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Options for Financing your Small Business

If you are a small business owner, getting the right financing at the right time is important. Financing is sometimes needed to get through a rough spot, provide seed money for a start-up, or acquire a loan to guide you through to long-term growth.

The following are five common small business financing options.

SMALL BUSINESS LOANS

A small business loan is one of the most common financing options. Loan approval rates vary. Loans are available from various types of organizations.

Financial Institutions

Anyone seeking financing should first consider options available through their financial institution. If you are an existing business, two years of financial statements are usually required and some equity to secure a portion of the loan.

87% of all Small-Medium sized businesses (SMEs) who applied for debt financing from a financial institution received approval. (Stats Canada 2017 )

For a new start up business, you can increase your opportunity to be considered for a loan by having a strong credit rating. Your credit rating is a main factor in determining whether you will be able to secure financing. Seeking financing for equipment, for example, tends to be easier as banks will able to add security to the loan by putting a lien on the equipment you are purchasing.

As of December 2017, Canada’s domestic banks authorized more than $225 billion in credit to SMEs across the country. (CBA Business Credit Stats, Dec. 2017)

Canadian Government Financing Program

The Canadian Government’s Small Business Financing Program provides an opportunity for small businesses to receive up to $1 million in financing for purchasing or improving land, property or equipment.

Business Development Bank of Canada (BDC)

The Business Development Bank of Canada (BDC) offers loans of over $50,000, a good alternative if you are unable to get traditional financing.

Community Futures Program (Ontario)

You may be eligible for financing of up to $150,000 to start or grow your business in rural Ontario. Repayable financing is available through loans, loan guarantees or equity investments. You can also access services like business training and business planning support. More information can be found at canadabusiness.ca

Futurpreneur

Futurpreneur is a loan and mentorship program for anyone 18-39 years of age. This program does not require equity to secure the loan. Loans are approved based on the strength of your business concept and your character (credit rating). Futurpreneur also provides ongoing support and mentorship, which is invaluable.

Export Development Canada (EDC)

Export Development Canada (EDC) offers a number of options for exporters as they have a higher tolerance for risk. EDC financing can support you to go after and deliver on international opportunities. They provide support to expand your global footprint and international projects, or cover your work-in-progress costs.

Rise Assets

Rise Assets provides microfinancing and mentorship to entrepreneurs living with mental health and addiction challenges who are interested in pursuing self-employment. Business loans, leases, and other investments are offered depending on the stage of development, needs and capacity of each business.

Rise Assets provides two types of lending; low interest business loans to launch a business and event lending. They also provide mentorship and support for business. They do not require security or a guarantee and there are no hidden fees. These loans are character based meaning they look at both the person and the business.

They also offer event lending with loans to be used by an entrepreneur to pay vendor admissions, purchase inventory, and cover marketing costs in order to sell/showcase their product or service at an event. Entrepreneurs must use the sales from their event to immediately pay back their loan before covering any other costs.

INVESTORS

Canadian Venture Capital Fund

You may want to pursue an opportunity with a venture capitalist (VC) as an investor that provides capital to firms exhibiting high growth potential in exchange for an equity stake. This could be funding start-up ventures or supporting small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to risk investing in such companies because they can earn a big return on their investments if these companies become successful.

Resource: Canadian Venture Capital Fund www.ovcf.com

Angel Investors

If you are willing to give up some equity in your business, you may want to search for an angel investor. These investors are interested in early-stage businesses, hoping for future return if they succeed.

You may give up part ownership of your company to these investors, but their experience and network of connections can be valuable to the future success of your business. The beauty of this relationship is that you will not have loan payments that will burden your cash flow.

Just remember these investors suit entrepreneurs with high-growth businesses and a clear exit strategy. Before sharing your idea, either publicly or with potential investors, make sure to seek legal council on how to protect your intellectual property.

Resource: Angel Investors Ontario www.angelinvestorsontario.ca

CROWDFUNDING

Crowdfunding is a way to raise money for an individual or organization. There are online crowdfunding platforms where people can collect donations from family, friends, friends of friends, strangers, businesses, and more. By using social media to spread awareness, people can reach more potential donors than traditional forms of fundraising.

Before you start crowdfunding find the best platform for your needs. Compare the best online fundraising platform by fees, features, support, and more.

There are two ways to crowdfund: reward/donation-based models or debt/equity funding. Reward or donation-based models are unregulated outside of traditional consumer protection and business laws. Selling equity in the company or taking loans with some promise of payback will bring you under regulatory scrutiny, but is still possible in some regions.

The Government of Canada’s Canada Business Network equity crowdfunding is currently an option in British Columbia, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia. Conditions vary between provinces and depend on exactly how your crowdfunding process works.

The upside to the crowdfunding model is often its downside as well. It is highly transparent, meaning that early-stage companies still in product development can spread the news of their idea, building a community of followers. It also means that others may steal your intellectual property and copy your idea before you launch so you should seek some legal protection before pursuing this type of funding.

PERSONAL FINANCES

Using personal finances to fund your small business, which many include using savings, selling investments or using personal assets, is an option. The benefits of personally financing your business is that it allows you to maintain the ownership of your company, as well as determine when and how you return the funds.  

Some people choose to continue to work full-time during the early stages of their start-up, which helps to support their cost of living and finance the initial costs of starting the business.

Support from family and friends is another option that many people use to help support their start-ups or expansions.  It is important to be clear with expectations with your lenders, including family and friends.  When borrowing money, have a written legal agreement in place detailing the payback date and terms with lenders.


More information about how to access financing for your small business is available at www.cbo-eco.ca

The type of money you raise and how you raise will depend on your situation and the clearly defined goals you have set for your company. You will need to understand your cash flow projections and your business operations completely so that you can to predict the financing you are likely to need. If you do secure the funding you will need to understand how to manage your money.


The Mississauga Business Enterprise Centre (MBEC) is your central source for small business information, resources and guidance. If you have a small business related question, please review our frequently asked questions, steps to starting a small business, or ask a question. Our team of small business experts are available to assist.