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Six sources of financing for businesses

17 November 2020 by National Bank
Startup funding

Choosing the right funding for your business is crucial. Before you begin, document your project and develop a plan for the future and, most importantly, take the time to determine your actual needs and evaluate the options available to you. Our experts, Geneviève Turbide-Potvin and Luc Ménard, are here to answer your questions. 

Step one: Determine your needs

First of all, the kind of financing you need depends on the stage of development of your business. Are you in the start-up phase? Is it an ongoing operation? Or are you acquiring or growing? That’s the first thing you need to ask yourself.

Then, determine the actual needs for which you’re seeking financing. Whether you’re looking to sustain growth or pay for equipment – or maybe even acquire another company – the right financing option is not the same for all cases.

What are the main sources of financing for a business?

1. Crowdfunding campaigns

This form of financing is often used before a product or service is even available commercially. It allows a business to collect individual contributions through an online platform. “Crowdfunding is a good idea for when you’re developing a product or idea and are close to going to market, but haven’t made any concrete sales yet,” explains Geneviève Turbide-Potvin, Vice President, Transaction and Financing Solutions for the Commercial Banking at National Bank.

2. Personal investments

You could use your savings to finance your project from the start. That way, it shows your bank and potential investors that you believe in your business plan. Furthermore, you need to reach a certain balance in your sources of financing to start a business off on the right foot.

The value of your property could allow you to partially finance your start-up. “It’s a good way to get financing at a very low interest rate, which gives you a fighting chance when starting a business. Plus, when personal financing is properly segmented, you can deduct the interest for more funding,” the expert continues.

3. Proximity capital, or “love money”

Your partner, a family member or a friend could lend you money that you’ll pay back when the start-up generates profit. “If you choose this option, the best advice I can give you is to have a very, very clear shareholder agreement or loan agreement,” notes Geneviève Turbide-Potvin. “It will help you avoid any future family arguments.”

Your lenders could also ask you for a share in your company. That’s why it’s important to have a shareholder agreement.

4. Grants and funding programs

There are different funding programs and grants for businesses available at the federal and provincial level. Given the current context, many new programs were created, such as the Canada Emergency Wage Subsidy and the Canada Emergency Business Account.

“It is your account manager’s responsibility to stay up to date on wage subsidies as well as all the programs and various financial partners that can benefit entrepreneurs,” the expert adds. “Bankers are like a business’s quarterback. They have to know what’s available on the market.”

The earlier you include your account manager in a transparent way in your thought process and negotiation process, the better they’ll be able to support you. “They could recommend grants and programs to round out your financing package. Contributions from provincial and Canadian financial partners can give your bank flexibility on certain credit conditions and allow them to give you support that’s better tailored to your needs,” Geneviève Turbide-Potvin points out.

5. Bank financing

This is the traditional form of financing. Your account manager will help you determine the bank product that suits your needs to ensure that your financial results are balanced. Generally speaking:

  • Short-term financing should be used for short-term needs. To finance receivables or an increase in inventory needs, for example, consider an operational line of credit.
  • However, for medium- or long-term needs, like funding to purchase equipment, a company or a building, term loans and mortgage loans are better options. The term for this type of loan will usually run as long as the useful life cycle of the good.

“One important thing to keep in mind is that with traditional financing, the bank is looking to invest in the business for up to three times its value – this is the shareholders’ equity,” Geneviève Turbide-Potvin explains. “Don’t forget to save the benefits generated by the company so you can reinvest them, because you’re expected to maintain the balance between the bank’s involvement and the entrepreneur’s, even during steady growth.”

6. Private financing

After having received a financing proposal from your bank, you could also decide to partner with an investor who, ideally, shares your vision for the business.

Private investment consists of two categories:

  • Venture capital, which is for businesses that haven’t achieved profitability or whose project is related to a new technology or process. This is an appealing form of investment, but it’s risky for the investors. Therefore, they expect high returns.
  • Growth or development capital, which is for businesses that already have products and market shares. Growth capital is for projects that involve modernization, acquisitions, international development and business transfers, for example.

If you’re acquiring a competitor and its profitability elicits uncertainty, private investments could be a better financing option for you. “At that point, it’s better to find an investment partner or a private investment partner,” says Geneviève Turbide-Potvin. “They’re often more patient, so they’ll offer more flexible financing conditions and longer moratoriums and amortizations. This allows the business to proceed more comfortably.”

Investors all have different levels of patience and different expectations and strategies. “To find the right investor profile for your project, take the time to determine who you would like to address before you even contact any investment firms,” advises Luc Ménard, Executive Vice-President, Managing Director and Head of Private Investments.

For investors, other than the business numbers and projections, the competency of a business’s leadership is a crucial factor in their decision to invest or not. Investors are looking to partner with an experienced entrepreneur who is able to clearly communicate their vision. They will want to determine what kind of entrepreneur they’re doing business with to ensure compatibility and synergy. In fact, Luc Ménard believes that “the management team is the main factor. Investors want to do business with entrepreneurs whose team has complementary talents, and who aren’t afraid to partner with people who are better than them in certain areas.”

What determines whether you get financing?

To get financing, you need to document your project and provide a complete report. And if the bank or investor you’re speaking to doesn’t know you, you’ll have to build an even more exhaustive file. It will have to include your updated financial information and your projections so your business’s ability to repay can be establish. Geneviève Turbide-Potvin believe this to be an essential detail. “If you’re working towards an acquisition, the bank will want to know about the owner’s down payment, meaning their contribution to the project. And to determine the feasibility of the project, they will ask for up-to-date financial information as well as projections,” she adds.

Your business’s financial performance will be examined according to different ratios, and sometimes it will be compared to other companies in an industry similar to yours. Your historic level of profitability will allow the bank and investors to ensure that your company isn’t in deep debt, that you’ve made the right decisions throughout its growth, and that the plan you’re proposing is realistic and makes sense.

To finance a start-up, which by definition doesn't have a financial history, the following factors are crucial if you want to obtain financing: the sector of activity, the size of the target market, and the use or competitive advantage that the future product or service will create.

You must also be able to clearly summarize your project and vision. When meeting with your bank and potential investors, you will have to answer questions related to your commercialization and production strategy, your positioning, and your competition.

For many entrepreneurs, getting financing is a make-or-break moment. Being well-prepared could make a world of difference.

An expert will be able to tell you about the solutions that are best for you.

Learn more

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