Business financing may be required by a company for various reasons and may address many operational needs, but it will mostly always be for:
- start-up costs
- ongoing operational costs
- capital equipment/property purchases
- partner/shareholder buyout
- business projects
- business expansion
The following are the most common sources of financing in business. JEDI can further assist with financial planning and sourcing relevant partners for all financing categories.
Conventional Lending/Debt Financing
Banks, credit unions and public financial institutions are commonly used by business owners as a source of financing. The most common financing instruments are lines of credit, operating loans, capital loans and mortgages. Most financial institutions will require a business to provide a business plan before loaning money. These business plans commonly consist of financial statements, marketing, project capacity and risks, and may require a personal statement of net worth from the owner. The lender will analyze your plan and determine what risk it represents. This type of lending typically requires some form of security in the form of business assets or a personal guarantee from the business owner(s).
Venture capitalists are often large organizations that have a large pooled fund of money raised by both public and private investors. Besides private venture capital companies, some pension funds and mutual funds also provide venture capital. They lend and operate within the mid to large industry environment. While these lenders will also do their due diligence on your business operations, unlike a conventional loan from a lender, they will look to have equity ownership in the business and participation in the management structure.
Angel investors are generally individuals with significant capital to invest in businesses. They are open to smaller businesses than venture capitalists. They can also usually provide a strong network of business and financial contacts that can be beneficial to the business. This type of lender will also look to to have equity ownership in the business and participation in the management structure.
Public Offering (Share Offering)
A public offering, or “going public,” is for companies that are larger in size. This is mostly because “going public” comes with significant costs and is for sourcing significant amounts of capital. However, while there may be advantages and large growth opportunities with this type of equity financing, there are significant disadvantages which must be carefully considered before moving forward with this process. These can include: limiting management’s freedom to run the organization; corporate governance; the significant time, expense and the requirements of securities legislation; loss of corporate privacy; limitations on sale of the business owner’s shares; and possible loss of control to the original business owner.
Many forms of grants are available to Canadian companies from the provincial and federal government. These grants and loans are often targeted at specific industries or areas, and have criteria which must be met by the business before it is eligible. Most grants also require matching funding, which in turn would only supply 50% or less of the capital required. Businesses must be prepared to invest a substantial amount of time to complete the application process. For more information on the grants available in Canada, go to our Grants section.