14 Types of Financing for Startups

By June 26, 2020Uncategorized

Money is oxygen. When you are a startup and you run out of money, well, it’s like running out of oxygen. You will need money to get started, you will need money to grow, you will need money to make money.

Read on to find out the plethora of financing options for your startups in addition to the personal savings and the bootstrap (friends and family) funding models.

In writing this article, we want to help you navigate the financing options available in Canada to start, grow or scale your startup. We tried not to bog you down with jargon and technicalities, nor did we do a dive deep. Instead, this blog is meant to provide you with basic information and we invite you to explore further. A note on the Peer to Peer (P2P) funding option, currently there is only one business lending platform, Lending Loop, the rest of the P2P platforms mentioned are for personal loans.  

Note: This post was written by our affiliate Sue-Lin Tarnowski.

Considerations

As you navigate through the myriad of loan options, pay particular attention to:

  • Interest rate
  • Application fees
  • Repayment period
  • Usage restrictions
  • Late payment fees
  • Personal liability

Financing Options

Pros

Cons

Notes

Equity Financing

Venture Capital (VC)
  • Provides funding, mentorship, expertise and credibility
  • May not require history of revenue generation
  • Equity dilution can be significant
  • Can be difficult to obtain or close
  • Time consuming process
  • Suitable for companies that are revenue-generating and seeking growth
Angel Investors
  • Flexible business terms
  • Can provide advice and guidance
  • Networking opportunities
  • Startups will have to relinquish some control of company
  • Is an expensive form of capital
  • Suitable for companies that are seeking growth, raising less than $2M, looking to give away up to 20% of their company’s equity 

Debt Financing

Bank loans
  • Various options available depending on needs
  • Funding flows relatively quick
  • Owner retains complete control of business
  • Requires large amounts of documentation and can be time consuming
  • Repayment must be made regardless of success of business
  • Suitable for startups which do not wish to relinquish some control of company
Microloans
  • No experience in management or entrepreneurship required
  • Microlenders may provide additional assistance to support the loan and business owner
  • Low loan amount
  • Must be in good credit score rating
  • Most suitable for businesses with little or no credit history, low-cost startup businesses, sole proprietors or businesses with very few employees
  • Can be used for equipment, inventory, working capital, fixtures & furnishings
Mezzanine
  • Cash flow position is used for risk assessment rather than company assets
  • No equity dilution
  • Flexible repayment terms
  • Higher interest rate than asset backed financing
  • Requires positive cash flow
  • Most often used to raise money for a significant expansion of the business, or an acquisition
  • Is a hybrid of equity and debt financing
Public Offering (PO)
  • Increased public awareness of company
  • Stocks and shares are useful for mergers and acquisitions
  • Ability to attract top talent as stock options can be offered
  • Equity dilution
  • Expensive and time consuming process
  • Additional disclosure to the public as mandated by Provincial Securities Act
  • Additional cost for periodic reporting, accounting oversight and investors relations
  • Reduced flexibility and control
  • Suitable for companies looking to grow to generate the capital needed to expansion
Revenue based financing
  • Less expensive than equity financing
  • No ownership dilution
  • Usually no personal guarantee or collateral required
  • Running the business long term as no exit is expected
  • Company does not have to be profitable to qualify
  • Revenue required
  • Lower loan amounts than VCs
  • Monthly payment required based on a percentage of monthly revenue
  • Not suitable for startups without history of revenue generation
  • Businesses must be open for at least 6 months
  • Not subtle for businesses without minimum sales history and monthly revenue
Factoring
  • Can enhance financial ratios, make balance sheets more attractive, improve cash flow and improve credit worthiness
  • No repayments required as it is not a loan
  • No set terms as long as company is able to pay the outstanding amount at any time without penalty
  • Provides quick turnaround for cash flow
  • Requires minimum volume of accounts receivable to qualify
  • Not an alternative for a long term business loan, factoring is best used for short term financial needs.
  • The profit margin for the product you’re selling needs to be high, around 25%.
  • Ideal for businesses which have most of its cash tied up in accounts receivables, wholesale or distribution companies or are part of the import industry

