Financing is one of the most challenging issues you will face as a business owner. You’ll need to identify potential sources of funding, make sure you meet all their requirements, and prepare your applications or pitches. There are a number of specialized funding programs available depending on your business type or sector.
Debt vs. Equity Financing
Before you start pursuing financing options, you need to establish an approach. What type of funding do you want? What will you do if your first choices don’t work out? There are many financing options available, depending on your needs and strategy. Make sure you’ve done all your research and business planning so you know how much financing you’ll need.
Find a Balance Between Debt and Equity Financing
Ideally you should have a balance of equity and debt financing:
- Equity financing: securing investments from yourself and others in exchange for partial ownership and/or a share in the business’ profits and losses.
- Debt financing: borrowing money from lenders that must be repaid with interest no matter what.
Types of Equity 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. 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.
Personal Investment: From Yourself, Friends, or Relatives
Personal savings, securities, real estate, and other personal assets are your most obvious sources of cash. Friends and relatives can provide additional funding. In most cases, the small business owner must assume the largest share of the risk by making the largest investment.
Personal investment in the business demonstrates a faith in and commitment to your business. This is important to other potential investors and lenders. Banks and other lenders have rules about how much investment they require before they will lend money to your business. This is sometimes called the debt-to-equity ratio, and it varies depending on the type of business.
Partner Investment: Full Partners and Silent Partners
If you cannot supply all the equity capital you need, you can also find partners who are willing to invest money into your business. You will usually share ownership with your partners, including profits and liabilities. In most cases, your partners will also want a say in how the business is run.
If you don’t want to share decision-making authority, you can take on limited partners, sometimes called silent partners. They contribute financially to your business without participating in management or controlling the partnership. Limited partners are normally only responsible to the business or its creditors in proportion to the amount they have invested, and liable only to the extent of the amount of capital they’ve contributed.
If you are considering a partnership agreement, make sure you seek legal advice.
Shareholder Investment: Public Corporations and Private Corporations
If you have incorporated your business as either a private or public corporation, you can take on shareholders to finance your business. Shareholder investment is complex—make sure you seek qualified legal advice from an experienced lawyer and have a shareholder agreement in place.
A private corporation can have up to 50 shareholders, but it cannot sell shares to the general public. The vast majority of new small business corporations are private. Company ownership is shared by all the shareholders, usually in proportion to their investment. Make sure you talk to a lawyer about who to approach for investment, and how best to start.
You must be able to demonstrate the viability and profitability of your business to attract potential shareholders. It can be difficult to attract shareholder investment before a new business launches.
Public corporations can sell their shares to anyone, providing the best opportunity for raising equity capital. But offering shares to the public can be a long, complicated, and expensive procedure. You must file a detailed business operations prospectus with the Alberta Securities Commission.
When your business gets larger and more successful, a public share offering can be a great way to raise funds.
You can also raise funds by asking your employees to invest in your business. Your options include:
- Making a partnership offer to your best employees
- Selling stock to your employees as a form of profit-sharing (if your business is incorporated)
Employees can be a great way to raise equity: they understand your business, trust the management, and can keep a close eye on their investment. Investing can improve your employees’ working habits too—they will benefit from your shared success.
The disadvantage is that it can be difficult to remove or replace employees that have invested in your business if they become unproductive or uncooperative.
Venture capital firms provide equity financing for businesses, usually for high-risk enterprises with great potential. Most venture capitalists plan to liquidate all or part of their investment at a substantial profit within five to ten years—they are not lifetime investors.
Venture capitalists are looking for:
- Fast growth potential
- Great management
- Substantial financial commitment from the business owner
Most venture capitalists will not want to become involved in your day-to-day operations, but they will often want representation on your board of directors.
Types of Debt Financing
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.
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
Potential lenders in Alberta include:
- Banks and trust companies
- Alberta treasury branches
- Credit unions
- Private investors
- Commercial finance companies
- AFSC Commercial Loans
- Business Development Bank of Canada
Small Business Services Canada has a detailed description of the debt financing options available.
Business Term Loans: Longer-term Loans for Financing Fixed Assets
Major purchases like land, buildings, and equipment are usually financed through a combination of equity capital and business term loans, sometimes called fixed-asset financing.
