Sources of capital

Putting all your eggs in one basket is never a good business strategy. This is especially true
when it comes to financing your new business. Not only will diversifying your sources of
financing allow your start-up to better weather potential downturns, but it will also improve
your chances of getting the appropriate financing to meet your specific needs.
Keep in mind that bankers don't see themselves as your sole source of funds. And showing that
you've sought or used various financing alternatives demonstrates to lenders that you're a
proactive entrepreneur.

Whether you opt for a bank loan, an angel investor, a government grant or a business
incubator, each of these sources of financing has specific advantages and disadvantages as well
as criteria they will use to evaluate your business.
Here's an overview of seven typical sources of financing for start-ups:

1. Personal investment
When starting a business, your first investor should be yourself—either with your own cash or
with collateral on your assets. This proves to investors and bankers that you have a long-
term commitment to your project and that you are ready to take risks.

2. Love money
This is money loaned by a spouse, parents, family or friends. Investors and bankers considers
this as "patient capital", which is money that will be repaid later as your business profits
increase.
When borrowing love money, you should be aware that:

 Family and friends rarely have much capital

 They may want to have equity in your business
 A business relationship with family or friends should never be taken lightly
3. Venture capital
The first thing to keep in mind is that venture capital is not necessarily for all entrepreneurs.
Right from the start, you should be aware that venture capitalists are looking for technology-
driven businesses and companies with high-growth potential in sectors such as information
technology, communications and biotechnology.

Venture capitalists take an equity position in the company to help it carry out a promising but
higher risk project. This involves giving up some ownership or equity in your business to an
external party. Venture capitalists also expect a healthy return on their investment, often
generated when the business starts selling shares to the public. Be sure to look for investors
who bring relevant experience and knowledge to your business.
BDC has a venture capital team that supports leading-edge companies strategically positioned
in a promising market. Like most other venture capital companies, it gets involved in start-ups
with high-growth potential, preferring to focus on major interventions when a company needs
a large amount of financing to get established in its market.

4. Angels
Angels are generally wealthy individuals or retired company executives who invest directly in
small firms owned by others. They are often leaders in their own field who not only contribute
their experience and network of contacts but also their technical and/or management
knowledge. Angels tend to finance the early stages of the business with investments in the
order of $25,000 to $100,000. Institutional venture capitalists prefer larger investments, in the
order of $1,000,000.
In exchange for risking their money, they reserve the right to supervise the company's
management practices. In concrete terms, this often involves a seat on the board of directors
and an assurance of transparency.

Angels tend to keep a low profile. To meet them, you have to contact specialized associations
or search websites on angels. The National Angel Capital Organization (NACO) is an umbrella
organization that helps build capacity for Canadian angel investors. You can check out their
member’s directory for ideas about who to contact in your region.

5. Business incubators
Business incubators (or "accelerators") generally focus on the high-tech sector by providing
support for new businesses in various stages of development. However, there are also local
economic development incubators, which are focused on areas such as job creation,
revitalization and hosting and sharing services.

Commonly, incubators will invite future businesses and other fledgling companies to share their
premises, as well as their administrative, logistical and technical resources. For example, an
incubator might share the use of its laboratories so that a new business can develop and test its
products more cheaply before beginning production.

Generally, the incubation phase can last up to two years. Once the product is ready, the
business usually leaves the incubator's premises to enter its industrial production phase and is
on its own.

Businesses that receive this kind of support often operate within state-of-the-art sectors such
as biotechnology, information technology, multimedia, or industrial technology.

MaRS – an innovation hub in Toronto – has a selective list of business incubators in Canada,
plus links to other resources on its website.
 6. Government grants and subsidies
Government agencies provide financing such as grants and subsidies that may be available to
your business. The Canada Business Network websiteprovides a comprehensive listing of
various government programs at the federal and provincial level.

Criteria
Getting grants can be tough. There may be strong competition and the criteria for awards are
often stringent. Generally, most grants require you to match the funds you are being given and
this amount varies greatly, depending on the granter. For example, a research grant may
require you to find only 40% of the total cost.

Generally, you will need to provide:

 A detailed project description

 An explanation of the benefits of your project
 A detailed work plan with full costs
 Details of relevant experience and background on key managers
 Completed application forms when appropriate
Most reviewers will assess your proposal based on the following criteria:

 Significance
 Approach
 Innovation
 Assessment of expertise
 Need for the grant
Some of the problem areas where candidates fail to get grants include:

 The research/work is not relevant

 Ineligible geographic location
 Applicants fail to communicate the relevance of their ideas
 The proposal does not provide a strong rationale
 The research plan is unfocused
 There is an unrealistic amount of work
 Funds are not matched

7. Bank loans
Bank loans are the most commonly used source of funding for small and medium-
sized businesses. Consider the fact that all banks offer different advantages, whether it's
personalized service or customized repayment. It's a good idea to shop around and find the
bank that meets your specific needs.
In general, you should know bankers are looking for companies with a sound track record and
that have excellent credit. A good idea is not enough; it has to be backed up with a
solid business plan. Start-up loans will also typically require a personal guarantee from the
entrepreneurs.
BDC offers start-up financing to entrepreneurs in the start-up phase or first 12 months of sales.
You may also be able to postpone the principalpayments for up to 12 months.
Alternative forms of capital raising
As a startup, your business faces many challenges, but none are as big as finding money to get
everything off the ground. From renting office or production space to buying goods and hiring
staff, everything you need to do to turn your idea into a viable business requires money.
Unless you’re independently wealthy or were left a nest egg from a benevolent relative, you’re
probably going to have to work to get that funding. Below are 12 unique ways to get money to
fund your small business.

