As businesses grow, they often need to raise extra capital or funding. The first task is to clearly define the reasons you need extra capital. Once you’ve done that, you’ll have a better idea of just how much you’ll need, and whether it’s justified.
Money inside your business
Once you’ve determined how much you need, a solid first step is to look inside your business to see if you already have access to some of that capital. For example, you could explore selling equipment you don’t use very often, or minimizing travel expenses by using online meeting tools like Zoom or Google Meet instead of physically travelling. You could also reduce the amount of personal withdrawals you’re making, or renegotiate deals with suppliers for better credit terms.
Your personal funds
Always evaluate whether you can provide your own funds before taking out another loan. Also known as bootstrapping, self-financing is the most common form of raising capital for business startups. Banks, credit unions, government lenders, and other investors will want to know exactly how much of your own cash you’re planning to invest in your business, so your personal funds are a good early place to find cash (in the right circumstances).
Friends and family
Your friends and family can often be a good options for seeking financial support as they’re easy to approach and want to see your business venture do well. You’ll probably be able to borrow money with little or no interest, giving you a huge advantage as you look to establish or grow your business. Make sure to set out the terms of the exchange — such as
when and how the money will be repaid, what it will be used for, and whether interest will be charged.
Partnering
Depending on your goals, you may be able to partner with an existing business to provide the support and resources you need to grow. For example, if you’re looking to export, you may be able to partner with an existing exporter to cut down on your costs by giving them a margin of your profits. In this way, you can make it less expensive to grow without attaching yourself to another fixed cost.
Angel Investors
These are successful individuals, often experienced business owners, who invest their own personal funds into promising small businesses with high growth potential. Here are some key points to consider when exploring angel investors:
- They typically seek businesses with strong growth prospects, and are willing to invest early in such a company’s development.
- It can be beneficial to find angel investors with expertise in your industry, as they often bring valuable skills and experience to the table.
- In exchange for their investment, they may seek a return on investment, equity, or both.
- Angel investors are often more willing to invest in the early stages of a business, making them a great option for startups looking for initial funding.
Crowdfunding
The concept behind crowdfunding is to let prospective entrepreneurs seek capital from many investors prepared to commit small amounts online.
Make sure you research your options thoroughly before choosing a crowdfunding investment platform. GoFundMe and Kickstarter are just two of many popular crowdfunding platforms available to Canadian startups.
Government grants and subsidies
It’s always worth checking out what the government can offer you. Mostly, this type of funding comes in the form of grants, but you may also be eligible for subsidies or loans. Governments at all levels want businesses to succeed, so they create programs to supply tax breaks, wage subsidies or loan guarantees. The Business Benefits Finder (or the French version) on the Government of Canada website is a great place to start if when exploring government assistance.
Loans
Loans are usually classed as debt, where you borrow the money and then set a repayment schedule with the lender to pay back the principle, plus interest.
A business is typically ready to get a loan, when it meets the following criteria:
- Stable cashflow: The business consistently generates enough revenue to cover operating expenses and has funds available to repay debt.
- Good credit history: Both the business and its owners have a solid credit score, showing a history of managing debt responsibly.
- Clear business plan: A well-developed business plan with financial projections that demonstrates the company’s ability to repay the loan.
- Collateral: The business may need to offer assets (like property or equipment) as collateral to secure the loan.
- Time in business: Most financial institutions prefer businesses that have been operating for at least 1-2 years, as this indicates stability and experience.
- Low debt levels: The business should have manageable existing debt and not be overly leveraged.
- Legal and financial documentation: The business should be properly registered, have up-to-date tax returns, financial statements, and other required documentation. Having these factors in place helps demonstrate to a bank that the business is financially stable and capable of repaying the loan.
Other forms of loans include:
- Asset finance, vehicle or real estate.
- Credit cards.
- Canada Small Business Financing Program
- Lines of credit.
Different lenders have various options and terms for business loans, so talk to us directly to determine which options work best for your needs.
Peer-to-peer lending
This refers to borrowing money directly from other individuals or investors rather than from a bank or other traditional financial institution. P2P lending is facilitated through online platforms designed to connect borrowers and lenders. You’ll still need to repay the loan and undergo a credit assessment to determine your creditworthiness, but you’ll have access to funding you may not otherwise have through a bank, and you may be able to access lower interest rates.
Next steps
- Determine how much money you need.
- Explore your current business and your personal finances to see how much of the money you can come up with yourself, without putting either your business or yourself in financial jeopardy.
- Consider what type of funding you’re most comfortable with, and identify the options available to you.
Speak with a Coast Capital Business Advisor, accountants, or business mentors. They can provide valuable insights and help you navigate the funding process.
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This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