Business term loans can last anywhere from one to 15 years, depending on the useful life of the asset you’re purchasing. If you cannot repay the loan, the asset you’re purchasing will be repossessed by your lender.
Lenders will only finance a percentage of the asset’s value—75% of a truck’s value, or 80% of a building’s value, for example.
The benefits of a business term loan are:
- Your loan agreement is based on your ability to repay the loan out of your earnings—it’s less likely you’ll end up with a loan payment you can’t make.
- As long as you meet the terms of your loan agreement, there are no other payments to make—no profit-sharing or salaries, for example.
- You can build a long-term working relationship with your lender, in case you need more financing in the future.
To secure a long-term loan, you must convince lenders that your business is viable and will be profitable over time. Some lenders may require your personal guarantee—if the business cannot repay the loan, you will be personally responsible for it.
Securing Financing for Your Business
There is no universal formula to finding financing for your business. Each lender or investor will have different requirements—not all options will be available to you. Their criteria might include credit history, management ability, stability of the business, or quality of the business plan. Some financing is only available to businesses in certain sectors, activities, or geographic regions.
What Lenders and Investors Are Looking For
Every lender and investor will have different criteria you must meet before they will finance your business. Make sure you understand exactly what each one needs. Your job is to persuade the lender to give you money—make sure you have a compelling, memorable presentation.
See Small Business Services Canada for an extensive guide on how to secure equity financing from investors.
Whether you are looking to secure debt or equity financing, at minimum, make sure you have:
- A strong credit score
- The right combination of education and experience for your business—how long have you been running this business? What relevant experience or education do you have that will help your business be successful?
- A business plan—your lender will want to see it
- Focus on writing and understanding your financial statements
- Understand the type of business you’re running—is it low risk or high risk?
- A clear list of loan details:
- How much money you want to borrow
- How long you need to repay the loan
- What you will be using the money for
- How much money you are personally investing in your business
- A good relationship with your lender:
- Find out what services they offer
- Give the manager all the information they require as quickly as possible
- Be on time with all documents, payments, and meetings
- Borrow only what you need, only when you need it
- Make realistic repayment commitments
Make sure you talk with your accountant, lawyer, financial advisors, and/or business consultants before you enter into any financial agreement.
Understand Business Terms and Key Financial Ratios
When you’re working with investors and lenders, you will run into complex financial terminology and financial ratios you need to understand. Use BDC’s Glossary to make sure you’re speaking the same language.
Types of Financing
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 maturity of the business, your financial records to date, and your future growth prospects.
Visit Small Business Services Canada—they maintain a detailed list of financing sources. Some sources are national (available to businesses throughout Canada), while others are regional (available only to some areas in Canada).
Types Of Conventional Financing Available
Your options for traditional equity financing include:
- Angel investors
- Venture capital
- Initial public offering (IPO)
See Small Business Services Canada for more detail about equity financing options.
Types of traditional debt financing include:
- Business loans
- Lines of credit or operating loans
- Credit cards
- Supplier credit
- Commercial mortgage
A detailed description of debt financing types is available from Small Business Services Canada.
Conventional financing isn’t always available. If your business doesn’t have a sales history, or you operate in a higher-risk environment, you may find it difficult to get conventional financing. But don’t worry—there are other options. Alternative financing might be just what you need.
Types of Alternative Financing Available
Investing your personal savings back into your business will give you the freedom to operate it as you choose. It will also make your business more attractive to potential investors.
Here are some options for raising personal capital:
- Use your personal savings
- Increase your income: get a part-time job, ask for more hours or a raise at work, or rent out a room in your house
- Sell non-essential personal assets: think high-value assets like your second vehicle, property, recreational equipment, furniture, artwork, or collectibles
- Cut expenses or save money: Switch to budget products or make fewer incidental purchases—small changes can make a big difference
- Ask your credit card company for lower rates on your personal credit cards
Sometimes referred to as “love money,” investments from family and friends have lots of advantages: they won’t impact your credit rating, there are no service fees, and usually come with no or very low interest rates. But be careful—they can be a potential source of conflict in your relationships.
Unsecured Lines of Credit
An unsecured line of credit will give you access to cash whenever you need it. It will help with resolving short-term cash flow problems, business expansion, or other expenses. You can usually negotiate the repayment terms and interest rates. A good credit history and a good relationship with your bank will play an important role in your negotiation.
