When starting your own company, one of the first concerns revolves around the myriad ways of financing a business. How do you go about getting the capital to get you off the ground? Do you apply for a loan? Find investors? Both? These funds are crucial for operational growth and success, yet many entrepreneurs find that securing financing is one of the hardest elements of getting a business running. As a savvy professional, it’s important to understand the primary ways to finance your business.
First, here are the three main types of business finance:
Equity Finance: This is money that comes with ownership (or equity) in a business. This includes private or angel investors, venture capitalists, and more. Investors become part owners of a business, so down the road, they’re not repaid, but rather receive some of a company’s profits. As a result, investors usually want a say in how a business operates.
Debt Finance: This is borrowed money, be it via a personal loan, a small business loan, or any other type of equipment or land loan. Debt finance usually comes from a bank, and that institution doesn’t get to provide any input on how a business operates. Once the debt is paid off, the business relationship is officially over.
Lease Finance: This always involves equipment – vehicles and facilities, for instance – and no debt or equity is ever involved.
Here are some of the most common ways to get financing for a business. (These aren’t all exclusive of each other – a good entrepreneur may seek out many of these options.)
Many business owners tap into their own personal savings to get a business off the ground – this can be cash or another kind of financial assets, such as personal stocks, retirement accounts, business credit cards, or home equity lines of credit. Of course, this is risky, since you’re putting your own funds on the line, but the plus side is that it shows commitment (if you don’t believe in your business, who will?)
Patient capital is also known as love money. These are funds borrowed from a spouse, family member or even friend – given as either a loan or an investment. When it comes to loaning money, family members and friends can sometimes be more flexible with their repayment terms – they don’t charge a huge amount of interest, for example, or they’re more understanding of the fact that it may take some time to be repaid. That said, don’t take acquiring this type of capital lightly. Once you mix business with love and friendship, the terms can get a little sticky. Business owners should treat taking patient capital from friends and family with the same professional care as if they were securing money from a business investor or a financial institution.
Typically, venture capitalists are looking for start-ups in fast-growing technology sectors, or, they’re seeking the types of start-ups that have huge potential to grow … fast. (Venture capitalist firms like Sequoia Capital and Tencent Holdings have been behind everyone from Apple and YouTube to Activation Blizzard.) Receiving funds from a venture capitalist often includes giving up some ownership in your company. One thing to keep in mind: Venture capital is a competitive and crowded market.
They’re not ready to invest as much as a venture capitalist might, but angel investors still tend to provide substantial funds to a business during its origin stages. These individual investors usually have a vested interest in a business – they’re retired and the business is in a field they’ve worked in before, for example, or they’re interested in investing in a business with the understanding that they will also serve in some sort of consultant or advisory role. It can be hard to find angel investors (strong network skills help, as does reaching out to angel investor networks), but having strong business acumen and a solid plan of action is essential.
Potential angel investors want to know they’re making a sound decision, and they may be more likely to stake their confidence in someone who’s earned an MBA. You’ve got to approach angel investors with a solid pitch, and MBA programs (including some that are offered online for Canadian professionals, such as Aston University’s Online MBA program) can help prepare students for that, covering financial management, organizational strategy, and more.
The Business Development Bank of Canada (BDC) provides small business loans for entrepreneurs who are starting or buying a business, building or renovating facilities, buying equipment, researching and developing new products, developing new markets, acquiring information or communications technology, or selling a business. Business owners can learn more about applying for these types of loans on the BDC’s website.
This is exactly what it sounds like: money from the government that doesn’t have to be paid back. Of course, it’s not always easy to earn; most grants include a pretty intense application process, and you’ve got to have a business plan that shows strong promise. Many of these grants are geared toward women or minority-owned businesses.
Business Loans from Commercial Lenders
Dozens of banks, financial institutions, and microlenders provide loans for entrepreneurs and small businesses – it’s one of the most traditional ways to fund a business. That said, it’s not always the easiest. Terms vary based on the bank and the type of loan, but, generally, when applying for one, you’ve already received some other type of funding from elsewhere, be it personal funds, patient capital, or angel investors. This is because a bank wants to see that you’re a competent manager and have a good background managing businesses in the past; that you’re profitable; and that you have some assets or equity that it can seize should you fail to pay off your loan.
Businesses have to apply to get into one of these programs, created with the goal of providing financial assistance, mentorship, training, and other types of guidance to start-ups during their early years of operation. Incubators – sometimes also called accelerators – can provide everything from physical space to technical resources. StartUpToronto lists several business incubators online, and it’s easy to find others via Google search.
Does your business plan involve a product that might attract a large audience? If you want to secure financing while also generating mass appeal, a crowdfunding campaign on a website like Kickstarter, GoFundMe, or Indiegogo might help. These platforms rely on taking anything from one to thousands of dollars from individual donors interested in funding your project. Generally, they’ll get something in return, whether it be your product once it’s complete, a special shout out, or some other fun incentive.