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8 sources of start-up financing

These modes of raising money could give your company the momentum it needs

6-minute read

Diversifying your financing sources allows you to access different types of services tailored to specific needs and situations.  

We often think of financial institutions as the primary source of financing.However, banks often see themselves as just one source among many. So, they tend to favour business plans based on various financing alternatives.  

How do you finance a start-up?  

Whether you opt for a bank loan, a grant, a business incubator, or even friends and family, all of these financing options can be combined, although each one will have specific requirements.  

This article presents different sources of financing that you could use to start your business. 

1. Personal investment 

Personal investment is usually the first source of funds when starting a business. Using your own money means you won’t have to apply for a loan or seek investments from people outside the company, which can take a long time. It also allows you to maintain control of your business and keep all the profits from your business activities.  

If you decide to take out a loan to start your business, your financial institution will expect you to invest some of your money in the project or provide collateral. This demonstrates your long-term commitment to your project. 

2. Love money 

Your spouse, parents, other family members or friends can lend you money. Bankers call this patient capital because repayment is flexible and unpredictable. Since there is no specific contract, the loan is often repaid based on the company’s profits. 

However, starting a business relationship with friends and family should never be taken lightly. If you are thinking about borrowing money from them, remember that they:  

  • rarely have much capital 
  • may want to hold equity in your business, which is not a good idea 

3. Venture capital  

People or companies that invest in venture capital are looking to invest in companies with high-growth potential. Technology-driven sectors such as information technology, communications and biotechnology are particularly interesting to them. 

This type of financing is for promising but more risky projects. It also allows the business to grow quickly without using its cash to pay off debts.  

People who invest in venture capital want to play an active role in the companies they finance. So, you will have to transfer part of your business to them. Expect that they will want a good return on their investment.  

If you go the venture capital route, 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 promising markets. This team invests in start-ups with high-growth potential.  

4. Financial angels 

Financial angels are generally wealthy individuals or retired business executives who invest in SMEs. They are particularly interested in companies in the early stages of development. The amount invested varies from $25,000 to $100,000.

They are often leaders in their field. Your business will benefit from their:

  • experience
  • network of contacts
  • technical knowledge
  • management expertise

To reduce the risk of losing their investment, financial angels may reserve the right to:

  • supervise the company's management practices
  • sit on the board of directors
  • require an assurance of transparency 

Financial angels tend to keep a low profile. To meet them, you have to contact specialized associations or search the Internet. The National Angel Capital Organization, the Canadian International Angel Investors and Anges Québec can connect you with angel investors.  

Learn more about finding angel investors for your business.  

5. Crowdfunding 

Crowdfunding is a form of fundraising where a business asks many people to make small contributions.  

Generally, the company offers an equity interest in exchange for financing. However, these investors will have a harder time selling their shares than those who invest in public companies.  

Business owners also have more flexible rules to follow for crowdfunding than would apply for an initial public offering (IPO).  

There are various forms of crowdfunding:

Equity crowdfunding

In exchange for their money, investors receive shares in a company or the right to a portion of the revenue or profits from a specific product.

Debt crowdfunding

Investors lend their money to a company at relatively high interest rates. By lending small amounts of money to several businesses, these people reduce their risk. For its part, the company receives a large amount of money, but in small increments.

Crowdfunding through donations or rewards

A company sets a fundraising target and asks for donations. In exchange, it offers a token for the product or service that will be developed.

 6. Business incubators

Business incubators can support start-ups at various stages of development.

They generally focus on the high-tech sector. Incubator companies operate in cutting-edge sectors such as biotechnology, information technology, multimedia, or industrial technology. There are also local economic development incubators that support a wider variety of businesses since their focus is on job creation and regional revitalization.

Incubators share space and administrative, logistical and technical resources. For example, an incubator can make its labs available to a new business. This will enable the company to develop and test its products at a lower cost before starting production.

Companies generally stay in an incubator for two years. When their product is ready, they leave the incubator to fly solo and produce it themselves.

Thanks to the support they receive, they have a better five-year success rate.

7. Grants 

Some government agencies provide grants to Canadian businesses to help them innovate.

Grants can be used to pay for:

  • research and development 
  • marketing  
  • salaries  
  • equipment 
  • boosting productivity 

Also, if you obtain a grant, your business may be eligible for additional financing if it meets certain requirements. 

Conditions for receiving a grant 

The amount of the grant is usually awarded based on certain conditions. The most important ones are: 

Dollar-for-dollar matching

Most of the time, the company must match the grant. The required investment varies greatly from one organization to another. In the case of a research grant, you may only have to provide 40% of the total cost. 

Meeting the terms and conditions

A grant is money you don’t have to pay back. However, you are obliged to comply with the conditions of the grant to keep it. If you don’t, you’ll have to pay it back. 

Getting a grant is not always easy because the criteria are stringent. Also, there is usually a lot of competition, and preparing your application takes time and energy. 

How to apply for a grant  

To apply for a grant, you will need to provide:

  • a detailed description of your project, including the location
  • an explanation of its benefits
  • a detailed work plan with full costs
  • a description of the experience and background of key individuals in the business
  • duly completed application forms, if required

Assessment criteria

Most organizations require:

  • a realistic project that can be completed using available resources and the company's expertise
  • reasonable time frames
  • an approach in line with the grant's objectives
  • an innovative project
  • a real need to start the project
  • some relevance for society or a specific group

Here are some reasons why a grant may be denied:

  • research/project does not meet eligibility criteria 
  • business’s location is ineligible
  • applicant did not communicate the relevance of their project
  • proposal’s rationale is weak
  • research plan is not specific enough
  • amount of work required is unrealistic
  • applicant cannot match the grant

Finding grants for your business

The Government of Canada's, Business Benefits Finder provides financing sources, including government grants and subsidies.

8. Business loans

Bank financing through business loans is one of the main sources of financing for small and medium-sized businesses.

Not all commercial loans are equal. Lending institutions offer different advantages, such as personalized service, flexible repayment terms and varying interest rates. 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 established firms. Entrepreneurs with a solid business plan and a good credit rating are more likely to get loans. You need to show that you are determined and committed.

How to get financing when starting a business

Here’s a video that summarizes the different forms of financing for your business:

BDC offers start-up financing for entrepreneurs.

You could also contact organizations specializing in lending to new or young businesses, such as Futurpreneur.

If you are an Indigenous entrepreneur, you may have access to tailored loans and other services offered by your local Indigenous financial institution. Visit the NACCA  website for a listing.

You can also find small business loan programs specific to your province using the Business Benefits Finder.

Calculating the cost of a business loan

If you want to learn more about the criteria on which banks base their decisions, calculate the cost of a business loan and establish a monthly amortization schedule, check out our business loan calculator.

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