1. Crowdfunding
There are a handful of really good crowdfunding sites that have become very popular with
inventors, entrepreneurs and the general public in the past two years. Kickstarter is probably the
most recognizable, but Indiegogo is gaining in popularity, along
with RocketHub, Fundable and Fundly. Each has its own pros and cons, so it’s best to fully
investigate the details associated with each site.
Recently, Indiegogo began offering fundraising campaigns without end dates, while RocketHub
allows you to keep all the money you raised, even if you don’t meet your goal. Fundly is known
for its success in helping non-profits, and Fundable is considered small business-friendly. In the
end, the right platform for you will be based on your needs and goals.

2. Angel Investors
Angel investors stand out from other types of funding options because they are always on the
lookout for the next business or idea to invest in. Many of the biggest tech companies today,
including Google and Yahoo, were funded by angel investors. At its most basic deal, taking
money from an angel almost always requires you to give your investor some share of equity in
your company. Angel investors and any related transactions must be registered with the
Securities and Exchange Commission (SEC).
3. Venture Capitalists
Similar to angel investors, venture capitalists have money to invest, which they want to invest in
young, up-and-coming businesses with a high potential for growth and monetary
returns. Venture capitalists typically also look for a share of equity in exchange for their
investment, but are also interested in having a voice in the direction of the company. VCs are
looking to make money on their investments, and many feel the best way to do this is to have
some control in how the company is managed.
4. Small Business Administration (SBA) Loans
The U.S. government has a vested interest in the continued growth and success of the small
business sector. As a result, the Small Business Administration offers many different loan types
to help entrepreneurs get started. Explore the different SBA loan options here. If your business is
a non-profit or educational institution, you might also want to explore SBA grants.
5. Microloans
Reserved largely for non-profit organizations, microloans are granted by institutions to
individuals who would not normally qualify for a traditional bank loan. Instead of gifting a
donation to the non-profit organization, microloan organizations allow individuals to invest in
economic opportunities. Microloans are very popular in small and developing nations as well.
6. Personal Financing
Starting your own business is risky, and in many cases this level of risk is what
prevents traditional lenders from granting loans to entrepreneurs. This is made even more
difficult if the startup owner hasn’t invested any of his or her own money. It’s very hard to get a
third party to give you money for your idea or business if you haven’t ponied up your own.
If you have savings or own your home and are willing to refinance or take out a second
mortgage, then these are options you should definitely explore if you’re comfortable with the
potentially bad consequences.

7. Purchase Order Financing

Many different factors can affect a business’ cash flow, including seasonality and supply and
demand. For example, some companies may find themselves unable to fulfill a large order due to
a lack of funds to purchase the materials needed to produce the goods.
In these instances, purchase order financing might be the answer. A purchase order financing
organization will essentially extend an advance so the organization can purchase the materials it
needs today and then collect back the money once the goods are sold.
Companies that most often qualify for purchase order financing are those that deal in
manufactured goods—not services—and that stand to make a margin of 20% or more on the sale.

8. Vendor Financing
If your ability to pay your bills is contingent on your ability to sell your product, you may benefit
from negotiating longer payment terms with your vendors. Most vendors require payment on
invoices within 30 days before implementing late fees and penalties. You may be able to
negotiate a longer term that gives you more cash to work with in the interim.
This is especially important if you have a sales cycle longer than 30 days. If it takes 45 days from
purchase of goods to sale, you’ll never be able to pay invoices in 30 days. This
takes negotiationand may not be an option for all vendors.
9. Friends and Family Loans
Your friends and family have a vested, personal interest in watching you succeed. This might
make them more willing to invest in your business, especially in the beginning. Taking money
from friends and family, however, can be tricky, and all of the pros and cons should be
scrutinized before deciding to use this method to generate funds.
10. Contests
Believe it or not, there are organizations out there that offer monetary rewards—or even
financing—for businesses and entrepreneurs who enter their contests. Eligibility requirements,
entry fees and judging criteria vary widely. But if you have confidence in your idea and your
pitch, this might be the way to get some cash.
11. Product Pre-Sales
If your business is based purely on the selling of a single product, the easiest way to raise the
money to produce the product may be to pre-sell it. By pre-selling your products, you can be sure
not to make too many and have a warehouse of unsold goods. It also keeps you aware that there
are consumers relying on you to follow through.
This level of pressure can be a little intimidating for some entrepreneurs, so take time to consider
the ramifications of collecting money before providing a product. You will need to have a solid
timeline in place and adhere to it. Otherwise, customers might demand their money back, which
could lead to a variety of problems.

12. Alternative Lending Sources

Using alternative lenders might require more due diligence on your part because you want to be
sure you are doing business with a legitimate vendor. In most cases, however, these lenders fall
just outside of the category of banks or government institutions. Some of the more popular
alternative lenders include PayPal, Kabbage, OnDeck, Can Capital and Prosper. Here are
some considerations to take into account.
Regardless of the funding option you choose, spend time to clearly investigate all of the terms
and conditions and make sure it’s right for you and your business. Speak with other
entrepreneurs or small business owners, and seek advice from different lending sources. You
want to be sure that the choice you make to help your business today doesn’t end up hurting it
tomorrow.

On top of that, you need to make sure your finances are stable before reaching out for
funding. Creating financial reports that show your business is on the right path is a must-have in
order to convince a lender or investor to infuse capital into your business. Financial software
like QuickBooks can help you generate these reports, or you can reach out to an accountant to do
it for you. Either way, without proof that your business is ready to receive money and put it into
action effectively, your chances of landing funding are slim.