Starting a New Business: How to Find Financing

I’ve always been a fan of being your own boss. Yes, it is in fact more difficult than being employed and more energy consuming – but if you are talented and feeling underestimated, building your own business could be a viable solution to your concerns. You do not need to start off “big” with a business, you do not necessarily need to be full-time on it from day one, nor hire anyone. Find your area of expertise and flow from there, even as a side hustle that can one day evolve into a new business. Create something – anything –  and you shall be joyous.

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Grow your plants the right way, not the easiest way

If your business has outgrown the side hustle stage, or you simply want to take it to the next level (or start at a higher level), you will need to be seeking financing. In this short post I will review the different alternatives and share my random thoughts and experiences with them. This is not your A to Z guide on how to find business financing in Canada or a list of the best business lenders in Canada. It may expand into one, some day, but for the time being – the idea is 100% to give you a general background on each of the roads not taken (or do taken).

Self-financing

This is obviously only relevant if you have the cash at hand

Self financing your business means that you get more risk and more reward. No one is partnered up to your success, there is no interest to pay, but if you are going to bleed money, it will be your out of pocket money. While most entrepreneurship gurus don’t normally recommend to go down this route, I feel this is the most honest way to create a sustainable business. If you think you can turn your loonies into more loonies, why would you take your funds from anyone else?

With that being said, doubling down on your risk heading a new path as an entrepreneur who is likely taking up a moderate salary, or no salary at all, when at the same time if this venture goes south, you will lose a (probably significant) sum of money is tricky.

I would personally only go down this path if the amount of cash you are risking in a business is not going to make or break you. In the same fashion as I wouldn’t recommend investing all your money into any other specific financial instrument. Additionally, I would only fund cash generating businesses which have prospects of being profitable in a short period of time. If you have grand plans in mind it may take a very long time until you will be able to rip any benefits.

Financing through family and friends

Financing through family and friends is almost similar to self-financing, with the only exception you will be creating debt. It may be a no-interest loan or a low-interest loan but it’s still a loan.

Similarly to self-financing your own business, I wouldn’t recommend it unless you are certain that the amount of money you are borrowing from each individual is not going to make an impact on his finances and he can withstand the loss. It is very difficult to do that kind of due diligence with family members or friends, though.

If you have a rich uncle with business experience who explicitly states to you that he is OK with you losing the money in your venture (or simply handing it to you), you can do it. In all other cases I wouldn’t have gone down this route. The worst thing than being in debt is being in debt to a family member or a friend that you actually care about and ruin personal relationships over this.

Angel investors or VCs

Angel investors, VCs, or any partner with specific knowledge and understanding of how new businesses operate (and more than enough resources) is optimal for financing your business. Qualified investors and venture capital funds even more so, as this is what they do for a living; they are aware of all the risks, or they would be out of business.

I’m not even talking about the preferable financing that doesn’t put you in debt but rather buys a portion of the company’s equity. I’m not even talking about the added values having such people as business partners. I’m talking about create a reasonable expectation sheet and working with people who understand your position and have the capabilities of additional financing round in the future as well.

The biggest problem with these people is that the competition is fierce. There are a lot of other businesses/startups out there (in Canada and worldwide) competing for the same resources.

Government Grants

I am not going to delve into government grants but generally speaking this is one of the best way to finance your new business. You will get a no-interest loan and some additional support. You will not be personally accountable for any funds lent, if the business shuts down.

The problem – you have to research, find which grants you are eligible for, if any, and then apply and hope to beat many others who are competing for the same spots. Additionally many of the grants are really small and can only partially financing your business.

Banks

Banks are not going to lend money to a new businesses that don’t have a good credit score and trading history. They will be happy to lend money to individuals with a personal security (collateral) if that individual has a good credit score and history with them. Borrowing money into your personal account and then using it to financing a new business is tripling down on the risk. If you aren’t successful you have spent time without a salary, lost your own savings, and remain in owe to the banks who will not hesitate to liquidating your collateral if they believe you are not going to pay back your loan. If possible, avoid.

Online lenders (or, shark lenders)

There are two types of online / quick lenders out there – business lenders and loan sharks. Business lenders like OnDeck seem to be OK in the sense that they are serve a specific role in the SME echo-system. They are able to lend money with a very quick approval process and help small businesses that require a cash injection to fill a gap in cash-flow. OnDeck is considered expensive, though, so I wouldn’t use it for longer term loans. Either way, if your business is new and unproven they are not likely to accept you.

Loan sharks are where most young entrepreneurs end up in when they have failed any other option and they should be completely avoided at all costs. I recommended to avoid most types of financing options until now, but I still realize a lot of people may opt for sub-optimal financing just because that’s what they have available for them. If you took a personal bank loan to start the business of your dream against my advice, that’s fine. As long as you know what you’re doing, you could do well in spite of the tripled-down risk. If you are going to borrow money from loan sharks with crazy interest rates it is very unlikely you will manage to close the gap fast enough to repay your debt and rip any benefits from the business you established.

Concluding thoughts

Financing is not an easy topic, and there is no “right way” or “wrong way” with the exception of predatory loan sharks which should always be avoided regardless of your situation. Everything else is very circumstantial.

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