Money and financing are essential to start up and run any business. There are a lot of one-time costs and recurring expenses involved in running a business; having the money to take care of those will fast-track growth and profitability.
In our previous article, Newcomer’s guide to starting your own business in Canada, we provided an in-depth understanding of how to plan and start your business and detailed out various aspects of planning your business, getting it up and running, and managing your business finances. Now, we’re going to explore the various ways and means through which you can secure the required financing for your business.
How much money do you need to start a business?
To estimate how much money you will need, consider:
- Start-up costs – including rent deposits, any building renovations, licenses, permits, office equipment and supplies, computers and computer software, any other tools, vehicles, insurance, employee recruitment and training, initial inventory and raw materials, and marketing materials and advertising. Download this free list of startup costs you can expect to incur when you launch your business.
- Initial cash-flow or working capital – to cover all overheads and expenses until you start earning a profit (this is sometimes called your “runway”).
Tip: Use RBC’s start-up cost calculator to get an estimate of the required money.
Funding options for newcomers
There are two ways you can fund your venture – either by using your own money or borrowing money from other individuals or financial institutions. Let’s look at these options and dive deeper into each of them to understand the ones that may be best for you.
Use personal savings
Many entrepreneurs begin by funding their business with their own savings. Some of the advantages of using your own money are:
- It’s the cheapest form of financing,
- You have complete control over expenses and how you run the business,
- You are not indebted to anyone,
- You learn to be mindful of spending and thoroughly think through all expenses, and
- Builds credibility and creates a good impression in the eyes of a potential investor.
It’s also important to consider the risk of losing your savings if something goes wrong. Before going all-in with your money, think about how that loss will affect you and the impact it would have on your emergency fund.
Tip: When investing your own money into the business, it’s advisable to put it in a separate business bank account. This will enable you to show a separation between your personal spend and business expenditure while filing taxes, and claim a tax deduction wherever applicable.
If you decide to borrow money, there are various entities you can consider. Some of them are:
1. Friends and family
This is an attractive option for entrepreneurs as it allows you to plan a repayment schedule that’s comfortable to both parties. However, to avoid damaging your relationship over money, it may be worthwhile to follow a few basic rules when borrowing from friends or family:
- Make a formal pitch that explains why it’s a good idea to invest in your business, the problem you’re solving, and outline your vision and mission.
- Provide a business plan, projecting expected revenue based on market research and your plan to repay them.
- Describe the risks involved in investing in your business and how you would repay them if things don’t go as planned.
- Sign a formal agreement that outlines the rate and schedule of repayment, and if they get a share or equity in the business for their investment.
- Provide regular updates on your progress.
2. Financial institutions like a bank
Canadian banks offer business loans for purposes of financing expansions, purchasing new assets, selling or acquiring a business, or securing working capital for day-to-day operations. While shopping for a loan, consider the duration for which it’s being offered, the percentage being financed, flexibility of repayment, loan collateral, and the rate of interest.
How do you get approved for a loan from a bank?
Some of the criteria that banks consider before lending money are:
- For established businesses: In general, banks will try to understand the industry your business operates in along with the major factors that would contribute to the success of your company. They would also expect to see two or three years’ of financial information to get a sense of the company’s growth trajectory, profitability, liquidity position, and accumulated equity.
- For new businesses: Same criteria as established businesses applies. However, personal net worth carries more weight. Management experience is also crucial to get addressed, especially when the business owner is new to Canada. Experience of either working or owning a business in the same industry, management team composition and experience, and a proven track record can all play an important role in the assessment process.
- Some other criteria considered are: The industry (some industries are treated differently based on the environment that they operate in, the risk involved, and the rate of success or failure), market segmentation, competitive environment, and financial projections.
- Credit rating is often taken into consideration. This can be a challenge for newcomers to Canada who do not have a credit history. In such a situation, newcomers can consider having a co-signer, someone who is more established in Canada, to vouch for them.
What are the different types of loans you can get from a bank?
There are five types of loans that are available through a bank:
Technically, the bank loans money to you, not your business. The security or collateral that you provide as your repayment guarantee is drawn from your personal assets, such as residential real estate.
Personal line of credit
Lets you access funds on an ongoing basis up to a pre-set credit limit – works similar to a credit card. You pay interest on what you borrow, pay it back and can borrow from it again as long as you have available credit. You also don’t need to re-apply, unlike other types of loans.
Tip: Be careful when using a personal line of credit for business expenses, because it can impact your credit score.
Business line of credit
Similar to a personal line of credit in functionality but is linked to your business. Lets you borrow money up to a pre-approved amount, and you pay interest only on the portion you use. The collateral offered is typically your inventory, proof of purchase orders, real estate, etc.
Term business loan
A term business loan enables you to achieve big-ticket business goals such as buying long-term assets, make expensive investments, modernize equipment, purchase property, open new locations, hire more staff or make improvements to the business to keep growing. You pay back the loan in regular instalments (usually monthly), at a fixed or variable rate. The repayment period is also fixed, usually in years.
Working capital loan
Helps finance a business’ daily or short-term operational needs, such as rent or staff salary. This is ideal for businesses with seasonal sales.
“For any start-up business, a business plan is a must in order to get funding. It can be completed by an accountant, a business plan expert, or even the borrower themselves. Proof of personal net worth is also required. Personal bank statements, property tax bills, income tax returns, etc. are good to provide. This is just a general guideline; each case is reviewed individually and additional documentation may be required depending on the situation.”