Use credit cards with caution—they usually have very high interest rates. Use them only for short-term cash flow, not long-term funding. Responsible use of credit cards can help you build a good credit history and provide short-term access to cash when you need it. Credit card loyalty programs like travel rewards, low introductory interest rates, balance transfer options, and more can also make credit cards more beneficial.
Crowdfunding Sites and Peer-to-peer Lending
Also known as crowd-sourcing, crowdfunding websites such as ATB BoostR can help you access loans via small amounts donated by a large number of people—anyone can be a potential lender.
To create a successful crowdfunding campaign, make sure you:
- Tell an attractive and engaging story to capture viewers’ attention, show them your passion, and convince them to take part in your venture.
- Use videos, images, and photos to attract attention.
- Network! Crowdfunding is based on relationships. Online campaigns can help you get the word out about your project.
- Give your lenders recognition. Plan time to connect with potential lenders and answer their questions. Personally thank everyone that donates, and give investors exclusive perks like early access to your product.
For more information:
- Read the Business Development Bank of Canada’s (BDC) guide to crowdfunding.
- Check out the Canadian Crowdfunding Directory for a list of all active and beta Canadian crowdfunding platforms.
- Learn about the security risks of crowdfunding from the Alberta Securities Commission blog.
Asking for a deposit from your clients before beginning work can provide you with the capital to secure raw materials for a project before getting started. Some companies pair advance payment with crowdfunding to secure financing for their venture from a large number of interested parties before beginning production.
Factoring means selling your accounts receivables (the money your customers owe you) to lenders. They buy your customers’ outstanding invoices as collateral for funding. Factoring is usually only an option for established businesses.
You have two options for factoring:
- Borrow against your accounts receivables, but keep responsibility for collecting. Usually you can borrow anywhere from 65–85% of the invoice amount. With this option, you are still responsible for collecting your receivables (getting payment from your customers).
- Sell responsibility for your accounts receivables. In exchange, you can obtain a short-term loan that generally ranges from 70–90% of the total value of your invoices. Your lender will then become responsible for collecting all outstanding payments from your customers.
Leasing as a Financial Tool
Leasing property and equipment (instead of buying it outright) can be a much more attractive option because it involves a much lower initial investment. Your lease rates will depend on your credit rating, and the value and life-span of the assets you’re leasing. Make sure you compare options from lots of different companies before you commit to a lease agreement.
Contests and Awards
Entrepreneurial or small business competitions are organized by nonprofit organizations, business corporations, or government bodies. They are usually business plan competitions, but can also be specific to other aspects of your business, such as environmental stewardship or innovation. Prizes might include cash, recognition, or in-kind support.
Benefits of awards and contests include:
- Free marketing and publicity
- New technology tools
- Increased credibility
- Cash prizes
- Mentoring and coaching
Contests happen throughout the year. You can find out about them through:
- Business Link’s Business Link Connector newsletter and social media
- Business or industry associations
- Small business periodical magazines
- Newspaper business sections
Life Insurance Loans
You can take out loans against your whole life insurance policy or universal life insurance policy.
Whole Life Insurance Policy Loans
Whole life insurance policies provide you lifetime insurance coverage, and also build cash value. You can borrow against the value of your insurance by using it as collateral for a loan.
If you plan to borrow against your life insurance in the future, make sure you buy a whole life policy that provides both a death benefit and cash value. If you build enough equity, you can borrow up to 90% of your policy’s cash value.
You will have to repay the insurance loan with interest, but interest rates are usually better than regular loans, and there are no credit checks required because the insurance equity is the collateral (any future death benefit would be reduced by the outstanding loan amount).
Universal Life Insurance Policy Loans
Universal life insurance policies allow you to build a policy fund by making extra contributions above the monthly insurance cost. The policy fund is then invested, and can grow significantly. Withdrawing money from the policy fund is subject to tax on any growth, but there is no interest on money borrowed from the policy fund.
Home Equity Line of Credit
A home equity line of credit (often called a HELOC) lets you borrow on the equity of your home (the current market value of your home, minus the outstanding mortgage balance), using your home as collateral.
There are two types of HELOCs:
- Fixed rate loans: The loan is repaid over an agreed-upon time period and interest rate.
