Your business is starting to come to life, and now you’re thinking about either getting it off the ground or expanding. Navigating the world of business funding can feel overwhelming. You can use your savings, which many business owners do, but there are other ways to raise funds to help your dream become a reality, fast-track growth, and increase profitability.
Maybe you’re looking at renting more space to increase production, trying to secure advertising dollars, business insurance, or purchasing raw materials to fulfill a big order. You need money to do this, and you’ll need to figure out how to raise that capital to fund your business.
Here’s a list of five avenues of funding available to a variety of businesses in Canada.
What does funding mean in business?
While business funding can happen in a variety of ways, its core definition is when funds are procured for the purpose of starting, running, and/or growing a business. There are many ways entrepreneurs can find funding for their business, from their personal savings or loans to business grants and investors.
5 types of business funding
In business funding, often the market in which the business is situated will impact the type of business funding available. But before you start applying for business funding, it’s essential to set your business up for success.
Make sure your company meets the funding requirements
Apart from personal savings and family loans, almost all funding options are specific to a business type. This can be anything from a startup requirement to a not-for-profit. There are funding types that require a certain threshold of revenue in the last fiscal year or maybe even catered towards entrepreneurs working in the field of research and technology.
Create a business plan
It can’t be emphasized enough that creating a business plan is an essential part of success. A business plan is a document that outlines all aspects of your business, from marketing strategies to projected finances. It generally includes an executive summary that is usually required for funding purposes, although some funding organizations or individuals may ask for a complete plan.
A business plan can set you up for success by providing tangible milestones and a solid path to profitability, even for new startups. It also helps with financial planning, which can be a challenge for new entrepreneurs.
Research and make a list
No matter what you’re trying to achieve with your business, research will almost always be an integral part of that. With funding, researching all options available can be daunting. Thankfully there are a lot of ways to go about this.
Your local business community
The great part about local business communities is that they are no longer restricted to geographical location. With online networking, business communities can span the country, giving broader insight into many different aspects of business, funding included.
Internet search and databases
This may seem obvious, but an internet search can produce a lot of valuable information. Using keywords like “startup funding,” “business funding,” and even your location, whether that’s provincial or federal. There are also databases, such as Crunchbase, for various types of funding like investors and grants.
Once you’ve compiled some information, create a list of possible funding options to investigate further. Some funding options, such as government programs and grants, have application deadlines. Creating a spreadsheet can help keep track of these deadlines.
1. Business incubators
Incubators and accelerators are specialized types of resources that are geared specifically to help business owners prepare for when they look for investors. An incubator helps entrepreneurs formulate solid business ideas, work with a business plan, and generally work on a flexible schedule until the business idea or product is ready to pitch to investors. Accelerators do precisely what they sound like: accelerate the growth of existing businesses.
There are databases such as MaRS Startup Toolkit that can help you find information on potential incubators.
Some examples of business incubators are:
2. Grants and government funding programs
Grants are ideal because they are money awarded to successful grant applicants that they don’t need to pay back. They are basically an investment in your business or business idea that the granting organization wants to see come to fruition.
The federal government runs various grant and funding business programs for specific industries and communities. These grant programs can range from a few thousand dollars to $250,000 or more, depending on the size and type of business. Research and development, particularly in agriculture, tend to have the highest grants available. Some of the federal government’s financing options can be found through the Government of Canada portal. There are also provincial grants and funding programs available.
There are quite a few specialized grant and funding programs available through the Government of Canada, some of which are the following:
- Indigenous business funding programs
- Black Entrepreneurship Loan Fund
- Canada Small Business Financing Program
- Canada Cultural Spaces Fund (CCSF)
- Canada Job Grant (CJG)
These are just a few of the extensive funding opportunities available.
Business investors are organizations or individuals who invest money into a business to help it start or expand in exchange for some control over the business. This is usually anywhere up to 49% control,which also includes a percentage of profit shares. Investors, after all, want to see a return on their investment.
There are a few different types of investors that can vary significantly.
Venture capitalists (VCs)
Venture capitalists are a group of professional investors who invest capital into various startups and established businesses on behalf of their clients. Venture capitalists can be quite beneficial to business owners as they are a solid and reliable source of income.
Venture capitalists also come with valuable resources and knowledge of the business world, which they impart to the entrepreneurs to help them succeed. This can be just as valuable to a new business owner as capital funding.
Angel investors are very specific. Like other investors, angels invest money in businesses in exchange for a percentage of control and profit shares. Unlike venture capitalists, angel investors are wealthy, independent individuals who choose to invest some of their personal wealth into businesses that they see as promising. They also differ from venture capitalists by typically investing in newer businesses rather than already established ones.
Angel investor databases, such as the Canadian Investment Network, match entrepreneurs with potential investors. These databases, as well as networking through business colleagues (yes, even competition!), can unlock a wider network of angels. Once you’ve secured an angel investor, the chances of securing another are much higher.
Crowdfunding has become a wildly popular way to invest in startup businesses and is an almost $20 billion dollar industry. Many new entrepreneurs have gone on to grow successful businesses from crowdfunding.
Crowdfunding is a type of investment where everyday people invest or donate a small amount of money into a new business or business idea. These investing or donating individuals are not wealthy investors or venture capitalists.
