Loans from traditional banks offer lower interest rates than other sorts of debt financing. Sadly, there’s a catch: the banks are reluctant to fund ventures that lack significant collateral and a profitable track record. But don’t let that stop you. You can improve your odds of securing a loan by leveraging the Canada Small Business Financing program when you visit a banker. Offered through Industry Canada, it guarantees 85% of the value of bank loans, up to $250,000. (For details, visit strategis.ic.gc.ca/csbf.) Most startups are eligible, provided their expected revenue won’t top $5 million in the fiscal year in which they’re applying.
THE TOUCH OF AN ANGEL
Like the investors on Dragons’ Den, angels are high-net-worth individuals, usually former executives or entrepreneurs, who invest in high-potential, early-stage businesses. On top of their money, angels offer contacts and expertise. But it all comes at a price: equity and a demand for a delicious rate of return. Angels typically expect at least five times their initial investment within five years, though in practice many investments fall short of this. Angels generally aren’t after control of your firm. Still, in return for an investment that usually ranges from $20,000 to $500,000, many angels want an active role in decision-making and an assurance of transparency. Although they’ve historically kept a low profile, the proliferation of angel associations and syndicates is making it easier to get their attention. For a North America-wide listing of such groups, see angelcapitalassociation.org.
Often the easiest funding source to tap into is friends, parents, a spouse or that wealthy uncle in the Shuswaps. According to the Business Development Bank of Canada (BDC), 13% of all Canadian entrepreneurs, not just those who run startups, turn to this source. Still, this kind of love isn’t unconditional. To avoid being the subject of menacing mutterings at your next family reunion, practise full disclosure and put the deal in writing. Also, don’t consider friends and family just for their cash. Chris Van Staveren, a partner at KPMG Enterprise and consultant to the Dragons’ Den investors, suggests asking them to co-sign or guarantee a bank loan, which might feel less risky to them. “They’re not giving you physical money, though they’re still supporting you,” Van Staveren says. “But if you default on the loan, they’ll still have to pay.”
OTTAWA’S FRIENDLY BANK
The BDC offers tailored loans, subordinated debt, venture capital and consulting services, especially to startups, fast-growth companies, manufacturers and exporters. Like the big banks, this underappreciated Crown corporation will expect you to present it with a business plan, financial projections, a good personal credit rating and a personal investment of 25% to 30%. However, its mandate is to look beyond the numbers to your goals, projects, management team and potential. And it’s often more flexible than the banks. Its Co-Vision program, for instance, lends qualifying entrepreneurs up to $150,000, with the options of customized repayment and postponing repayment of principal during your company’s first year.
A VENTURE PARTNER
Is your business an IT, biotech or communications company with fast-growth potential that is likely to go public or be acquired within five years? It so, then venture capital might be the source of capital for you. It’s a high-stakes business typified by investments of $500,000 to $5 million, sometimes more. But be warned: while VCs are more hands-off than angels, they’re just as demanding. (After all, they’re responsible for investing other people’s money rather than their own.) They’ll generally want to liquidate at least part of their holdings within five to seven years, for a payout of five to 10 times their investment.
GOVERNMENT’S HELPING HAND
These days, grants are tougher to come by than they used to be. But a sprawling array of other federal and provincial programs can help fund your startup. Options include loan guarantees such as the CSBF program (see “Guaranteed Loans,” above left); the National Research Council’s Industrial Research Assistance Program, which provides innovative firms with funding and advisory services; and the Scientific Research and Experimental Development program, which offers significant tax credits on R&D expenses. To learn about all the federal and provincial programs, visit canadabusiness.gc.ca or your local Canada Business Service Centre.
GROW IT ON CREDIT
It’s hard not to be tempted by the ease and availability of plastic, especially if you’re approved for a low-interest card. Among Canada’s Emerging Growth Companies in the 2008 PROFIT HOT 50 ranking, 22% have used credit cards to fund their firms’ startup and/or subsequent growth. Credit-card issuers offer a multitude of interest-rate and annual-fee options geared to business. And you might be able to avoid their sky-high standard interest rates by continually transferring balances to new cards whenever you get a limited-time, low-interest offer.