Financing Options for your Business – A Checklist

Entrepreneurship and the gig economy are on the rise—which means small business funding is also evolving. If you’re trying to jump-start a business, you might need to get creative with your financing. The trick? Finding the funding source that best suits your company’s specific needs. By seeking a mix of traditional and emerging options, you can build your business faster.

How to Bootstrap Your Company With Personal Funding

Some small businesses have minimal startup costs. If you want to start an online company, for example, all you need is a domain and a basic web hosting package. For a service business, you might only need a few basic marketing materials to get started. In this case, the easiest funding option is often a personal investment. Using your own money to start a company comes with minimal risk. If the idea doesn’t pan out, you’re not indebted to anyone.

The key to bootstrapping a business is to keep your costs as low as possible. Purchase only the essentials and wait until you’re sure you need them. As you grow, you can reinvest the profits back into the company, but it’s best to keep your expenses low at first. This method helps your spending keep pace with growth, so you avoid going into debt. What’s more, it motivates you to get cracking and sell your goods or services, negotiate with suppliers, and develop other skills that will serve you well throughout your career.

Other strategies that can help you bootstrap a company includes:

  • Bartering: Trade services with another small business. If you’re an accountant, you could offer tax preparation services in return for help with marketing.
  • Work from home: Save on the cost of office space by working out of your house and using remote team members
  • Advance payments: Keep cash flowing by requiring a deposit or payment in full up-front
  • Free and low-cost marketing: Utilize the power of social media and search engine optimization for free marketing

Investment from Friends and Family

When you need a bit more capital to get a company started, your friends and family can be a great source of funding. After all, loved ones may be more confident in your potential for success than strangers will be. Before you reach out with a funding request, decide how you plan to give value to your investors. Can you pay them back with interest? Will they own an equity share in your business? Do you want donations with no strings attached? From there, you can decide if you wish to ask for significant amounts from a few people or smaller amounts from a higher number of people. This choice depends on the size, reputation, and financial standing of your network.

When you’re asking for money from loved ones, it’s essential to strike the right blend of personal and professional approaches. Demonstrate your intent and show them that you’re well-prepared by putting together a pared-down version of your business plan. Honour your personal relationship by taking each person out to discuss it over coffee or dinner. After you get contributions, it’s a good idea to provide regular updates and to return the investment as soon as possible.

Nonprofit Funding Support

Historically, most funding organizations have been for-profit. Recently, however, nonprofits have started to enter the small-business funding arena. Since nonprofits tend to have priorities other than making money, they often offer lower-cost loans. That means you may pay less in interest over the lifetime of your funding relationship. 

One nonprofit that can provide support is Futurpreneur Canada, a group that offers both financing and mentoring to help you start a company. Futurpreneur focuses on young entrepreneurs; you must be between the ages of 18 and 39. If you qualify, you can get a business loan of up to $45,000. The best part? The loan comes with a low interest rate, and you only need to pay interest for the first year. In addition to a business loan, the organization matches you with a business mentor.

Angel Investors

An angel investor is a wealthy individual who gives funding directly to your company. In most cases, these investors look for young companies that are ready to grow. Angel investors often look for companies that have:

  • A great idea and a well-researched plan of action
  • The readiness to go commercial quickly
  • Potential for growth
  • High earnings potential
  • Leaders with a track record of success
  • A qualified, powerful team

If that sounds like your company, you’re probably ready to seek and obtain angel funding. You can start by reaching out to your professional network for leads. Alternatively, you can join a business accelerator organization, or even contact known angel investors directly. Do you expect to need additional financial help down the road? According to the Business Development Bank of Canada, securing an angel investment can help you to attract venture capital funding.

Venture Capital Funding

Are you starting a business that has the potential to make major profits quickly? Venture capital (VC) might be the funding choice for you. Venture capitalists are investors who provide startup funds, often in return for partial ownership in the company. Many VCs look for high-potential ideas in booming markets such as technology.

Since most VCs expect fast results and a high return on investment, you need to do a bit more legwork up-front to find the right partner, and you should start by finding firms that invest in your industry. Prepare a strong pitch and a compelling pitch deck — a presentation that explains your business plan and convinces potential investors of its potential to make money by serving a need in the market. If the VC firm likes your presentation, you can show them your research, development plans, and designs to convince them you’re worth the risk. The more information you can show regarding such things as patents that have been applied for and/or obtained as well as existing sales data, the better your chances of securing an investor. Not only that but in some cases they may even bid against each other for a piece of the action.

If you plan to seek VC funding, allow plenty of time to vet firms and present your pitch. The process might take months, but if you have a solid business idea, the results can radically accelerate your company’s growth.

Government Grants and Financing

When the government wants to spur economic growth in a specific area, it occasionally offers grants and financing to help get companies going. These grants change frequently based on current needs. Are you ready to hire your first employees? The Canada Job Grant offers money for training. If you’re trying to develop an export business, the CanExport program gives grants of up to $50,000 to cover up to half of your expenses. Check the government’s database of grants and financing opportunities for small businesses regularly to find the latest opportunities.

If you’re planning to apply for a government grant, keep in mind that the competition can be intense. To improve your chances of securing this funding, it’s a good idea to be over-prepared. Make sure your application meets the program’s requirements, and be ready to explain why your business is significant. If you have unique technologies or plans, try to give detailed explanations of everything, but in layman’s terms rather than getting so technical, they won’t understand what you’re telling them.

Business Incubators and Accelerators

Does your new business need physical office space or access to high-tech equipment? In this case, a business incubator or accelerator is an excellent way to get started. These groups offer a variety of services to new businesses, ranging from industry networking to lab space. In other words, they can give you access to resources that are financially out of your reach. Since you share these resources with other up-and-coming companies, you have the potential to make some valuable connections and partnerships. These programs are usually open to new businesses in specific fields.

The choice between an incubator and accelerator depends on where you currently stand with your business. If you’re at the idea stage, an incubator is probably best, because it can help you turn that idea into an actual product. If you already have a product, consider an accelerator. These programs help you grow a product into a company. Both programs can provide networking opportunities, legal assistance, and mentorship. There are a variety of accelerator and incubator programs around Canada. In British Columbia, for example, New Ventures BC offers an accelerator for tech companies.

Traditional Bank Loans

Even with the many funding options available to you, traditional bank loans are still an option. With this method, your bank is likely to look at factors such as your credit score, history of repayment, and business plan. Banks want to minimize their risk, so you’ll need to above and beyond to convince them of your potential for success. At a minimum, you should arrive fully prepared with a well-crafted business plan, professional references, and a list of equipment you can offer as collateral. You may also need to provide reports, including financial projections, cash flow statements, and sales reports. The bigger the loan, the more information you will be expected to provide. In most cases, you’ll have an easier time qualifying for a bank loan if you have strong credit and your business is established.

If you opt for a traditional loan, it’s crucial to scrutinize the terms. These can vary dramatically between banks, and you may be able to find a better deal by shopping around. As you’re looking at different loans, pay particular attention to the:

  • Interest rate
  • Repayment period
  • Usage restrictions
  • Late payment fees
  • Personal liability

With so many ways to secure funding, starting a small business is a manageable career path. Finding the right financing is key to your success, so it’s worth your time to do the research and find financing that’s ideal for your business type. That way, you can continue to grow and hire staff as needed.

Source: QuickBooks Canada Team