Whether you are a start-up, or need money to finance growth in your business, it's always tough to know where to go to get funding. Should you head to a credit union, a chartered bank, your parents, cash in your RRSP's, or mortgage your home? Surprisingly, there are many ways for a small business to raise finances; here are a few that you might want to consider.
Grants - many small businesses start by searching for grants - after all you don't have to pay the money back, so that must be good! The problem is there are almost no grants open to a standard small business. Grants are made available to particular industries, and/or limited geographic areas for very specific projects, and are often only available to people within certain demographics.
Don't hold your breath waiting for a grant, it's probably the most unlikely source of funding for an average small business. Never purchase a guide to, or directory of, grants as all government grants are listed for free; a good place to start is: http://www.canadabusiness.ca/eng/page/2740/
Credit Unions and Banks - financial institutions often lend to small businesses through the Canada Small Business Financing Program. Under the program, the Government of Canada makes it easier for small businesses to get loans from financial institutions by sharing the risk with lenders. You will still have to put forward a business proposal and go through all the standard checks and balances a financial institution makes for a normal business loan. Note that there is a 2% registration fee attached to the program, however this can be included in the loan.
Community Futures Development Corporations and Community Business Development Corporations - these agencies should probably be the first call for most small businesses as loans come with a mass of support, which will help guarantee success. There are 269 non-profit CF/CBDC branches across Canada offering loans to entrepreneurs of up to $150,000, designed to help them grow. What's more, they streamline the process so that things can move at the speed you need. Rates vary from region to region.
Peer-to-Peer Lending - This is brand new to Canada and came out of the popularity of Crowdfunding (see below). Legislation was changed at the end of last year to allow non accredited lenders to lend money to businesses (an accredited investor generally has to have minimum individual income of $250,000.). While it does open a new financing option for small businesses it comes at a price. Interest rates range from 6% to 15.5% depending on the deemed risk. In addition, your business must have been operating for 2 years or longer, have annual revenues of $200,00 or greater, and have assets which can be used as collateral, or can sign a General Securities Agreement.
Crowdfunding - this is not really a financing option in the true sense of the word, but deserves a mention here. Using a crowdfunding platform, members of the public can pledge money to a business and in return receive a 'perk'. Money pledged is not a loan and no interest is paid. Typically successful companies who have raised money this way have been those developing a unique product where the people pledging receive the first opportunity to get hold of the product. Although this sounds like a dream come true, it's not easy to run a successful crowdfunding campaign. Community Futures Stuart Nechako, in Northern B.C. has a crowdfunding initiative called InvestLocalBC.ca for local nonprofits, the arts communities and business startups which allows them to create online forums to fund, support and evolve their initiatives and projects. This resource is available to all CF's and there are plans for it to comply with securities requirements and equity investments for business in the future.
Bank of Mom and Dad (and other family and friends) - Often, if you need a relatively modest amount of financing, friends and family can provide the answer. The best way to approach this very personal source of financing is to develop a detailed business case to demonstrate you are serious about the business and can explain why you need the money, how it will be used, why it will increase revenues in your business AND how you plan to pay them back! Too often when approaching friends business owners just ask for the money because. That's not good enough, it's not professional and rarely works.
Bring on a Partner - If you need money to expand your business, you probably need additional skill sets too. Consider selling a percentage of your business to someone who can also become a valuable asset to your business. This is a win-win situation. You'd be surprised at how many people are looking for business opportunities with established businesses.
Home Equity - Many business owners are loath to access the equity in their home, or take out a second mortgage. The reason for this is they are worried about the risk involved. However, they often expect financial institutions to take the same risk they themselves won't take. If you truly believe in your business consider borrowing on your home equity, it can actually offer one of the lowest interest rates available.
Sell Stuff - If you have a luxury item, consider selling it. Selling a high-end motorbike, boat, or antique can help you reach you business goals. Horrified about selling something precious? Reconsider how invested you are in your business.
What type of funding is right for you? That's a tough one and only you can answer that after you've done a ton of due diligence. Talk to your accountant, lawyer and other advisors before making any decision on borrowing money. Interest rates can vary significantly from funding to source to funding source, with the least traditional potentially being so onerous they might cause more financial challenges than they solve.