Securing capital from traditional sources such as banks can be tricky for small businesses, especially if a company doesn’t have a long earnings history or sufficient assets to collateralize, says Jeffrey Tannenbaum, a partner at Ernst and Young. Other times, the terms set out by a traditional lender might not be agreeable, or a company could require a little more guidance than a bank would provide. That’s when small businesses should turn to alternative sources of capital.
Angel investors can offer advice and industry-specific expertise along with dollars. “The downside to that is often you are giving up some control of your business, because angel investors do play an active role…and they do often take an equity position,” says Tannenbaum. Similarly, venture capital firms invest in startups or companies looking to grow. They offer more potential capital than angel investors, and have strong connections. Like angel investment, taking venture capital means giving up the reins to some extent. The Canadian Venture Capital and Private Equity Association maintains a searchable online database of VC firms in Canada, while the National Angel Capital Organization has a similar list on its website. Another good method of finding potential investors is simply to ask around or search online for firms that are investing in businesses similar to yours.
Federal and provincial governments run programs offering loans and grants to help entrepreneurs too. “By doing that, you don’t give up any equity within the business, but [loans or grants] might be more difficult to get or there might not be as much funding available,” Tannenbaum says.
Small businesses can raise capital through crowdfunding sites, such as Indiegogo and Kickstarter, which allow them to pitch their ideas online and request cash in exchange for some kind of incentive. There’s also peer-to-peer lending: Businesses apply for a loan through an online platform, such as Lending Loop, that vets and posts the applications for investors to browse.
For businesses seeking small amounts, credit unions often have microloan programs and are willing to wade in where big banks fear to tread. And there’s always “love money,” also known as loans from family and friends.
Whatever a company decides to do, Tannenbaum says it’s important to be prepared with strong, supportable financial projections—and plan well in advance. “There should be some lead time between when you want to obtain financing and when you begin looking for it. It is a process you need to go through.”
- Get serious about social media
- Focus on small data, not big data
- Make the most of your millennial workers
- Get more creative with pricing
- Reel in a huge client
- Evolve your marketing strategies
- Five sources of financing every small business needs to know
- Equity crowdfunding will soon be legal in Canada. Should you jump in?
- Is Canada finally developing a sustainable startup ecosystem?
- Why Canada’s getting a “C” for innovation
- Why do Canadian startups ignore government funding sources?
- Nine women’s stories on making it in venture capital
- How to fix venture capital’s gender disparity problem