- Variable rate lines of credit: Allow you to access cash whenever you need it within a pre-approved limit. At the end of the line of credit’s lifespan, you must pay the outstanding loan amount.
International Trade Financing Companies
If you have exhausted your financing options within Canada, you may be able to access financing from outside Canada.
Government Grants, Loans, and Financing
Canadian federal, provincial, and municipal government bodies can help your business through grants, loans, or other forms of financing. Finding and applying for government grants or loans can be a time-consuming, complex process. Be aware that you may not find any government financing programs that are specific to your current business needs.
There are many misconceptions about government grants for small businesses. The government isn’t giving away free money—they’ve created publicly-funded programs to help the Canadian economy. Some programs are available to businesses all over Canada, while others are restricted to certain business types or regions. Most funding programs have very strict requirements for use of funds and reporting requirements. Learn more in our Ultimate Guide to Business Grants on the blog.
Small Business Services Canada has an extensive free list of regional and federal public funding opportunities in Canada. Make sure you do the research to confirm that your business is eligible before you apply.
Always do your research (and contact us!) when you come across websites advertising free grants—some of them are scams. You should not have to pay for grant money, lists of grants, nor the application package for a grant. Grant qualification criteria and application processes are public information that can be easily accessed by checking the grant web page or contacting the administrators of the grant.
Federal and provincial governments can lend money or provide cash advances, or even provide government-backed loan guarantees to help you secure third-party financing.
Other Government Financing Options
The Canadian government can help your small business succeed in other ways, such as:
Visit Small Business Services Canada website to find out more about other government financing options.
Specialized Financing Programs
Specialty financing programs are available to businesses in some sectors and regions, or to certain types of entrepreneurs such as youth and women.
Financing Programs for Women
Some organizations provide specialized small business funding for women entrepreneurs.
Alberta Women Entrepreneurs (AWE) offers repayable loans of up to $150,000 to female-owned, Alberta-based businesses. Loans can be used to start or purchase your business, or to expand your existing business. Lending decisions are strongly tied to AWE’s assessment of your business plan for viability and economic impact.
AWE also provides advising, mentoring, training, and other support for women entrepreneurs.
Financing for Youth Business Owners
Youth entrepreneurs can get special financing rates to start their own businesses in Canada.
Futurpreneur Canada is a national non-profit organization dedicated to growing our nation’s economy one young entrepreneur at a time. They look at character, not collateral, when providing youth aged 18-39 with pre-launch coaching, business resources, startup financing and mentoring to help them launch and sustain successful businesses.
- Operating for 23 years: known previously as Canadian Youth Business Foundation (CYBF)
- Empowering young entrepreneurs to start a business by offering the following resources:
- Business planning resources: click here for the Business Plan Writer
- Funding up to $60,000: $20,000 provided by Futurpreneur and $40,000 provided by Business Development Bank of Canada (BDC)
- Mentorship for two years with a focus on identifying skillset gaps and matching entrepreneurs with a suitable mentor
- Qualifying for the Futurpreneur program:
- Aged 18-39
- Canadian Citizen or Permanent Resident
- Business is pre-revenue or within one year of startup
Financing for Technology Businesses
If you own a Canadian technology business, there are a number of special financing programs available:
- Alberta Innovates: This provincial government-funded organization has many programs to help build small and medium-sized technology businesses in Alberta.
- Valhalla Angels: Valhalla Angels is a community of Canada’s top angel investors. We’ve formed a diligent process that screens companies before they present to our membership to ensure you see only the best deals at our forum.
- Calgary Technologies Inc. (CTI): connects investment-ready technology companies with experienced investors.
- National Research Council Canada’s Industrial Research Assistance Program (IRAP): This national program gives financial support to qualified small and medium-sized businesses to help them develop and commercialize innovative, technology-driven products or services.
- Build in Canada Innovation Program (BCIP): This program helps companies test their products and services with the federal government before taking them to market.
- Accelerate Fund: Provides funding and mentorship support to early-stage technology companies in Alberta.
- TECTERRA programs: TECTERRA offers a number of financing programs for geospatial technology companies, including investment programs, commercialization support services, and networking programs.
