Private Sector Financing

Private sector lenders and investors provide financing in order to earn a return on their money. They decide whether to provide your business with financing based on an assessment of the risks and potential reward in doing business with you. The way that private sector firms will assess the risk and reward of providing you with financing depends on their business model and the type of financing that they offer.

To get financing, you need to demonstrate that you can pay back the money. You will need to show the lender or investor that your venture will be profitable, whether you are:

• starting a business
• developing a new product
• expanding into a new location
• developing new markets
• purchasing new equipment

To do that, you should prepare a professional and well thought-out business plan.

• Business Planning
  Find out how to write a business plan and access templates and sample business plans.

Debt

Debt financing is a loan of money that needs to be paid back along with interest payments.

When deciding whether to finance your business, a lender will look at your business’ potential and your assets.

• For new businesses, a lender will look carefully at your business plan and may ask you to put up some personal assets (such as your car, home, personal investments) as collateral.
• For existing businesses, the lender may wish to see your business plan and will also look carefully at your past financial statements and your projected revenues. He may also ask you to put up some of your business or personal assets as collateral.

Debt can be short-term or long-term:

• Short-term debt: includes loans with a term of less than a year (operating term loans) and lines of credit.
• Long-term debt: includes loans with a term of more than one year. It is generally used to finance the purchase of major assets such as buildings, land, machinery, equipment, computers and shelving.

The amount of money you will pay to the lender is set out in a contract. The payments can include fixed payments of principal (paying back a portion of the sum that you borrowed) and interest. In other cases, they may involve minimum monthly payments based on either a fixed or floating interest rate.

There are several types of debt financing, including term loans, lines of credit, credit cards, micro credit, supplier credit, commercial mortgages and leases.

Commercial Term Loans

Financial institutions provide commercial loans to businesses like yours for:

• buying long-term fixed assets, such as land, buildings or equipment;
• increasing working capital;
• investing in business expansion; or
• buying another business.

Commercial loans generally have a specified period for repayment, usually ranging from three to five years. They also usually have a fixed interest rate. The loan will have a predetermined schedule for repaying the principal and interest.

You will be asked to provide an asset as collateral to secure your loan. If you are financing the purchase of an asset, then you can usually use that asset as the collateral. If you are looking for working capital or a business expansion loan, then you will need to put up assets that you currently own as collateral. This can include buildings, real estate, equipment and accounts receivable.

Lines of Credit or Operating Loans

A line of credit or operating loan is usually attached to your main chequing account and can be used to pay operational expenses, when there is not enough money in the business’ bank account. This type of financing is ideal when there are ebbs and flows in a business’ cash flow. It can allow you to continue operating normally, when you are waiting on payment from clients or during a temporary slowdown in revenues.

Entrepreneurs may also be able to secure their line of credit with personal assets. For example, many banks now allow individuals to have a home owner’s line of credit related to the equity in their home and this line of credit can sometimes be split into personal and business categories.

Credit Cards

Using your credit card to finance your business is often the easiest way to get money quickly. You don’t have to complete an application, you don’t need to convince anyone of the merits of your business and you don’t need to wait to get the money.

However, this is also one of the most costly options. The interest rates on credit cards are often double or triple the interest rates offered on commercial loans and lines of credit. Unless you are sure that you can pay the credit card debt off by the due date, you should avoid this option.

For convenience purposes, some banks are now linking a business owner’s credit card with their line of credit. That can make it very convenient for you to access your line of credit and may be a good option for many businesses. That said, be sure that you fully understand the fees that may be associated with accessing your line of credit via your credit card (sometimes there are per transaction costs).

Micro-Credit

Micro-credit involves providing small loans (often only a few thousand dollars) to low-income individuals that would not qualify for traditional bank loans. These loans can help people without much money to start a very small business and have the opportunity to improve their financial situation. Micro-credit is often targeted at specific demographic groups, such as youth, women, Aboriginal persons, people with disabilities or new Canadians.

Supplier Credit

If you are purchasing equipment or machinery, you may be able to get financing through your supplier. A lot of suppliers will automatically provide payment terms of around 30 days (but not all do) with some extending as long as 45 days. Some suppliers of expensive equipment will allow you to finance your purchase and will make arrangements with you for a specific repayment plan and interest rate.

If you are purchasing goods to resell to your customers, you can pay for the goods up front, in which case they become your asset and you assume the risk if you cannot sell them. However, some manufacturers, in particular manufacturers of new goods that are trying to increase their market share, may be willing to have you sell the goods on consignment. That means that you only need to pay the manufacturer for the goods when the merchandise sells.

Commercial Mortgage

If you are purchasing real estate (land, building) for your business, you may be able to get a commercial mortgage. A mortgage is considered a long-term debt. It is offered by various financial institutions, including commercial mortgage companies, insurance companies, trust companies and chartered banks.

Lease

If you need to purchase vehicles, equipment or other assets for your business, leasing may be a possibility. If you are concerned about the possibility of your equipment becoming obsolete after a while, leasing may be a good option for you since you will not be stuck with a worthless asset.

If you own a substantial asset (such as real estate), you may be able to sell it and then lease it back. This can provide your business with much needed capital to pay back debts or finance growth.

• Canadian Financing and Leasing Association
  
  http://www.cfla-acfl.ca/
  Procure equipment, vehicles and related items or services by way of leases, secured loans or conditional sales contracts. Members of this association specialize in this type of asset-based financing.

