If you’re starting a business, your success or failure won’t just hinge on the quality of your product or service. Securing finance to make your goals a reality is a critical early challenge you’ll need to overcome. Figuring out how much money you’ll need to start and run your business until you break even is essential. Here are some key considerations when figuring out how to finance your start-up business.

Ask Yourself

• How much money is required to start this business?
• How much of your own money do you have for this business?
• Do you already own any assets needed to start this business?
• Do you have family, friends, acquaintances, or others willing and able to invest in this business?
• Do you have a solid personal credit rating or lines of credit available?

Equity Investment

Equity means ownership. With equity investment, an investor makes money available in exchange for an ownership share in the business. If you use equity investment, consider how much ownership you’re willing to give up and at what price. Once you sell 51 percent of your shares, you lose control of your company.

Equity investment includes money from individuals, including yourself, or other companies in your business. This money may be from personal savings, inheritance, personal loans, friends, relatives, business partners, or stockholders. These funds aren’t secured on any of your business assets.

Before going down this road, it is vital to know the BC laws that apply to any company or other entity that raises money from investors. Check out Seeking Equity Investment? Know the Rules for more information.

Personal Savings

As the most common form of equity investment, most people get funding for their start-up from personal savings, inheritances, friends, or family. You should aim to fund 25 to 50 percent of your business from your pocket. This shows prospective lenders and investors that you’re personally willing to assume some risk and committed to your business’s success. It’s also a requirement for many small business loans, usually secured or backed by assets.

Try to keep a personal investment of at least 25 percent in your business to increase your equity and leverage. The more equity your company has, the more attractive it makes you look to banks that can give you loans.

Debt Financing

1. Government Funding

Government grants are the most sought-after type of financing because they’re free money you don’t have to pay back. However, most grants are geared toward specific industries or groups of people, such as youth, women, or Indigenous business owners. 

Most government funding programs are loans, in which you’d have to pay the principal amount plus interest.

Find more information on free government funding programs:

• Business Benefits Finder – A list of available government programs across Canada.
• Contact your industry association to find out if they know of any grants you might be eligible to receive.

Since the application process varies across different programs, you should contact the coordinator of the one you’re interested in to find out specific application requirements and processes.

2. Commercial Loans

Commercial or personal loans from financial institutions make up the second most common form of financing. Getting a loan is a big decision. Take time to consider whether a personal or business loan would work best for you. 

• Long-term loans – Use long-term loans for more significant expenses or fixed assets you expect to use for over a year. These might include property, buildings, vehicles, machinery, or equipment. New assets, other unencumbered physical business assets, additional stakeholder funds, or personal guarantees generally secure these loans.
• Short-term loans – Short-term loans are usually for a one-year term or less and can include revolving lines of credit or credit cards. These are generally used to finance day-to-day expenses such as inventory, payroll, and unexpected or emergency items. However, these are often subject to a higher base interest rate.

Getting Your Loan Approved

What do Potential Lenders Look For?

Many lenders will look for the Four C’s of Lending when evaluating a loan application:

1. Cash flow – Your ability to repay the cash you’re borrowing. This is measured using the cash flow forecast you created for your business plan.
2. Collateral – The value of assets you’re willing to pledge for assurance that you’ll repay your loan. The dollar amount placed on these assets will be compared to the loan amount you requested.
3. Commitment – The amount of money that you’re committing to your business. You can only expect to obtain a loan by contributing a fair share.
4. Character – Your credit score and history with the financial institution. Your credit rating or score is calculated from your history of borrowing and repaying bank loans, credit cards, and personal lines of credit. With a good credit rating, your loan prospects stay high.

A lender might determine how much to lend you by evaluating your cash flow, collateral, and commitment. They will then subtract your existing debt to arrive at a final amount. Note that lenders look at the limit on your credit cards, not the amount you’re currently using.

Typically, start-ups are not rich in assets, so you may be required to secure your business loans with personal collateral such as your house or vehicle.

The difference between a private lender and a government program is the relative importance of these four C’s. A bank might place more importance on collateral and commitment, whereas a government program can often decrease the need for these by providing a government guarantee to the lender.

Make a Good Impression

You can increase your chances of securing a loan by:

• Having strong management and staff
• Showing steady business growth potential
• Showing reliable projected cash flow
• Offering collateral
• Having a strong personal credit rating
• Always making your loan and interest payments on time and never missing a payment

How Small Business BC Can Help Your Business

SBBC is a non-profit resource centre for BC-based small businesses. Whatever your idea of success is, we’re here to provide holistic support and resources at every step of the journey. Check out our range of business webinars, on-demand E-Learning Education, our Talk to an Expert Advisories, or browse our business articles.