Unless you’re fortunate enough to launch a business sitting on a bank account full of cash, odds are you’ll need to raise cash at some point along the line. There are plenty of options for getting funding for your business, although not all of them are typically feasible. Some are costly, while others are a little more out of reach. Fortunately, there is a great deal of financial support available for small business owners if you know just where to look.
Banks are probably the best place to start for obtaining business funding, but in a lot of cases, a bank won’t be your best bet. Banks will likely be able to give you a more favorable rate than other types of lenders, and it is certainly going to be cheaper than other sources of cash, such as credit cards. The main obstacle is that banks tend to be stingy in extending credit to startups. Since many small businesses don’t have the collateral to back up a loan, you may be required to put up personal assets. You could be at risk of losing those assets altogether if you default. If you do qualify, banks may only be willing to loan you a small amount.
Borrowing from family can be a bit of a slippery slope. On the positive side, there is probably no one who wants to see you succeed more than your family members, and they may be willing to do whatever they can to help. Borrowing from a family member may be your cheapest funding option, and may even be free with few strings attached. Family loans, however, can come with a number of issues. These loans often come with little formality, leaving your family member potentially wondering when or if he or she will get the money back. Failure to repay could also lead to hard feelings, not to mention it could be prohibitively expensive for the lender if your business fails and the lender is out thousands of dollars or more.
Microloans may be a good option for those who don’t qualify for traditional bank loans but don’t want to deal with the high fees that come with credit card debt. Microloans are small, short-term loans obtained by small business owners who may not otherwise have the resources or credit history to obtain traditional credit. Microloans are often easier to qualify for due to more relaxed requirements, and proceeds can often be received quickly. These loans are normally, however, just for relatively small amounts and have quick payback terms. In many cases, microloans need to be paid back in two years or less. This may not be enough time for your small business to recoup borrowed funds.
There are a number of organizations and funds that specialize in microloan lending. Many require you to reside in a specific province to qualify.
The Canadian Small Business Financing Program was created with the goal of taking some of the lending risk of small businesses out of the hands of financial institutions. Small businesses with annual revenues of less than $10 million are eligible to apply, and can receive loan amounts of up to $1 million. As of 2016, over the past decade, nearly $10 billion in loans has been issued. There are dozens more federal and provincial organizations offering loans and funding to small businesses.
Government loans can be a great source of funding thanks to their low rates. The CSBFP has a maximum rate of the current prime rate plus 3% on variable rate loans. Government loans, however, tend to come with more red tape. Many loans have restrictions on how the money can be used. The application process also tends to be somewhat long and drawn out, and fees for taking out a government loan can be high.
Giving up equity in your business should generally be considered a last resort. Instead of borrowing money that needs to be paid back over a certain period of time, equity issuance involves actually selling a percentage of your business to obtain the capital you need. While the amount you receive in the sale generally never needs to get paid back, you’re giving up part ownership in your company. You may never be able to get that portion of your business back unless your shareholder is willing to sell it back to you at some point.
Equity investors are notoriously difficult to find, and the terms of such a sale are usually unfavorable. If you go down the road of issuing equity too often, you may eventually find yourself owning very little of your own business.