Entrepreneurs and their ideas come in all shapes and sizes but the one common issue they all must address is how to finance their small business idea. It’s estimated that roughly 82% of new businesses fail due to cashflow problems. Entrepreneurs are prone to undercapitalizing their business. Therefore, it’s essential to examine how much cashflow your business will need until you reach the all-important break-even point – the point at which your sales revenue equals your total expenses.
Before looking at your options for securing finance, there are several important points to consider:
- How much money will be required to get the business off the ground?
- How much of your own money are you willing to put in?
- If assets are required, do you possess any of them already?
- Do you have any family, friends or acquaintances willing to invest?
- How is your personal credit rating?
Now let’s consider the various early stage finance options available to Canadian entrepreneurs.
Traditional financing from banks, credit unions and other financial institutions remains the single largest source of small business finance in Canada. To secure one of these loans, lenders will expect you to satisfy rigorous criteria. Your own personal credit history will be considered, and you’ll be expected to produce a detailed business plan or business map, outlining your road map for the coming years. As start-ups are typically not rich in assets, you may be required to secure the loan with personal collateral such as your house or vehicle. Lenders like Vancity offer an extensive range of finance options for start-up businesses.
If you’ve ever watched the CBC show “Dragon’s Den” you’re familiar with the concept of equity investment. Equity investors provide start-up finance in exchange for an ownership share in the business. While it presents a tempting offer, it’s vital to consider how much ownership you’re willing to give up, and at what price. Once you hand over more than 50% of your shares, you no longer have the final say in the direction of your company. If you’re considering equity investment, it’s important to know the rules.
Friends and Family
It’s only natural to shy away from this source of finance. But, if handled correctly, this strategy can provide a valuable source of start-up finance. First, draft up a written agreement – with a lawyer if possible – outlining the terms of the loan including expectations for repayment. Establish if any equity will be involved, and be sure to treat your acquaintance investor like you would any other professional.
Despite several grant programs existing for start-up small businesses, many entrepreneurs ignore this potential source of funding. It’s estimated less than five per cent of Canadian small and medium-sized business apply for government grants, so it’s worth exploring if your business qualifies. Resources like Canada Business Network have gathered all of the available programs in one place.
Your Own Savings
It can be tough for first-time entrepreneurs to find investors or loans without a track record of success. This leads many to dip into their own personal savings to bankroll the start-up phase. Obviously, this finance requires a lot of planning, patience and time to gather, so it can prevent a quick business launch. As an accessory to approaching a financial institution for a loan, investing your own finance demonstrates your commitment and confidence in the business. An important point we’ve previously covered is to avoid the temptation to use your personal credit card to fund your business.
Though it’s relatively new, Crowdfunding has emerged as a hugely popular way for start-up businesses to reach their financing goals. Online platforms such as Kickstarter, Indiegogo and Wayblaze provide the infrastructure for these campaigns to happen but the onus is very much on the entrepreneur to get the word out and convince strangers their project is worth backing. To give a local example, Vancouver zero waste grocery store, Nada, recently hosted a crowdfunding campaign to help meet the costs of their first ever brick and mortar outlet. The campaign proved a resounding success, raising $55,000 on a $25,000 initial goal.
While it might not provide the instant growth potential of other methods, prudent financial management and careful scaling can allow you to slowly grow your business organically, ploughing profits back into the business to grow organically. This method requires patience, but doesn’t require interest payments on loans, or the need to give away a stake in the form of equity.