Your new business and capital: Choose the best financing options for your business
By ATB Financial 19 August 2020 4 min read
You have a great business idea, know the perfect space to launch it and have the demand – backed by market research – to make it profitable. The only thing lacking is capital.
After crunching the numbers, you may have come to the conclusion that you’re going to need more money than your savings to bring your vision to life. You might have enough start up capital to open the doors, but not enough operating capital to keep them open every day.
The questions at hand are: how much money do you need, how much money do you apply for – and from where (or who)?
Financing 101 for entrepreneurs
Where and from whom you access funding will depend on not only how much you need but what you will use the money for. Mapping out a business plan, business model and financial forecast will help you calculate the difference between what you have and what you need to get ahead.
As an entrepreneur, you can bridge the funding gap by accessing three main sources; equity investment, debt financing and crowdsourcing.
Equity investment: Equity investment is when someone invests directly in your business, usually for a share of it, because they believe its value will increase.
The investment can come from family, friends or angel investors.
One of the big pros of this form of funding is quick decision making because equity investors only have themselves to answer to. And they are more likely to hunker down with you when business is slow.
However, as you move up in size, equity investment comes with a higher cost as investors typically look for a 10 percent to 25 per cent stake to back their increased risk.
Debt financing: This is another name for getting a loan. The biggest benefit of debt financing is the lower cost of capital (interest). Which is currently around the prime lending rate plus, or between five per cent and six per cent. The lower rate is possible because lenders draw on a larger pool of funds and are secured.
The negative side to this option is that often financial institutions and lenders such as credit unions operate under strict guidelines, which can slow your decision-making process. You also have to make payments regularly, regardless of what is happening with your business.
Differences in types of loans
One of the most common misconceptions new entrepreneurs have is how the different types of loans are best used. So, we’re breaking it down for you.
If you need some help with cash flow a business line of credit can help. It is used to bridge the gap when your accounts receivable lag behind your accounts payable to cover day-to-day costs, not large purchases.
A common mistake entrepreneurs make in this situation, is using your business line of credit like a personal line of credit and using it to make hearty purchases, financing equipment, for example. Drawing down the credit can impact working capital and your ability to weather cash flow fluctuations.
When you need to make a big purchase, consider applying for a Business Term Loan. That is what you would use to buy equipment, purchase or renovate a property or even buy a new business. You repay regularly over a term of one to five years, with direct debit from your account.
If you are setting up a leased retail location, and want to make tenant improvements, there’s the Canada Small Business Program. The federal government shares risk with lenders under the program, guaranteeing 85 percent of each loan.
Crowdfunding has gained traction as a way to raise the money you need to launch or grow your business through networking. Entrepreneurs generally try equity, debt and rewards-based crowdfunding, depending on their needs and comfort zone.
If you are curious about utilizing crowdfunding for your business, check out our crowdfunding guide.
Get the right advice
It is important to source out and digest information at your own pace. Build a team of experienced and partners you feel comfortable going to with your questions and for strategic insights and advice. When establishing your professional partnerships, be sure to include a lawyer, an accountant and a banking representative.
Remember advice is cheap when you have nothing to lose; it’s up to you to figure out if it is sound. And one of the best ways to find that out is through clear communication and clarity.. What kind of experience does the person bring? How do they fit with the needs of your business?
For some added insights, download the ATB entrepreneur's guide for starting a buisness for tips, tactics and templates from the experts at ATB – and fellow successful innovators like you.