We're all for hard work and facing challenges, but we respect anyone starting a business today and looking for start-up business financing. What business loan/ loans and finance facilities are available for the Canadian entrepreneur?
The Challenge of Startup Financing
We can safely say it’s always been tough to finance a start-up, but in more challenging economic times, you can easily assume a hard job just got harder. So what financing is available to Canadian entrepreneurs, and as importantly, what do you need to do to get properly prepared to complete loans/loans in addition to your commitment to personal savings?
The Importance of a Business Plan
Many of our clients cringe when we ask them for their business plans. It seems daunting, but it certainly doesn’t have to be. Even a very strong executive summary will often do the trick—information about yourself, your background, your new business, and, most importantly, your financial potential. That potential, of course, relates to being able to pay back your borrowings!
Want to overcome obstacle #1, that business plan? Get someone else to do it: an experienced, credible, and trusted Canadian business financing advisor. That recommendation can come from a business peer, friend, banker, or lawyer and accountant. These people are on the front lines of start-up business financing for your company and others.
Types of Borrowings
So, what are some of the actual borrowings available for start-up Canadian companies? They include the Government small business loan, commonly called the SBL. Another government crown bank ( BDC ) provides working capital loans, which are true cash loans that are, in effect, unsecured—they require only your promise to pay and, of course, that of your new business.
Alternative Financing Methods
Other methods of financing and raising capital for your start-up include receivable financing, aka 'factoring', which provides instant cash on every sale you make, albeit at a cost.
But ask yourself what's more important to you now, 'the rate' or access to capital? In most cases, we think it's access to capital. Many retail or consumer-oriented firms have gravitated to merchant cash advance financing, which, in effect, makes loans against future sales. (A small portion of every future sale is used to repay the loan.)
Realistic Projections
Having realistic sales and cash flow projections often makes or breaks a new start-up in Canada.
The reality is that many clients we meet with bring us unrealistic sales projections, and, on top of that those projections don’t have realistic cash flow attached to them.
Case in point, the business entrepreneur shows revenue of 100k cash coming in off 100k in that same month. Guess what, though? It’s not a perfect world, and the reality is that cash if you are selling to a business, will come in stages in 30, 60, and we shudder! Even 90 days. So get realistic on cash flow and have your plan B ready!
Asset Financing
Many physical assets you need can be financed via Canadian lease financing. But be careful to ensure you have the right type of lease in place, that the rates are commensurate with your overall credit quality, and that the terms and structure of the lease—you guessed it—make sense! (Don’t lease computers for seven years!)
Key Takeaways
- Understanding Your Funding Needs: Identify the specific amount of capital required to launch and operate your startup.
- Bootstrapping Fundamentals: Explore bootstrapping strategies to leverage personal resources and minimize initial investment.
- Debt vs. Equity Financing: Weigh the pros and cons of debt financing (loans) versus equity financing/ venture capital/angel investors (giving up ownership) to choose the best fit for your goals.
- Crafting a Compelling Pitch: Develop a clear and concise pitch that effectively communicates your business idea and funding requirements to potential investors.
- Researching Funding Options: Explore the various financing options available, including government grants, sr&ed financing, angel investors, venture capitalists, and crowdfunding platforms via online lenders.
Conclusion
So, what's our bottom line for start-up financing in Canada? First, it's boy, do we respect your entrepreneurial spirit! But pay attention to those details we have discussed.
Call 7 Park Avenue Financial, a trusted Canadian business financing advisor in small business lending in Canada, who can make that road you have not travelled before a much more pleasant journey and distance!
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How can I improve my chances of securing financing for my startup?
Crafting a comprehensive business plan and developing realistic financial projections around sales and business expenses are crucial steps to demonstrating your business's viability to lenders.
What alternative financing options are available for startups?
A startup business can explore options such as receivable financing and merchant cash advances for flexible funding solutions beyond traditional loans.
How can government loan programs benefit my startup?
Government-backed loan programs from banks and credit unions offer accessible funding options with favourable terms for a guaranteed bank loan, providing startups with essential capital to kickstart their ventures. Monthly payments are tailored to your needs and come with competitive interest rates.
What should I consider when financing assets for my startup?
When financing assets, ensure you choose the right type of lease with favourable terms and rates aligned with your creditworthiness, avoiding unnecessary long-term commitments.
Do I need to make a personal investment in my startup?
Yes, it's essential to invest your own capital in the business. Government programs and lenders often require a personal equity injection, which demonstrates your commitment to the venture.
What resources are available for startups seeking mentorship and guidance in financing?
Startups seeking mentorship and guidance in financing can leverage various resources, including:
- Local business incubators and accelerators that offer mentorship programs and networking opportunities with seasoned entrepreneurs and investors.
- Small Business Development Centers (SBDCs) and Chambers of Commerce, which provide free or low-cost counseling and workshops on business financing.
- Online communities and forums where entrepreneurs share experiences, insights, and advice on financing options and strategies.
What are the potential risks associated with each financing option for startups?
The potential risks associated with financing options for startups vary depending on the type of funding sought. Some common risks include:
- Debt financing: Accumulating high debt levels can strain cash flow and increase financial risk, especially if the business struggles to meet repayment obligations.
- Equity financing: Diluting ownership and control of the business by selling equity to investors may limit decision-making authority and future profit-sharing.
- Alternative financing: Higher fees and interest rates associated with alternative financing methods, when compared to traditional business loans, such as factoring or merchant cash advances, can erode profitability and hinder long-term growth.
- Government loans: Strict eligibility criteria and regulatory requirements for government-backed loans may limit access to funding and entail compliance costs for startups.
What impact does the industry sector have on the availability and terms of startup financing?
The availability and terms of startup financing can vary significantly depending on the industry sector. Industries with high growth potential, such as technology and healthcare, may attract more traditional financial institution financing.
In contrast, industries with higher perceived risk or longer revenue cycles, such as manufacturing or biotech, may face challenges accessing traditional financing and rely more on debt or government-backed loans. Additionally, industry-specific regulations and market dynamics can influence the types of financing available and the competition among startups for funding.
