You should never put all your eggs in one basket when it comes to business. When you are starting a new business, this is especially true. In addition to helping your start-up weather potential downturns, diversifying your financing sources will also make it easier for your startup financing you need.
It’s important to keep in mind that bankers don’t view themselves as your only source of funding. Lenders will see you as a proactive entrepreneur if you have explored various financing options.
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Each source of financing comes with its own set of advantages and disadvantages as well as criteria that is used to evaluate your business, whether you choose a bank loan, an angel investor, a government grant, or a business incubator.
Personal investment
Whether you use your own money or collateral on your assets as your first investor, you should invest in your own business. Having a long-term commitment and taking risks show investors and bankers that you are committed to your project.
Love money
Usually, spouses, parents, family, or friends lend money to their friends. This is what bankers and investors call patient capital — money that will be repaid when the business becomes profitable.
If you borrow love money, you should keep these things in mind:
- It is rare for family and friends to have much money
- Your business may require equity from them
- Having a business relationship with a family member or close friend is never a casual affair
Venture capital
In the first place, it’s important to remember that venture capital is not for every entrepreneur. Investing in technology companies, communications companies, and biotech companies with high growth potential is what venture capitalists are looking for.
Investing in venture capital allows companies to carry out high-risk projects that are promising. An external party will take over some ownership or equity in your company. As the business starts selling shares to the general public, venture capitalists also expect a healthy return on their investment. Choose investors with relevant experience and knowledge.
Angels
A business angel is typically a wealthy individual or a retired executive who invests directly in other people’s small businesses. Often, they are leaders in their own fields who contribute their knowledge, experience, and networks of contacts as well as their technical skills. Angel investors usually invest between $25,000 and $100,000 in the early stages of a business. Typically, institutional venture capitalists invest in projects worth at least $1 million.
To compensate for the risk they take, they have the right to supervise the management practices of the company. Often, this entails a seat on the board of directors and a commitment to transparency.
Business incubators
Generally, business incubators support new businesses at all stages of their development in the high-tech sector. Economic development incubators are also available, which can help with job creation, revitalization, and hosting.
A typical incubator will share its premises and administrative, logistical, and technical support resources with future businesses and other fledgling companies. As an example, it might be possible for an incubator to lend its laboratories to new businesses so they can test and develop their products more cheaply before going to market.
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Subsidies and grants from government
You may be able to obtain funding from government agencies through grants and subsidies. Various federal and provincial government programs are listed on the website of the Government of Canada.
Criteria
There can be a lot of difficulty in getting grants. The criteria for awards are often stringent and there can be a lot of competition. There is usually a matching requirement on most grants, and this amount varies greatly depending on the grant provider. As an example, you might only need to pay 40% of the total cost for a research grant.
Bank loans
Among small and medium-sized businesses, bank loans are the most common form of startup financing. You should consider the fact that every bank offers its own advantages, such as personalized service and customized repayment plans. Choosing a bank that fits your needs is a good idea. Shopping around is a good idea.
A company with an excellent credit history and a sound track record is what bankers are looking for. It is not enough to have a good idea; you also need to have a solid business plan to implement it. Entrepreneurs will also typically need to provide a personal guarantee for startup financing.
