8 sources of start-up financing
Putting all your eggs in one basket is never a good business strategy. When you diversify your financing sources, you also have a better chance of getting the appropriate financing that meets your specific needs. Keep in mind that bankers don’t see themselves as your sole source of funds. And showing that you've sought or used various financing alternatives demonstrates to lenders that you're a proactive entrepreneur.
Whether you opt for a bank loan, an angel investor, a government grant or a business incubator, each of these sources has specific demands.
Here's an overview of typical financing sources:
1. Personal investment
When borrowing, you invest some of your own money—either in the form of cash or collateral on your assets. This proves to your banker that you have a long-term commitment to your project.
2. Love money
This is money loaned by a spouse, parents, family or friends. A banker considers this as "patient capital", which is money that will be repaid later as your business profits increase.
When borrowing love money, you should be aware that:
- family and friends rarely have much capital
- they may want to have equity in your business—be sure you don’t give this away
- a business relationship with family or friends should never be taken lightly
3. Venture capital
The first thing to keep in mind is that this funding source is not necessarily for all entrepreneurs. Right from the start, you should be aware that venture capitalists are looking for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications, and biotechnology.
Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business.
BDC has a venture capital team that supports leading-edge companies strategically positioned in a promising market. Like most other venture capital companies, it gets involved in start-ups with high-growth potential, preferring to focus on major interventions when a company needs a large amount of financing to get established in its market.
Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge.
Angels tend to finance the early stages of the business with investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer larger investments, in the order of $1 million.
In return for risking their money, they reserve the right to supervise the company's management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.
Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels. The National Angel Capital Organization, the Canadian International Angel Investors and Anges Québec can put entrepreneurs in touch with angels.
Learn more about finding angel investors for your business.
Crowdfunding is a form of fundraising where a business asks the public for a contribution, usually in exchange for equity in the company.
It usually entails a private company asking large numbers of people for small contributions. This differs from the more conventional practice of raising money through angel investors or venture capitalists, where a handful of actors inject larger sums into your business.
In return for investing in your business, supporters will receive equity, albeit with less liquidity than what do would get with public stocks. There are also more relaxed rules governing crowdfunding than IPOs.
There are various forms of crowdfunding, including:
- Equity crowdfunding, where, in exchange for their money, investors receive shares in a company or the right to a portion of revenues or profits from a specific product.
- Debt crowdfunding, where investors lend their money to a company at relatively high interest rates, thus mitigating their overall lending risk by spreading a large amount of money in small increments across a large number of loans.
- Donation/rewards-based crowdfunding, where a company sets a fundraising target and asks for donations—in exchange for some kind of token or receipt of the eventual product or service to be developed.
6. Business Incubators
Business incubators (or "accelerators") generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization and hosting and sharing services.
Commonly, incubators will invite future businesses and other fledgling companies to share their premises, as well as their administrative, logistical, and technical resources. For example, an incubator might share the use of its laboratories so that a new business can develop and test its products more cheaply before beginning production.
Generally, the incubation phase can last up to two years. Once the product is ready, the business usually leaves the incubator’s premises to enter its industrial production phase and is on its own.
Businesses that receive this kind of support often operate within state-of-the-art sectors such as biotechnology, information technology, multimedia, or industrial technology. Businesses that were supported by an incubator have a better success rate over five years.
7. Grants and subsidies
It’s not always easy to bring innovations to light so government agencies provide aid to Canadian companies. You may have access to this funding to help cover expenses, such as research and development, marketing, salaries, equipment and productivity improvement.
Technically, a grant is a sum of money conditionally given to your business that you don’t have to repay. However, you’re bound legally to use it under the terms of the grant, or otherwise you may be asked to repay it. As well, once you are granted money from one government source, it is not uncommon to receive further funding from the source if you meet program requirements.
Getting grants can be tough. There may be strong competition and the criteria for awards are often stringent. Generally, most grants require you to match the funds you are being rewarded and this amount varies greatly, depending on the granter. For example, a research grant may require you to find only 40% of the total cost.
Generally, you will need to provide:
- a detailed project description, including location
- an explanation of the benefits of your project
- a detailed work plan with full costs
- details of relevant experience and background on key managers
- completed application forms when appropriate
Most reviewers will assess your proposal based on the following criteria:
- Assessment of expertise
- Need for the grant
Some of the problem areas where candidates fail to get grants include:
- The research/work is not relevant.
- Ineligible geographic location.
- Applicants fail to communicate how their ideas will be addressed.
- The proposal makes without a strong rationale.
- The research plan is unfocused.
- There is an unrealistic amount of work.
- Funds are not matched.
The Government of Canada’s Business Benefits Finder provides sources of financing, including government grants and subsidies.
Loans are the most commonly used source of funding for small and medium sized businesses. Consider the fact that all lenders offer different advantages, whether it’s personalized service or customized repayment. It's a good idea to shop around and find the lender that meets your specific needs.
In general, start-ups have a harder time accessing loans than do established businesses. Entrepreneurs with a solid business plan and a good credit rating are more likely to be able to access loans.
How to get financing when starting a business
BDC offers start-up financing to entrepreneurs.
You may also be interested in organizations that specialize in lending to new ventures, for example Futurepreneur. If you are an Indigenous entrepreneur can access, you can access tailored business loans and other services through your local Aboriginal Financial Institution.
You can find province specific lending programs for new businesses using the Business Benefits Finder.
Calculate the cost of a business loan
If you want to understand more about the banks’ criteria and to calculate the costs of a business loan and a monthly amortization schedule, see our business loan calculator.