Equity

Investors that provide equity funding get a share in the ownership of your business and in your profits in return for their contribution. The amount of money that you pay to the investor depends on how well your company does.

Equity funds are usually unsecured, which means that the investor does not have a claim on any of the assets of the business. That means that you can still use your assets as leverage when trying to get additional debt financing. As a result, using a combination of equity and debt financing might allow your business to access a larger pool of money.

There are a wide variety of equity financing solutions, including angel investors, venture capital, business incubators and initial public offerings.

Angel Investors

Angel investors are generally wealthy individuals who invest in small businesses and start-ups with the intent of earning a higher rate of return than they could through other investments. Many of them are successful entrepreneurs themselves and can provide both financing and business expertise to the businesses that they invest in.

• National Angel Capital Organization
  
  http://angelinvestor.ca/
  Obtain capital and seed money in exchange for shares or equity ownership from angel investors to support the early-stage funding of your innovative and high-growth business.

Venture Capital

Venture capital businesses make equity investments in businesses with high growth potential, typically in the early stages of your business’ development. It is a good option for businesses that are not yet large enough to raise money through an initial public offering (on the stock market) and that may be considered too risky a venture for traditional commercial loans.

Venture capital businesses take on the risk associated with investing in small, less mature businesses with the hopes of making a significant return on their investment. These investors will usually insist on having significant control over the ownership of your business and the management decisions you make.

Venture capital is usually only available to leading-edge businesses developing highly innovative new products and services.

• Canadian Venture Capital Association
  
  http://cvca.ca/
  If you are looking for long-term investment for your business, venture capital can be the solution. While not involving themselves in the day-to-day operations of your business, these investors will expect a say in terms of significant decisions you make.
• Quebec Venture Capital Association (only available in French)
  
  http://reseaucapital.com/
  Support the growth of your innovative small business with equity and venture capital from members of this organization.
• BDC Venture Capital
  
  http://www.canadabusiness.ca/eng/summary/935/
  Applies to: All of Canada
  An alternate source of funding for your technology-based business.

Business Incubators

Financing is just one of the areas where business incubators can help your business. In fact, not all business incubators provide funding, but many of them do.

Not all incubators offer exactly the same list of services, but generally they try to act as a one-stop-shop to support entrepreneurs through the start-up stage. They provide a wide array of business support services, including things like:

• help with the development of your business plan
• office space
• administrative services
• technical support
• access to advisors like lawyers and accountants
• networking opportunities
• educational events and seminars
• general business advice

• Canadian Association of Business Incubation
  
  http://www.cabi.ca/business-incubation.php
  Work with a business incubator to secure financing and obtain hands-on management advice and assistance to help your new business succeed.

Initial Public Offering

An initial public offering (IPO) is the process of listing your business on a stock exchange. You sell shares in your business over the stock exchange and the shareholders collectively are the owners of your business. The money that you raise by selling the stocks can be used to finance the growth of your business and the profits that you make are shared among the shareholders.

An IPO is only a good option for a very small number of businesses. There are significant drawbacks to this option, including:

• a high failure rate, especially among businesses with proceeds of less than $1 million;
• the significant risk of your shares being under priced, in which case you do not get good market value for your offering;
• the high cost of an IPO (costs include meeting regulatory requirements, preparing the required prospectus, paying fees, and the work of various professionals that will assist you with your offering); and
• businesses often are pressured to focus on short-term results to meet investors’ desire for a return on their capital, rather than focusing on the long-term growth strategy.

Businesses should be extremely cautious about proceeding with an IPO and seek the advice of experts in the field.

• Steps to Getting Listed on the Toronto Stock Exchange
  
  http://www.tsx.com/en/listings/listing_with_us/steps.html
  If you are considering an initial public offering on the Toronto Stock Exchange, you should review this list of important steps to starting the process.

Other Types of Private Sector Financing

Beyond traditional debt and equity financing, there are other options that you can consider to finance your business and keep your cash flow running

Love Money

Love money is money that you friends and family invest in your business. This can be a convenient way of raising funds, especially if you are having difficulty obtaining financing through other means or if you don’t have sufficient personal assets to put into your business. However, you also need to be cautious. If your business is not successful and you are not able to repay your friends and family, this can put a significant strain on relationships.

If you do get money from your loved ones, it is best to put a contract in place to formalize the arrangement. Talk to your lawyer about drafting up an agreement that includes details like the amount of the investment, the interest rate or share in the profits, the proposed plan for repayment, and any security or guarantee that you are providing for the loan.

Advance Payment

In some cases, you may be able to get your clients to pay in advance. For example, if you custom manufacture orders for clients, you may be able to ask for a deposit before production begins. If your business provides a service on a regular basis to a steady client, you might be able to get that client to pay a retainer for your services.

Factoring

If you have an immediate need for cash and have uncollected accounts receivable, factoring may be an option for your business. This involves selling your accounts receivable to another business for a percentage of their value (often around 90 percent). The business that purchased your accounts receivable is then responsible for collecting the money from your customers and accepts the risk of non-payment.

Find Private Sector Financing

There are a wide variety of different private sector organizations that may provide financing to meet your needs.

• Sources of Private Sector Financing
  Find out about the debt and equity financing available from the private sector for your business needs.