Putting all your eggs in one basket is almost 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:
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.
This is money loaned by a spouse, parents, family or friends. A banker considers this "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.
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 a 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.
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 in 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.
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 Canadian Angel Investment Network can help put entrepreneurs in touch with angels. Angel Investors Canada is a not-for-profit organization that promotes best practices in this field.
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.
Incubators will often 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.
The incubation phase can generally 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.
The Canadian Association of Business Incubators has a comprehensive list of business incubators in Canada, plus links to other resources.
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, otherwise you may be asked to repay it. 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 fund only 40 per cent 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.
Canada Business provides sources of financing, including government assistance.
The Canadian Intellectual Property Office fosters the use of the IP system and the exploitation of IP information.
Bank loans are the most commonly used source of funding for small and medium-sized businesses. Consider the fact that all banks offer different advantages, whether it's personalized service or customized repayment. It's a good idea to shop around and find the bank that meets your specific needs, such as offering value-added consulting services.
In general, you should know bankers are looking for companies with a sound track record and that have excellent credit. A good idea is not enough; it has to be backed up with a solid business plan.
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.