here. Please review this list before asking a new question.
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Frequently Asked Questions
- I am thinking of starting a Social Enterprise. Why should I create a business plan and what should the business plan include?
- The thought of starting a new business is overwhelming when I look at all of the established competition. How can I come up with a business that will be able to compete?
- What are the various financing options for a social enterprise?
- I have heard of the term “Patient Capital” with respect to the financing of social entrepreneurship. What exactly does this mean?
- Do I have to register my social enterprise for GST?
- I have a vision, but lack some expertise... where do I start?
- Is a social enterprise the same as a socially responsible business? If not, what are the differences and similarities?
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Frequently Asked Questions
1. I am thinking of starting a Social Enterprise. Why should I create a business plan and what should the business plan include?
A business plan is used to map out the critical issues in starting and growing a business. The process of creating a business plan is useful in developing a business model and allocating resources, basically a plan of how will money be earned and spent over time. It is also useful for investors or partners to help them understand the business concept. While a great business plan does not necessarily guarantee business success, it does help all stakeholders better understand the feasibility and risks of the plan. It should be a living document that continues to evolve with the business.
Business plan formats can vary depending on the business model and organization complexity. Download the Planning Chapter of the Social Enterprise Guide for some tips on the social purpose business plan.
2. The thought of starting a new business is overwhelming when I look at all of the established competition. How can I come up with a business that will be able to compete?
This is one of the toughest questions faced by any new venture. As a new entrant into a market you will have difficulty competing head on with established, well financed competitors that have tuned their operations, developed a trusted brand and cultivated customer relationships.
The key for success is to develop a differentiated product or service that is useful to your customers and will be difficult for competitors to copy. This requires thinking about what your organization can do better than anyone else. Start by identifying your unique skills and resources and how these can be integrated in a business model that will allow you to compete. For many social enterprises, this involves integrating socially and/or environmentally beneficial activities in a way that positively reinforces the uniqueness and attractiveness of the business model.
A common opportunity for new ventures is to identify niche type markets that are underserved by larger competitors that may prefer to focus on larger opportunities. Often providing improved high levels of service in these underserved markets is what allows a new venture to compete. As an example, typical small service type businesses are often more convenient, faster responding and better able to develop customer trust by serving locally rather than from afar.
3. What are the various financing options for a social enterprise?
Like all businesses, social enterprises have a number of funding mechanisms. All mechanisms have their respective advantages and disadvantages and the suitability of each funding source will vary depending on the type of business, the business model and various other factors. In general, as the riskiness of a venture increases, the types of available funding will decrease. Businesses should aim to evaluate all sources of potential funding and concentrate on pursing the funding that best supports the business plan needs. Considerations can include the magnitude of capital requirements, investment timing, level of risk, investor alignment and investor expertise.
It is worth noting that businesses often develop their business plan to help increase their options for raising various types of funding. Investors, accountants and business advisors can be helpful in aligning the financing strategy with the business strategy. Some of the common types of funding available include the following:
Secured Debt: Similar to a home mortgage, secured debt is a loan that is backed by a marketable, real asset such as real estate or equipment that could be sold in the event that the loan cannot be repaid. Lenders expect repayment of the principle with interest; however, repayment terms and duration can vary greatly depending on the specific situation.
Unsecured Debt: Also a loan, but lacking the backing of marketable, real assets. Typically an unsecured loan will have less favourable terms and higher interest rates in order to compensate for the higher risk being taken by the lender. Loans can come in various types including:
- Bridge Loan: Typically a short term loan intended to help an organization "bridge” the gap until a larger financing package or revenue source is received. Bridge loans can also be secured.
- Mezzanine: Typically a short term loan with rights to convert to equity based on various triggers such as not being paid back within a specified time.
- Subordinated (Junior) Debt: Debt that is ranked lower in terms of repayment requirement than more senior debt such as secured debt. This means that in the event that the loan cannot be repaid, the subordinated lender is paid after the “senior” lenders, or not at all if there are no assets left. This higher risk position means that terms and rates are less favourable for the borrower than senior, or secured debt.
