What funding solutions are available for your SME?

08 September 2015 by National Bank
small business funding

Starting a new SME is always a big challenge, especially when it comes to securing financing. Thankfully, there are plenty of solutions out there. All you have to do is evaluate which one will best serve the project you’re trying to get off the ground.

First, to increase your chances of getting adequate funding, it’s crucial to draw up a credible business plan where you detail the short- and long-term financial needs of your SME. The business plan outlines what you intend to do with the financing you secure. But what happens once your business plan is in place? Where do you turn to secure funding? Here’s an overview of 7 sources of investment for startups:

Personal seed money

Ideally, the first investor in your business should be you, the entrepreneur. Investing in your SME shows that you are serious about the project and committed to it. You can use your personal savings to supply part of the funding necessary to get your business off the ground, or, you can put up personal assets—that is, property you own as an individual—as a guarantee.

Proximity capital

This is where you seek financial support from those nearest you in the form of loans—from a partner, parents, family members, or friends. Such “love money” or “patient capital” consists of equity or a loan based on personal relationships of trust rather than conventional risk analysis.

Repayment terms are generally favourable for the project owner: the money is reimbursed as the business generates profits, usually without interest or collateral, and without the lenders’ automatic participation in the SME. The possibility also exists for the debt to be forgiven.

After tapping into personal savings, Alex Sebastian, co-founder of Toronto-based startup Orchard Labs, leveraged an investment option in early 2015. His idea was to fill a void in the second-hard smartphone market: a diagnostic app able to test out the functions of a phone before it went up for sale. People could simply send their phone to Orchard Labs to have its worth assessed. Then, the company would facilitate its sale through their website. Today, Orchard Labs has a lot to be proud of; just recently, they partnered with mobile provider Public Mobile.

Angel investment

Wealthy individuals, experienced leaders in their respective fields, and retired business executives with good contacts are all potential “angel investors.” Such investors inject anywhere from $25K to $100K directly into businesses at the outset or during the first stages of development.

To counter the risk they take on by financing a startup, angel investors often sit on the board of directors and require total transparency from the entrepreneur.

When Orchard Labs sought their first round of investment, some angel investors decided to get in on the action, contributing to $500,000 in funding.

Collaboration with angel investors gives entrepreneurs access to a wide network of experts. This can help them broaden their knowledge and skillsets in areas such as marketing and the structuring of sales teams. As Sebastian puts it, “Angel investors have the experience that allows you to sanity check your decisions.”

Unlike business coaches, who are paid for their services, or mentors, who only volunteer their time, angel investors provide both financial support and their time. According to Sebastien, “When we met with Public Mobile and were able to say we had funding, that legitimized our business in their eyes and gave off the expectation of longevity.”

Venture capital financing

This source of funding is generally sought out by startups that are well-positioned in high-growth markets, such as information technologies and biotechnologies. They tend to have significant capital needs and less access to debt financing. Funding is put up by venture capital companies, capital is less “patient”, and repayment terms are much stricter.

When an investor finances an SME with venture capital, they are looking to build equity, and therefore, seek active, albeit temporary, participation in the company’s management. Gaining participation usually means buying shares or securities, which ultimately, the investor plans to sell off to make a substantial profit or capital gain. The venture capital is invested for 7 to 10 years and usually falls around the one-million-dollar mark.

Among other things, venture capitalists provide their expertise and network of contacts. Their involvement helps attract new investors and board members who, in turn, bring expertise in areas such as strategic and financial planning.

Before submitting an application for venture capital funding, entrepreneurs must complete some preliminary steps, for which they will often require financial support and useful advice. Entrepreneurs often forget that they can develop an attractive financing structure that will take them to the pre-marketing stage. The pre-marketing stage entails developing new markets or new value-added products created during the research and development phase.

Grants, guaranteed loans, and startup loans help SMEs develop their business model and test their products and services, thereby optimizing the chances of getting the venture capital funding required to go to market. A number of organizations, such as economic development centres, incubators, business accelerators, and the Business Development Bank of Canada, have developed programs that can provide you with some form of support at this stage.

Corporate incubators

In addition to mentorships, logistical and technical resources, incubation programs can provide seed capital to startups operating in the high-tech sector. In exchange for their services, some incubators charge fees or acquire part of the SME’s equity. A company generally stays in an incubator for a two-year period.

Bank financing

A number of financial institutions offer financing for startup companies. Banks favour entrepreneurs that supply a personal guarantee, have an excellent credit history, and have a strong business plan.

For entrepreneurs that have been in business for more than six months, National Bank offers an online solution that can provide access to financing in only seven minutes. This alternative to traditional channels is based on roughly 10 easy questions and a credit report check. Upon approval, the loan is deposited into a bank account within 24 to 72 hours. Once the financing is in hand, entrepreneurs can purchase equipment, expand their business or hire a new employee. They will therefore be able to realize their business projects more quickly.

Government assistance

Some government programs offer grants and contributions to SMEs, as well as loans and loan collateral.

Programs like the Canada Small Business Financing Program, for example, help SMEs get loans from financial institutions by sharing the risk with lenders.

Over the past 10 years, small businesses in Canada qualified for 76,000 loans and received over $9.4 billion in the form of asset-backed financing.

In Ontario, FedDev Ontario offers programs and initiatives to help create, retain and grow businesses, cultivate partnerships, and build strong communities. Businesses that meet certain criteria, such as providing services in French or innovation, may qualify for financial support.

Finally, in Quebec, the Quebec Economic Development Program provides a non-repayable contribution that covers up to 50% of a small business’ startup expenses for those who qualify.

In closing, it is critical to take the time to evaluate all of the potential sources of investment available for your business. Making the right choice for your profile and project type will have a positive impact on your startup’s trajectory.

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