Starting a business in pandemic times: PART 2 – Choose the right funding
Welcome to the second article in a three-part series on what it takes to start a business in overwhelming economic headwinds. Depending on your business plan, times of uncertainty may have better startup odds than you might think. Step two: Find the right funding for your business.
Not all financing can serve all needs—especially in times of economic malaise. But at the same time, the need for startup financing hasn’t necessarily slowed. This is good news. While the pandemic has been very disruptive, there continues to be significant demand for financing among startups in North America. In fact, some high-profile companies have come out of downturns in the past, including Airbnb, Slack, Uber, and Venmo.
Though these businesses happen to be big success stories, navigating this new and challenging reality is pretty tough—even if you have a great concept. To help you make the best decisions for your business, here are some important points to consider while looking for financing.
Meeting your startup’s funding needs
Brainstorming a sellable idea can be a difficult process. Financing it can be even tougher. Your best bet is understanding what choices you have—from “bootstrapping” to debt financing—and choosing one that aligns with your overall goals.
1. Consider personal savings
Thinking about tapping into your personal savings or assets may not be a bad idea. Known as “bootstrapping,” this DIY approach to funding could be a more simple route. “Your contribution is good,” says Farrah Solly, Senior Manager, Small Business Initiatives at Coast Capital. “It shows financial institutions that there’s a strong personal financial commitment to the venture.” But, she continues, “Financing rates are at an all-time low. So it makes sense to borrow in many cases.”
There may also be downsides. For instance, if you bootstrap, the financial risk is on you. Are you willing to wager your life savings? Also, if resources are limited, your business growth could be stalled and you may need to strategize ways to generate revenue in the interim, such as by pre-selling products or working a side gig.
A Small Business Manager from Coast Capital can holistically review your situation to ensure a balance of cash flow, lending, and personal contributions. If you do invest your own cash in your business, make sure to open a business bank account to house the funds. That way, you’ll be organized at tax time and can take advantage of any tax deductions.
2. Apply for business lending
An obvious lending choice for most small business owners is to apply for financing from a bank, credit union, or alternative lender. “We can either lend on the strength of the business itself,” says Coast Capital’s Solly. “Or look to utilize personal assets, such as home equity, towards business financing.” Below are popular types of business financing:
Personal loan: With a personal loan, you can borrow a fixed amount of money and make regular payments (or “instalments”) over a set timeframe. Interest is charged on the full loan amount. One downside is that you are putting your personal credit at risk.
Personal Line of credit: A personal line of credit (LOC) is a type of revolving loan that allows you to borrow money up to a pre-approved amount. You can use the funds for anything, spend and pay off the loan as needed, and only be charged interest on what you use. If you’re unsure about your startup costs, a personal LOC provides more flexibility than a personal loan. Again, the downside is you are putting your personal credit at risk. But an LOC is also a good way to give yourself a salary during the first months of starting a business since that time is the most challenging.
Small business loans: These are geared specifically for business-related expenses, such as setting up shop, purchasing equipment, or hiring staff. Types of small business loans include:
- Fixed-term loan: You can borrow a lump sum of money, usually over a longer period of time. It’s repaid in regular instalments over a set term (e.g., 10 years), and you pay interest on the total amount borrowed.
- Business line of credit: You can borrow money up to a pre-approved amount and only pay interest on what you use. It gives you more flexibility than a business loan and funds are always accessible when you need them.
A business loan can use personal or business assets as security, depending on your situation, and the borrowing rates and qualification amounts will differ from a personal loan. “Business loans involve a much deeper dive on the business itself and more due diligence overall,” says Solly. “So, small business loans generally take longer to bring to fruition.”
3. Try government financing
One government option is the Canada Small Business Financing Program. You can borrow up to a maximum of $1 million. The program makes it easier for small businesses and startups to get loans from financial institutions by sharing the risk with lenders. But keep in mind that financial institutions are responsible for administering the program and approving the loans.
4. Borrow from family or friends
If luck is on your side, loved ones may be willing to kick in cash to launch your business. If you go this route, draft a written agreement that sets out the loan terms, such as the interest rate and a loan repayment schedule. This may seem overly formal if you’re dealing with parents or friends, but the last thing you want is to sour personal relationships. A contract keeps everyone on the same page.
Acting on your best instincts
Despite challenging times, getting business financing does not have to be insurmountable. Just keep in full view how you will be using the funds and the terms of payback before you make a decision. And lean on the expertise of a financing partner who has the ability to grow with you.