Equity: Equity involves a financial Investment in exchange for an ownership share in the organization. There are numerous types of equity including common shares where all equity holders have equal rights or preferred shares where some investors have greater rights.
In-kind Investment: Similar to equity funding except that products or services are provided in lieu of a financial investment. In-kind relationships can also involve the exchange of products and services between two organizations.
Joint Venture: A partnership with a second organization where funding and usually non monetary resources are provided to the partnership in pursuit of a common goal
Internally Funded: A significant number of early-stage businesses undertake activities that can generate revenue with minimal capital. Often these are service-type businesses such as consulting or maintenance services. Generated income can be used to support more capital intensive activities that will help the business grow.
4. I have heard of the term “Patient Capital” with respect to the financing of social entrepreneurship. What exactly does this mean?
In short, Patient Capital refers to financing that allows an organization to start-up and become financially sustainable on its own. Naturally, Patient Capital needs to be of sufficient quantity to provide the necessary resources for an organization to become financially sustainable. In addition, the capital must be in place for a sufficient time period for this financial sustainability to develop. Patient Capital can be provided in a number of financing structures such as equity or debt.
Often Patient Capital is provided by investors that have social impact goals in addition to the need for financial return. When this is the case, it is important that the following issues be addressed by the investor and the social entrepreneur in order to ensure that the goals of the Patient Capital provider are being met.
- Develop a plan to measure progress towards financial sustainability, in an auditable way
- Align the investors with the management team and board as they pursue a single strategy for social impact
- Make it easy to measure and compare social return on investment
5. Do I have to register my social enterprise for GST?
As a registered charity, you may qualify as a "small supplier" where you do not have to register for GST but you may choose to do so voluntarily. Qualification for this exception requires you to pass either one of the following tests:
1. Gross revenue test
The annual limit to qualify as a small supplier using this test, gross annual revenue must be less than $250,000. Gross revenue includes business income, donations, grants, gifts, property income, and investment income, less any amount considered a capital loss for income tax purposes. If your annual revenue is $250,000 or less in either of the prior two years or if this is your first fiscal year, you qualify as a small supplier.2. $50,000 taxable supplies test
If revenues from taxable supply of goods and services subject to GST are less than $50,000, you qualify as a small supplier. If total revenue from taxable supplies in the current calendar quarter and total revenue from taxable supplies in the last four calendar quarters add up to $50,000 or less, you do not have to register.
The Canada Revenue Agency (CRA) provides guidelines on what revenues are considered taxable for charities. As a general guideline, most services, supply of used or donated goods, meals-on-wheels programs, catering services for private functions, parking space rentals and facility rentals. On the other hand, sale of new products, restaurant services, memberships, event tickets and admissions are considered taxable. The CRA website should be consulted if there is uncertainty about the product or service offering is taxable.
6. I have a vision, but lack some expertise... where do I start?
The short answer is: start by writing down and developing your vision in as much detail as you can from the current information you have, and then do research in the real world by talking to others in the local community, and afield, who can help inform your ideas. Finally, in all likelihood you will want partners who possess the technical skills to carry out this venture.
7. Is a social enterprise the same as a socially responsible business? If not, what are the differences and similarities?
Social enterprises are businesses operated by non-profits with the dual purpose of generating income by selling a product or service in the marketplace and creating a social, environmental or cultural value. So yes, they are different from socially responsible businesses. Social enterprises are owned by non-profit organizations and they seek a blended value return on investment - they seek a social (or sometimes an environmental) as well as financial return. Their profits are returned to the business or to a social purpose, rather than maximizing profits to shareholders. A socially responsible business may have a double or triple bottom line, but income goes to private shareholders and the financial bottom line is almost always the most important.
Non-profits start social enterprises for three main reasons:
- To fill a community need in the market (for example, providing employment or job training to people with barriers to employment)
- Advance the organization's mission
- To help the organization's financial sustainability
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