How to get financing as a new business

Any small or large business can be at risk to fail due to a lack of funds. From poor planning, to under or overestimating the market, to economic shifts, to mismanagement – anything can happen.

Whatever the case may be, as a small business owner, you have options to start, grow or rebuild your business by finding the appropriate sources of funding.

While each has its advantages and disadvantages, exploring all of them is a good idea to ensure your doors open and stay open.

Most people aren’t in the position to fully fund their businesses themselves, but it makes sense that you bet on yourself first. Obviously, a higher contribution from you means a lower required contribution from outside sources. This translates into more retained equity and less interest owed on borrowed money. Of even greater benefit to you, however, are the optics. Any potential investor in your business will want to see your willingness to invest as well. It shows that you’re confident in your business and your ability to succeed, which, in turn, will elevate their level of confidence in you and the business. And confident people are more likely to part with their money.

Your friends and family know you, trust you and want you to succeed. For these reasons, F&F is usually the easiest place to go looking for money. But the ease could come with risks far greater than those associated with borrowing from strangers.

Most business owners will hit up F&F at the very early stages of the business, when there’s little to no plan for the business. The ask is essentially “please invest your money and be very patient while I try to make this work.” It can lead to some very uncomfortable dinner-table conversations if your F&F lenders start to become impatient.

Secondly, is the issue of participation. It’s easier to manage a stranger’s need to get involved than a friend’s or relative’s especially if you see them a lot, and even more so if they feel they have ideas or thoughts to contribute.

Finally, there is the possibility of insolvency. If you lose a stranger’s money, you get on with your life. If you lose your aunt’s money, those uncomfortable family dinners will become unbearable really fast.

Angels are the stars of Shark Tank and Dragon’s Den wealthy individuals with a very expensive hobby: helping businesses succeed. An angel’s motivation can come from anywhere. Financial return is one, but so is making a difference in the world, a general interest in the space or category and a liking for the founder.

An angel investor also tends to be more hands-on because (a) they often have the time and (b) they almost always have the expertise in building business — it’s how they made money to invest in your business. If you engage an angel investor, you can expect them to want a fairly sizeable ownership stake in your business and a fairly active role in the strategic direction of your business. And you should give them both. The right angel is what the industry refers to as “smart money” (an investor with legitimate value to add beyond cash), and you absolutely can’t have too much of that.

The hardest part of engaging with an Angel is meeting them. Angels don’t have storefronts, and they generally don’t have websites.

Incubators are great for super-early stage start-ups where it’s the founder(s), the concept and not much else. The incubator normally provides a space for the company to work, guidance, mentorship, and occasionally business services like bookkeeping and strategic planning.

Being part of an incubator program also usually comes with an investment of some kind, but the aforementioned services are usually part of it, so the cash infusion is normally less than the percentage of equity the incubator takes.

All levels of government offer grants and bursaries to entrepreneurs, but the competition to secure GGs is tough because the government isn’t interested in equity. What they are very interested in is putting money into a company that will create more jobs, and by extension, more tax payers.

For this reason, when you apply for a government grant you have to be extremely focused and be ready to demonstrate how you’re going to make your business work to meet their interests and improve the economy.

A loan from a bank or credit union is by far the most common avenue taken by entrepreneurs because the bank doesn’t want equity and the terms of the loan are always negotiable. While the bank is interested in backing great business ideas, they’re much more interested in backing great business plans. Before you make an appointment with your bank, be sure your plan is well-thought-out, realistic, executable and easy to read.

As your business grows and expands, so too do the options for funding, including opportunities to access venture capital, equity partners and junior capital, which can work on its own or in tandem with a loan from a credit union or bank.

There are many organizations across the country that exist to support healthy business with Canada’s small and rural communities. Compared to outside investors or large banks, these groups have intimate knowledge of the community your business is in and will understand the specific challenges you face.

For example, a BC-based organization called Community Futures is dedicated to supporting small businesses in rural communities by supplying more than just funding. Their mandate is to provide local companies with business resources, advice, and planning services to help businesses get off the ground, or even help bridge the gaps of expansion. Different than a bank, Community Futures uses lending criteria that looks at more than just the numbers—they explore how a new business could positively affect the community it is entering and can give advice makes sense to your specific business.

The four C’s should be your guide. If you feel confident that you satisfy all four, and you can get two or three objective people to agree with you on each point, you should be in good shape.

This is the amount of money you can afford to take on. And if that seems silly because you can “always afford to take someone else’s money,” remember that it’s never free.

An Angel will want to see the capacity to give up control. An incubator will require the capacity to put in the work. Before you go looking for money, be very clear on what you’re prepared to give up and/or handle.

This is what you’re prepared to concede should your venture not succeed. If your investor is going to lose their money, they’d like to be able to come away with something to cover their losses, like your house or your TFSA. When considering using your collateral, be very honest with yourself about what you can or can’t part with.

This is the likelihood you’re going to pay what you owe, regardless of the outcome. The higher your credit score, the more likely you are to get a bank loan, a GG or Angel money.

This is by far the most important "C" because the reality is that investors are ultimately buying into you. They want to know you’re committed and trustworthy. And when your investors come with questions, they want to know they’ll be getting truthful answers.

When you go into a negotiation, know exactly why you’re looking for financing, what you’re going to do with it, what you expect the results to be and the implications of those results to the people giving you money.

Doing your homework in advance and showing up with solutions will demonstrate confidence, diligence and creativity: three qualities most lenders expect and demand.