Whatever your vision for expansion, financing a growth strategy will likely require support from an external lender. That could be a bank, a personal investor or some other financial player capable of providing that eagerly sought after funding injection. But how can you make a strong case that investing in your operation will pay off?

Just how much debt can you take on?

The first step is looking at the company’s financial picture to determine how much debt it can reasonably take on now and years from now. According to Dustin Paisley—Co-Founder & “Chief Laundry Operator” of Local Laundry and former business advisor at ATB—no matter how large it grows, a business that’s overleveraged itself will suffer long term from the burdens of paying off the debt.

As an entrepreneur, Paisley co-founded Local Laundry in Calgary. The socially-minded apparel company sells high-quality casual wear items, all designed and made in Canada.

Even with financial constraints unique to the clothing industry—like high inventory and warehousing costs—Local Laundry has grown steadily since it was established in 2015. In 2023 alone, they expanded their portfolio by acquiring another clothing company, and Paisley was named in the Top 40 under 40 by Avenue Magazine.

Local Laundry opted for a “slow-growth strategy” to keep its debt levels low, says Paisley, avoiding more traditional forms of capital investment, like a sizable bank loan. Profits are instead reinvested back into the company and nearly all of the production and design work is outsourced to manufacturing partners.

“We operate extremely lean and that’s always been the name of the game for us,” says Paisley.

Local Laundry’s growth strategy was inspired from the failures of struggling businesses Paisley witnessed, which all seemed to have one thing in common.

“It was always their cash flow that was the issue, because of financing and being over leveraged, so (Local Laundry) never wanted to go that route,” says Paisley. 

Get real about your business plan

Paisley recalls a loan applicant seeking a sizable injection of equity to launch a restaurant. Initially, the plan of the first time business owner was to go all in to construct the state of the art restaurant space of her dreams.

Startup costs alone were projected to cost well over half a million dollars, and the applicant had committed to funding around 10 percent of the construction budget from her own money. Despite the discrepancy in the numbers, her business plan was thorough and impressive, and there was an interest to offer financing, says Paisley.

Still, no bank was going to offer the entire amount. A typical startup’s operating costs at the onset of the business are often higher than expected, requiring extra cash on hand. Even with financing, the aspiring restaurant owner was likely going to be hundreds of thousands of dollars short of the projected budget.

When presented with this situation, the applicant revised her numbers, finding she could lower her startup costs significantly without sacrificing too much of the original vision. When she and her advisor worked together to get the whole financial picture, the applicant was able to come up with a workable plan.

“Whatever your plan, let’s lay the whole picture out to say, here’s the (financial) reality,” says Paisley. “Here's where your idea, or your funding model, fits within this reality. And if you want to go this route, here's what you need to do. In many cases, this means adding to your team. Whether it's a business partner with cash, an outside investor, or simply capital raised from family and friends, more non-debt based cash is often the best answer.”

Go over your financial books, then go over them again

Understanding your company’s complete financial picture will allow you to plan contingencies for potential cash flow gaps when the need for financing is greatest. Paisley strongly recommends tracking the business’ cash flow on a regular basis, whether that’s weekly, biweekly or monthly. You should have an idea well before end of year calculations whether you’re making money.

Knowing where the company stands is necessary for the health of your business, and will strengthen the chances of financing. Just as important, it will significantly reduce the need to turn to riskier financing options, like last-resort lenders whose support will have many more strings attached—such as higher interest payments—than a traditional lender.

If there’s just no better financing alternative than a risky loan, Paisley strongly recommends halting the plan until conditions improve.

“If you're not getting support from investors, or from anything or anyone you know, the project itself may come into question,” he says.

Assess your financial options

If you take a look at any small retail operation in the country, it was likely established with government assistance.

The Canada Small Business Financing Program guarantees loans of up to $350,000 for anyone who’s eligible and looking to purchase leaseholds and equipment for their business. The program is backed by Industry Canada and administered through financial institutions, similar to a regular bank loan.

“One advantage for borrowers is not having to provide as much of a personal guarantee to qualify. Traditionally, to qualify for a loan to open a business, you’re going to have to provide a 100% personal guarantee,” says Paisley. “With the government loan, this personal guarantee can be reduced to 25% depending on the risk.”

Another benefit to the federal small business loan program is the lending institution is able to increase accessible funds to a maximum threshold of $350,000 because of the government's support.

Programs like these are perfect to finance leaseholds or equipment and materials, purchases other lenders are unlikely to support, says Paisley.

“It’s not often you’re going to get secured funding,” says Paisley. ”If you buy a $250,000 machine for your business, under the small business loan program, in some cases you can get the entire amount for that piece of equipment.”

While there’s plenty of government support out there for technology and innovation, some ideas won’t attract much institutional interest.

In those cases, like funding the development of a video game for example, popular crowdfunding options like Kickstarter or Indiegogo make more sense. What’s more, if such a project proves a success, it could create credibility in the eyes of a lender to support another financing plan down the road.

“That obviously shows there’s some validation there,” says Paisley. “The biggest risk for any brand new business is there’s not going to be any customers. But if you know there’s cash up front [from crowdfunding] to help finance the orders, that’s really key.”

If you’re looking for more resources to support your business growth, explore everything that our Entrepreneur Centre has to offer.