– Shuang Zhou (Regional Manager – Business Markets, RBC)
How long does it take to get a loan from a bank?
Depending on the complexity of your application, after all requested documents are received, it can take a couple of days to two weeks for the loan to be approved. Typically, it takes a few days to prepare the loan application. The turnaround time is short if there are no additional questions from the risk department. It could take longer if there are additional questions or requirements or if it is a larger and more complicated transaction, and the underwriting group has to be involved. Once the loan is approved, there could be additional work pertaining to legal, appraisal, etc. that has to be completed before the funds are issued.
3. Business Development Bank of Canada (BDC)
BDC, owned by the government of Canada, is the only Canadian bank devoted exclusively to entrepreneurs. It provides start-up financing of up to $100,000 CAD to entrepreneurs in as little as 48 hours. The application is filed online, there’s no application fee, and the business loan is provided at a competitive interest rate.
Apart from start-up loans, BDC has financing solutions for every milestone of a business. BDC loans can go beyond $100,000 CAD, and help finance the purchase of a franchise or a business, purchase of technology, real estate, and equipment, and also loan you working capital.
4. Government programs and grants
The federal government has various loan programs to fund businesses in specific industries and communities.
Various programs outlined on the government of Canada website
Depending on the industry or region where you are based, you can identify the appropriate innovation funding program for your business and find financing help by checking the eligibility criteria.
Canada Small Business Financing Program (CSBFP)
CSBFP is a government-sponsored program that offers loans of up to a maximum of $1 million CAD to start or grow a company, or to help established businesses with a big investment. Financing obtained through this program can be used for purchase or improvement of equipment, including business vehicles, and renovations to leased property by a tenant. All loans are capped at $350,000 CAD.
Note: The CSBFP is offered by banks, credit unions, and other financial institutions. You’re eligible to apply if you operate your business in Canada and have annual revenues of $10 million CAD or less.
Speak with an RBC banking advisor now to learn more about CSBFP.
“Financing options are different based on each business. In general, if it’s a for-profit start-up or a relatively new business, the CSBFP is commonly utilized to finance property, leasehold improvement, and required equipment. If the business is well established and has been in operations for more than two years, the traditional lending options offered directly from the bank would be more cost-effective, such as commercial mortgage, term loan, revolving line of credit, etc.”
– Frank Zhang (Commercial Account Manager, Commercial Financial Services, RBC) and Shuang Zhou (Regional Manager – Business Markets, RBC)
5. Other entities: Nonprofits and community-based organizations
Some non-financial organizations such as nonprofits may also be able to provide financing for your business. They’re set up to help entrepreneurs belonging to certain demographic groups or geographic regions.
Futurpreneur Canada Finances and Mentors Businesses
Futurpreneur Canada is a national non-profit organization that provides financing and mentoring support to aspiring entrepreneurs between the ages of 18 to 30. Futurpreneur has helped over 12,000 entrepreneurs over two decades, and the 2019 federal budget has allocated $38 million CAD to Futurpreneur, to use over five years.
They offer collateral-free loans at better interest rates than most banks. They finance up to $15,000 CAD per business, and their partnership with the Business Development Bank of Canada (BDC) may provide additional financing of up to $30,000 CAD. That’s a total of $45,000 CAD available to you in financing, along with an expert business mentor for up to two years, and other resources to help you plan, manage, and grow your business.
They offer financing options for business owners in a specific geographic region or those who belong to a demographic group. The complete list of community-based organizations can be found on the government of Canada website.
Angel investors and venture capitalists (VCs) invest money in businesses in exchange for equity, which is a share in the company. Their goal is to get a good return on their investment, and they’ll usually pick businesses that demonstrate rapid growth, are innovative or have a mission that aligns with their values.
|Venture Capitalists (VCs)
- Wealthy and influential individuals who use their own money to fund businesses.
- Usually fund early-stage businesses.
- Group of professional investors who invest on behalf of their clients.
- Usually invest when the company is generating revenue and has a stable cash flow.
The National Angel Capital Organization (NACO)
BDC Capital, the VC arm of BDC
Both angel investors and VCs provide valuable advice to businesses they invest in as their success is related to your success. Typically, they will review your company’s financial statements, outstanding debts, and ownership structure.
How to approach angel investors and VCs?
- There are a number of angel investor groups across the country that support investment activity through accelerators.
- Network with other entrepreneurs to connect with venture capitalists or visit industry conferences to spread your business story.
- Prepare well and be ready with an elevator pitch that talks about how your product or service benefits customers and your competitor landscape.
This is another option that you can tap into to raise money for your business. Crowdfunding campaigns are generally hosted on websites like Indiegogo and Kickstarter, among others.
How does crowdfunding work?
Crowdfunding is the process of raising money from the general public. To do this, you pitch your business plan to the public, set a funding target, and convince them how your product or service is unique and valuable. You can seek donations or investments in return for special rewards or an ownership stake in your company.
Benefits of crowdfunding
- Lets you test the waters and gauge consumer interest in your product or service.
- Lets you build a customer base from around the globe.
- Creates a buzz around your business.
8. Business grants
No matter what stage your business is in, whether it is a newer startup or a well-established business and you’re looking to expand, there is most likely a small business grant for you. Download this free guide to learn how to apply for business grants.
As a newcomer in Canada, it can be confusing to find the right option to finance your business. As you educate yourself through this article, be sure to do your own research and consider the advantages and risks associated with each option. And if in doubt, always remember to seek professional advice from a banking and finance expert.