There are quite a few platforms for crowdfunding, some of which are:
Launched in 2009, Kickstarter is a crowdfunding platform that encompasses a plethora of business types, from design and tech to game development and music. Since its inception, Kickstarter has raised $5.6 billion in pledges.
Indiegogo is another popular platform that caters specifically to tech, design, and innovation. They are a global crowdfunding platform that can help expand the possibility of funding.
Crowd Supply is a technology-specific crowdfunding platform that averages around $61,000 raised per successful project.
Wefunder advertises itself as the “Kickstarter for investing” and is a platform specifically for early-stage startups.
5. Loans and credit
Don’t discredit securing business loans and credit to help fund your business. There are a lot of loans and credit available to business owners that offer perks. RBC is a great example of one of those banks that has an array of various business loans and credit options, each with its own perks and tailored to specific needs.
Financial institutions that offer business solutions can vary. Some offer loans to businesses with established credit history and high sales volume, whereas others will take a risk on new businesses with small sales volume and little established credit or poor credit history. It’s always safe to assume that the better the business credit and sales, the larger the loan, and usually, a much better interest rate and payment terms.
Even before looking at the possibility of business loans or credit, set your business up for success by building a healthy credit history. Even with a small sales volume, a healthy credit history will go a long way with smaller loans.
First, what is business credit?
Business credit is very similar to personal credit. It is a quantifiable measure of credit history, recorded as a score between around 300-900. It considers bill payments, debt-to-income ratio, and overall income. For example, if you’ve frequently been applying for credit, this can look bad on your credit rating. If you have a high debt-to-income ratio, meaning you have more debt than your income can sustain, this will negatively impact your credit rating. Conversely, if your bills have been paid on time, you have a healthy debt-to-income ratio, and you have healthy revenue and capital, then you’re in a good position. Be wary, though. A ding to your credit can stay on your record for years, so it’s best to treat your credit as a precious commodity because it can help you in the future.
It’s not just banks and lenders that will be looking at your credit score; some vendors will want to see your credit history before they work with you. They want to make sure they get paid as well.
In Canada, there are two main credit agencies, Equifax and TransUnion, which each have their own calculation methods. Make a habit of checking both as the scores could vary, and some credit history could show up on one report and not the other. These are issues that you will have to address with each credit agency yourself and can take some paperwork to sort out.
Building good credit
There are a few tangible actions you can take to set yourself up for credit success.
- Secure a healthy income stream: this will come with a history of paying customers and cash flow. You can build a business plan to help you look at your revenue history and forecast for the future.
- Register your business: a registered business not only looks professional but it’s also required for most lending companies to give you a loan. This is to ensure your business is legally allowed to operate in Canada.
- Start small: in order to build a credit history, you need credit. Start small with a business credit card with a small credit limit or a small line of credit and overdraft protection on your business bank account. But just having those credit options won’t really do much to boost your credit score. You have to use the credit. With credit cards and loans, start using them regularly while making full payments. This shows you can be responsible with your credit.
- Pay your bills on time: this really goes without saying. Make sure you pay your bills on time! If you’re late with your payments, suppliers and service providers have the power to register this with credit agencies. Worst case scenario, they will send you to a collections agency, which can do irreparable damage to your credit.
- Have leverage: leverage, or collateral, are investments that you own outright that show lenders and suppliers that you not only have a viable income stream but should you default on your loans, they have other options of collecting. Think of these investments as capital that can be liquified should the need arise.
How to use your funding
Now that you have funding, what should you do with it? There are a few options, and depending on the size of your funding, you can choose to use it in a variety of ways.
Keep in mind that if you’ve been awarded a grant, the likelihood is that the terms of your grant will include full use of the funds. Additionally, in your grant application, you’ve set out your intentions should you be awarded that money. Most grants require a report to be filed with the granting institution at the end of the granting period (usually 1 or 2 years). If you can’t show that you’ve utilized all of your grant funds, you may be asked to give some of it back. This is rare, but it can happen. So use the money wisely!
Investing in a marketing expert or firm can be a wise investment, depending on your business growth needs. Perhaps you are looking to expand into a new market and attract a new demographic. Maybe you are developing a new product or service and want to see how it will land with your target market. Whatever the case, outsourcing this research to an expert can pay off in the long run.
Invest in equipment or real estate
Remember that collateral we mentioned that could help you improve your credit? This is an opportunity to secure that. Perhaps you have been renting equipment, and you know this equipment is essential to your business. Purchasing the equipment outright can be a wise way to invest. The same goes with real estate, but make sure you watch the markets as they can fluctuate, even year-to-year.
Research and development
Regardless of your business, if you offer a product, the likelihood is that at some point, you’ll need to invest in research and development. Maybe you’re an entrepreneur who specializes in green resources or organic beauty products. To keep your business relevant, all of these products will need to undergo additional research and development in order for your business not to stagnate.
Hire an expert
This also goes with a market research expert, but there are other experts who could help you grow your business. Maybe you’re spending too much time with administrative work simply because you don’t have anyone to whom you can delegate this. An accounting virtual assistant can help. Or perhaps you are looking to develop a new gaming line and want to onboard a new game designer with specialized expertise. This is an effective way to invest your new funds to help your business grow.
Raising money is a new and uncertain experience for early-stage entrepreneurs. This guide is your gateway to the vast expanse of business finance and funding. It’s essential that you do your own research, consider the pros and cons of various options, and seek professional advice at the right time.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.