Putting all your eggs in one basket is never a sensible business approach. This is particularly true for getting funds for your new business. Diversifying your funding sources will assist your firm weather possible downturns, but it will also improve your chances of acquiring the correct finance for your requirements.
Keep in mind that lenders do not see themselves as your sole source of funding. Furthermore, indicating that you’ve investigated or utilized many funding methods demonstrates to lenders that you’re a proactive company owner.
Whether you go with a bank loan, an angel investor, a government grant, or a business incubator, each has its advantages and disadvantages and the criteria they will use to evaluate your firm.
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Here’s an overview of seven popular ways for fledgling firms to get money:
1. Putting money into oneself
When beginning a firm, you should be your first investor, either with your own money or with assets as collateral. This communicates to investors and lenders that you are serious about your business and prepared to take risks.
2. Money sucker
This is money that your spouse, parents, relatives, or friends have lent to you. Investors and bankers refer to this as “patient capital,” or money that will be repaid if your company’s profits increase.
When borrowing money for love, be mindful of the following:
- Friends and family members seldom have a lot of money.
- They could be interested in purchasing a stake in your business.
- Treating a business relationship with family or friends carelessly is never a brilliant idea.
3. Venture capital
The first thing to remember is that venture capital is not for everyone. In fields like information technology, communications, and biotechnology, venture capitalists are looking for technology-driven organizations and firms with high development potential, so you should immediately be aware of this.
Venture capitalists put money into a company to help it carry out a promising but risky idea. This requires giving a third party a share of your company’s ownership or equity. Venture capitalists expect a good return on their investment, usually achieved after the firm starts selling shares to the general public. Make sure you identify investors that have the right experience and understanding for your business.
BDC’s venture capital team invests in cutting-edge companies well-positioned in a rising market. Like most other venture capital companies, it invests in high-growth start-ups. Still, it chooses to focus on significant interventions when a company needs a considerable number of money to establish itself in its market.
Angel investors are often wealthy individuals or retired executives who make direct investments in tiny enterprises that are not under their control. They are often industry leaders who provide their technical and management knowledge and their experience and network of contacts. In the early stages of a business, angel investors often contribute between $25,000 and $100,000. Institutional venture funders demand more significant investments on the scale of $1,000,000.
In exchange for risking their money, they retain the right to monitor the company’s management operations. In reality, this generally includes a seat on the board of directors and promises of transparency.
Angels like to keep a low profile. You must contact professional organizations or do an online search on angels to meet them. The National Angel Capital Organization (NACO) is a non-profit that promotes the growth of angel investor capacity in Canada. You may go through their member directory to find out who you should contact in your neighborhood.
Business incubators (also known as “accelerators”) generally serve the high-tech sector by aiding start-up companies at various stages of development. On the other side, local economic development incubators focus on job creation, revitalization, and hosting and sharing services.
Future enterprises and other start-ups are often encouraged to use incubators’ premises and their administrative, logistical, and technical capabilities. For example, an incubator may share its premises with a start-up company to develop and test its products more economically before launching into production.
In most situations, the incubation period might last up to two years. When the product is ready, the business usually exits the incubator and moves into independent industrial production.
Businesses that get this kind of help are often in cutting-edge sectors like biotechnology, computer technology, multimedia, or industrial technology.
On its website, MaRS, a Toronto-based innovation cluster, maintains a list of Canadian business incubators and links to further resources.
6. Government grants and subsidies
Government agencies may be able to give financing through grants and subsidies to your firm. A comprehensive list of federal and provincial government projects may be found on the Canada Business Network website.
Grants might be hard to come by. There may be fierce competition, and award criteria are often stringent. Most contributions require you to match the funds you’ve been given, and the amount you have to check varies greatly depending on the donor. A research grant, for example, may only require you to contribute 40% of the total cost.
In general, you’ll need to supply:
- a comprehensive explanation of the project
- a description of the benefits of your project
- A detailed project plan that includes all costs
- Details about the appropriate expertise and background of key management
- Filled-out application forms, when needed
The majority of reviewers will assess your proposal using the following criteria:
- Expertise assessment
- The grant is necessary.
Some of the challenges that candidates experience while applying for grants are as follows:
- It doesn’t matter what you’re studying or working on.
- Ineligible geographical location
- Applicants don’t explain why their ideas are so significant.
- The strategy lacks a solid foundation.
- The study plan is jumbled up.
- There is an excessive amount of work to be completed.
- There is no money matching.
7. Bank loans
Bank loans are the most common source of finance for small and medium-sized businesses. Consider that each bank offers its unique set of advantages, whether individualized service or customized repayment. It’s good to shop around for the most acceptable bank to meet your needs.
Lenders favor companies that have a demonstrated track record and excellent credit. It is not enough to have a fantastic idea; you must also have a solid business plan to back it up. A personal guarantee from the company founders is usually required for start-up financing.