startups

6 Ways to Fund Your Small Business – Morningstar.ca


With increased news of tech layoffs, and anxiety about a recession rising, you might be considering diversifying your income streams by starting up  a business, or making money through the gig economy.

Raising capital for a business venture can be a challenging enterprise at the best of times. However, coming up with funds could be particularly difficult for those in the process of setting up their business, but have no business banking history or experience.

Here are some options to consider for small business professionals looking to jumpstart their enterprise and get their businesses going.

Option 1: Conventional Borrowing

Most banks in Canada offer business loans for start-ups. However, the process involves onerous due diligence by the lender that may demand your personal credit score and some form of collateral, such as your high-value assets including property or any valuable equipment.

The lender first appraises the market value of your collateral which could be time consuming, making the application process lengthy. It is therefore advisable to get the loan application rolling well ahead of the time the money is required. 

Invariably, conventional lenders’ risk assessment models and lending decisions are based on personal credit and personal assets. Which means that an unhealthy credit score is an absolute deal breaker. There is no way to convince the banker your business ethics are better than your credit score.

Another important factor to bear in mind is the sharply rising interest rates. Canada’s pandemic-era period of historically ultra-low interest rates has come to a grinding halt. As the Bank of Canada aggressively rises interest rates, business owners must take borrowing costs into consideration when applying for a loan.

Higher interest rates make it more expensive for businesses to borrow money and service existing debts. This is also the first time in many years that entrepreneurs must seriously consider the choice between fixed-rate business loans and the floating-rate option. With all the talks of an impending recession, it might be worth considering waiting a bit for interest rates to start edging lower before you borrow.

Read More   Here are the real reasons why the tech startup scene in Asia is thriving - e27

Option 2: Tapping a Line of Credit (LOC)

Typically, LOCs bear lower-interest rates, and the borrower only pays when they use the money. Arguably this is the most convenient, but not necessarily the easiest, way to acquire funds for your business.

Once approved, the funds can be accessed right away. What makes LOCs most flexible is that you can pay the money back as much, and as often, as you please.

The entire process, from application to receiving funds, can take a couple of months, which must be weighed while planning for your funding options. Again, rising interest rates could have meaningful implications for repayment, amortization period, and interest rates all of which come into play in deciding the type of line of credit best fits your immediate and long-term funding requirements.

Option 3: A Business Overdraft

A business overdraft is a type of line of credit on your business bank account. An overdraft facility gives you a short-term cash cushion when your business can’t fund from its own account.

This is a handy financing option for all businesses and can help you in a pinch when you need funds to either pay a vendor, make a timely purchase or cover unplanned expenses. Overdraft also protects your chequing account against unexpected charges made to your account which could otherwise incur NSF fees and damage your credit score. Keep a close eye on the interest charges, though.

Option 4: The Bank of Mom and Dad

Entrepreneurs who are just starting out can also tap private lenders among their network of family and friends. It remains one of the most common options to which small-business owners turn. Family and friends don’t often demand a collateral, or ask for a credit check. Many might also be happy to accept flexible payment terms.

Read More   Halifax podcast creation startup taps into recent podcast growth - HalifaxToday.ca

Many of the Silicon Valley tech behemoths were born in the basement or garage of their founder’s parents and received funding from their family and friends. 

Option 5: Private Lending Institutions

There are many private lenders that fund small businesses in Canada. Sometimes called “alternative” or “specialized” lenders, these include online lenders who take a technology-based route to funding. They differ from traditional banks in their risk assessment, funding process, and repayment arrangements.

Each private lender has their own assessment standard and use multiple data sources – business model, industry information, etc. – in addition to personal information to assess their lending risk.

Potential borrowers must be prepared with all the necessary documents including a business plan, bank statements, credit and debit processor statements, and proof of business ownership. 

Option 6: The Crowdfunding Route

Who hasn’t heard of GoFundMe or Kickstarter in 2022? A growing number of entrepreneurs these days take the crowdfunding rout to financing their start-ups. Leading crowdfunding sites Kickstarter, GoFundMe, SeedInvest and IndieGoGo can be a great way for businessowners to  

directly reach out to the masses and pitch their business ideas. If you have a compelling product or a business proposal and it resonates with prospective investors, they will each pay a small individual fee to fund the project.

In return, they can receive the product first, preferably at a lower price than at a public launch.

Crowdfunding may not the fastest or the most predictable way of getting business funding, but it’s certainly an avenue to consider. It is also a great way to test your product or business ideas and receive free feedback on the odds of it succeeding.

Read More   QuantPi wins top VC investor and closes a €2.5M pre-seed round  

Should You Choose Debt or Equity Financing?

To determine the type of business funding that’s best suited, it may be prudent to first consider whether debt financing or equity financing is the right option for you.

In the debt financing option, you borrow money to run your business and repay later in instalments. Credit cards, microcredit loans, commercial term loans, lines of credit, and overdraft are the most common types of debt financing used by small business owners.

Equity financing requires offering part ownership of your company to investors. In other words, you share your company’s profits and some decision-making power with someone in exchange for their investment in your company.

Crowdfunding, business incubators, initial public offering, angel investors, and venture capitalists are all examples of popular equity financing options. The biggest challenge with equity financing is having to give up some financial and operational control of your company.

Finally, all prospective business owners must consider other income streams to fall back on in the event your venture doesn’t take off. We are going through one of the most uncertain economic periods in history with a conspiracy of macroeconomic events threatening to hurt or hamper your hustle. Be sure to have plan B – a full-time job or a side hustle – in place that can help tide you over financially when going gets tough in your business endeavour.

 

 

 



READ SOURCE

This website uses cookies. By continuing to use this site, you accept our use of cookies.