Conventional financing is what most people think of when they think about loans, such as bank loans and lines of credit. There are different types of conventional financing available, depending on many factors such as the age of the business, your financial records to date, and your future growth prospects.
Types of conventional financing:
Equity capital is the amount of money that you and your partners put into the business or raise from other investors. Equity is not debt. While investors share in the profits (and losses), their investment is not a loan.
Types of equity financing can include money from:
- Personal savings or other assets
- Family and/or friends
- Community and/or associations
- Venture capital
- Investment through a partnership or other businesses
Be aware of the risks. Lenders expect you to have put some equity into your business. Business equity at a startup often comes from personal savings or other assets, and you must carefully manage the risk with this. If you use personal savings, or a second mortgage on your home, or sell an existing property, for equity financing, you must not put your home, the ability to pay personal commitments including food at risk while you wait for the business to break even. Make sure you consult your lawyer and your accountant before you enter into any kind of equity agreement – they will have a major impact on the future of your business.
Many startup technology companies’ equity financing to grow their businesses rapidly. You may be familiar with “Silicon Valley” or even local start up “incubators” that help technology companies raise money. This is a high-risk investment for investors who realize that the money they invest may not convert into a successful return. More companies fail than succeed and these companies can take many years before they become profitable. If you are starting a business that you expect to grow slowly over time and maintain as a source of income for yourself, then your equity financing will come from you, your family and close business partners. Venture capital and Angel investment may not be the best choice.
Debt financing is money you borrow for your business. It must be repaid-with interest. Lenders do not share in your business profits (as investors do), but they must be repaid no matter what—even if you have no profits.
Types of debt financing can include money from:
- Business loans
- Lines of credit or operating loans
- Supplier credit
- Commercial mortgage
Once you have secured all the equity capital you can, you can talk to lenders about a business loan. Different lenders have different requirements for awarding loans —make sure you understand them before you start.
To decide what type of debt financing is right for your business, remember these basic rules:
- Finance day-to-day operations (working capital) with short-term operating loans.
- Finance long-term fixed assets with longer-term loans or mortgages.
Conventional financing is not always available. If your business does not have a sales history, or you operate in a higher-risk environment, you may find it difficult to get conventional financing. But do not worry – there are other options. Alternative financing might be just what you need.
Examples of alternative financing include:
- Investments from family and friends
- Unsecured lines of credit
- Advance payment
- Life insurance loans
- Home equity line of credit
Which Option is Better?
There is a wide range of options that are extensively used by new entrepreneurs, and there is a risk with each of them. Remember that many marriages and friendships have been ruined by informal financial business arrangements. Personal loss of income from a bad investment can be devastating. Make sure you think carefully about whether the risk is greater than your likelihood to succeed before you use any of these ideas. The best way to avoid problems in advance can be to use 2-3 different financing strategies but remember that everyone needs to be paid at the time you agree to pay them.
Reach out to your team of advisors from Section 4 to discuss which lending options are the best choices for your business.
Preparing for the Loan/Financing Meeting
Always be prepared to explain your business. This list includes what most banks and financial institutions will ask you to provide.
- A clear explanation of what you want, that can be explained in a few sentences.
- A copy of your business and marketing plan that shows the projections for the next 1, 3, and 5 years.
- Financial statements and ratios, all up to date.
- Your accountant’s phone number and email handy in case the bank needs to contact them.
- Records of payment for employee wages and the necessary employer contributions to their benefits.
- Accounting files, including copies of up to date bank statements, copies of filed annual return(s) (the tax return for the business), copies of credit card statements, and proof of business insurance.
- Proof that personal taxes, business taxes, and GST/HST have been paid, and if not, statements to show how much is owing.
- Any additional information that your bank is asking for.
There are many programs which provide specialized financing for entrepreneurs across Saskatchewan. Many programs require you to complete a business plan and show positive cashflow projections. Some, are designed to help Immigrant Entrepreneurs start and grow their businesses. Visit our Funding News webpage regularly to stay up to date.
Visit the Business Development Bank of Canada (BDC) website and take the short, 45 minute e-learning course about “How to be Credible when Speaking with Your Banker”.