- The University of Calgary’s Hunter Hub for Entrepreneurial Thinking’s Energy New Venture Competition: This competition focuses on energy sector entrepreneurs with cash and in-kind prizes, networking opportunities, and the chance to work with investment experts at Innovate Calgary.
Financing for Indigenous Entrepreneurs
Provincial and federal funding programs are available for First Nation, Métis, and Inuit entrepreneurs who want to start their own business.
- Apeetogosan & Pinnacle Business Services: This grant is specific for both First Nation & Métis in Alberta. Apeetogosan & Pinnacle Business Services provide equity assistance for the startup or expansion of small businesses through Indigenous and Northern Affairs Canada (INAC)’s Aboriginal Business and Entrepreneurship Development. To access the application forms, visit Métis Entrepreneurs’ Assistance Program (MEAP) or Status Entrepreneurs’ Assistance Program (SEAP).
- Canada Council for Arts: This grant is specific for First Nation, Métis, and Inuit individuals who are either creating new works of art, working to maintain and transmit cultural knowledge, or exhibiting and distributing Indigenous works of art.
- Alberta Indian Investment Corporation (AIIC): This loan is specific for First Nations in Alberta. The AIIC provides interest-bearing loans to Indigenous entrepreneurs to help establish, acquire, diversify, or expand a business.
- Indian Business Corporation (IBC): This loan is specific for First Nations in Alberta. IBC provides development lending and financial services to First Nations’ businesses and individuals as well as a loan specific to women.
- Community Futures of Treaty 7 (CFT7): This loan fund is specifically for First Nations members of Treaty 7 to establish or expand a business. CFT7 provides lending services, business support services, community economic development, and more for members of the Treaty Seven First Nations.
- Settlement Investment Corporation (SIC): This loan is specific for members belonging to any one of the 8 Métis Settlements in Alberta. The SIC promotes economic development in Albertan Métis settlements by providing debt financing, business planning, mentoring, and management support services to Métis entrepreneurs.
- First Nations Bank: The First Nations Bank is dedicated to providing financial services and support for Indigenous business owners. They are a leader in the provision of financial services to Indigenous individuals and an advocate for the growth of the Indigenous economy and the economic well-being of the Indigenous community.
- Business Development Bank of Canada (BDC): BDC offers a variety of business and financial services for Indigenous businesses, including the Indigenous Entrepreneur Loan and advisory services for financial management, sales and marketing, and strategic planning.
Financing for Immigrant Entrepreneurs
- BDC New Canadian Entrepreneur: This program is for new businesses that have been in operation for at least 12 months and generated revenues, immigrated to Canada less than five years ago, have a permanent resident status or protected person status and have a viable business plan
- Futurpreneur Newcomer Loan: This program targets entrepreneurs between the ages of 18 to 39 who have permanent resident or citizenship status with no established or little credit history, who have been in business for less than 12 months
Financing for Rural Businesses
Some lenders focus on encouraging economic growth in rural Albertan communities, providing special financing opportunities for businesses in rural areas.
- Community Futures Alberta: Community Futures provides loans of up to $150,000 for Albertans looking to start or grow their business, with a special focus on strengthening and diversifying rural economies.
- Opportunity Development Co-operative (ODC): ODCs are registered with the provincial government as for-profit co-operatives. They identify or are approached by local entrepreneurs with a business opportunity in need of investment.
Financing for Agricultural Businesses
Agriculture is key to Alberta’s economy. Get specialized financing for business in the Albertan agricultural sector.
- AVAC Group: AVAC invests in early-stage commercial ventures, with a focus on agriculture and food technologies.
- Agriculture and Agri-Food Canada’s Advance Payments Program: The federal Advance Payments Program helps agricultural producers improve their cash flow throughout the year by providing cash advances based on the estimated value of their agricultural products.
- Agriculture Financial Services Corporation (AFSC): AFSC is a provincial crown corporation that provides financial services to agricultural producers, such as small business loans, crop insurance, and farm income disaster assistance.
- Canadian Agricultural Partnership: This federal, provincial, and territorial agreement offers a number of programs to help drive innovation, competitiveness, and market development in the Albertan agriculture and agri-food sectors.
- Farm Credit Canada: Provides financing, insurance, software, learning programs, and business services to Canadian producers and agribusiness and agri-food operators.
For a full list of financing opportunities available for your business, use the Innovation Canada program search tool.