Crowdfunding

Equity Crowdfunding
  • A regulated platform to potentially raise large amount of funding
  • Great opportunity to gain investors.
  • Complicated and costly as rules differ for each province
  • Lack of expertise from investors
  • Lots of ownership as each investor has equity in business
  • Ideal for first-time entrepreneurs who are unable to raise from larger investors, or companies that need funding for a specific product or project and one that could benefit from a broad fan base.
Rewards based crowdfunding
  • A regulated platform to potentially raise large amount of funding from individuals
  • Company does not lose equity
  • Great way to test the market and gain exposure
  • One of the cheapest form of funding
  • No collateral, previous business experience and credit check requirement
  • Simple process
  • Requires a strong brand and visual pitch
  • Funds may be forfeited if goal is not met
  • Funding amount may not be large enough as contributions are made by individuals
  • Your product or idea are exposed to potential competitors
  • An army of micro investors may discourage larger investors
  • Best suited for consumer oriented product ideas and creative fields
Peer to Peer (P2P) business loan
  • Exclusive online platform
  • More preferable interest rate
  • Is a regulated lending platform
  • Can be a source of more accessible source of loan than conventional loans from financial institutions
  • Loan can be paid off early without penalty
  • Short approval time
  • Convenient application process
  • Maximum loan amount is $500,000
  • The minimum loan qualification criteria may be difficult to meet – the business must have been operating for at least 6 months
  • Business must generate at least $100,000 annual revenue 
  • The business owner or guarantor must have a credit score that is 600+
  • Certain information will be disclosed to all investors in the P2P platform’s marketplace
  • Personal credit sore suffers if you are unable to repay the loan
  • Not a good option for businesses which have not been in operation for at least 6 months with minimum $100,000 annual revenue
  • Must be an incorporated company in Canada

Government Funding

Canadian Scientific Research and Experimental Development (SR&ED) Tax Credits
  • Easy and accessible funding for startups, particularly the ones with specified technological and research component
  • Tax incentives can come in one of three forms: an investment tax credit, an income tax deduction, and a refund
  • Laborious application process
  • Narrow scope of eligibility criteria according to the regulatory definition
  • Most suitable for companies with technological component, specified applied research, and experimental development 
Government Grants
  • Many programs for funding less than $1 million dollars
  • Does not need to be repaid
  • Business owner retains equity
  • Laborious application process
  • Stiff competition among applicants
  • Funding comes with many conditions
  • Most suitable for businesses seeking “free money” with time to invest in the laborious application process
Canada Small Business Financing Program (CSBFP)
  • Can be used to finance expenditures for property, equipment and leasehold improvements
  • Business owner retains equity
  • Business owner has autonomy
  • Laborious application process
  • Stiff competition among applicants
  • Funding comes with many conditions
  • Suitable for startups with less than $10M gross revenue
  • Expenditures for property, equipment and leasehold improvements qualify but not inventory or working capital
  • Loan cap is $1M
  • Program is offered in partnership with financial institutions

 

Selection of Canadian VCs:

Arctern Ventures

http://www.arcternventures.com

Cycle Capital Management

http://www.cyclecapital.com/

Emerald Technology Ventures

https://www.emerald-ventures.com/

First Ascent Ventures

https://www.firstascentventures.com/

iGan Partners

http://www.iganpartners.com/

Lumira Ventures

https://www.lumiraventures.com/

 

Main Canadian equity crowdfunding platforms:

Vested

https://vested.ca/

FrontFundr

https://www.frontfundr.com/

 

Main reward based crowdfunding platforms:

Kickstarter

https://www.kickstarter.com/

Indiegogo

https://www.indiegogo.com/

GoFundMe

https://www.gofundme.com/

 

Selection of  Canadian factoring companies:

BC Factors & Finance

https://getstarted.bcfactors.ca/

Commercial Capital LLC

https://www.comcapfactoring.com/ca/

FundThrough

https://www.fundthrough.com/

 

Selection of P2P Loan Platforms:

Lending Loop (Currently Lending Loop is the only P2P small business lending platform)

https://www.lendingloop.ca/

Commercial Capital LLC

https://www.comcapfactoring.com/blog/peer-to-peer-lending-for-startups/

Lendified

https://www.lendified.com/

 

Government Grants Resources:

Government of Canada site

https://www.canada.ca/en/government/grants-funding.html

Canada StartUps

https://www.canadastartups.org/funding-database/

Canada Grant Watch

https://canada.grantwatch.com/

Canada Small Business Financing Loan 

http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/Home

 

Selection of Angel Networks and Syndicates:

National Angel Capital Organization

https://www.nacocanada.com/cpages/about

Angel Investment Network

https://www.canadainvestmentnetwork.ca/

Valhalla Angels

https://valhallaangels.com/

Panache Ventures

https://www.panache.vc/

 

Selection of revenue based financing Vendors:

Company Capital

https://www.companycapital.ca/

Flow Capital

https://flowcap.com

 

Selection of microloans vendors:

Business Development Bank of Canada (BDC)

Futurpreneur

https://www.futurpreneur.ca/en/get-started

 

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