Five sources of financing every small business needs to know

Small businesses with lots of potential but a short track record need to be creative about raising funds

Cases of beer made by Collective Arts Brewing

(Matt Barnes)

The fellas at Collective Arts had a bold vision, a formidable following and a tasty beer. But when it came to raising money, particularly from the big banks, their story meant nothing. A small business with no revenue, no track record and no sales screams high-risk. Luckily, there are other pockets to pick to help your small business get the financing it needs to grow and thrive.

1. Friends and family

Contacting your closest connections is a crucial investment move for small businesses. While friends and family tend to be one-off investors, they pour $8 billion a year into Canadian businesses, according to Allan Riding, a Deloitte professor at the University of Ottawa’s Telfer School of Management who specializes in the management of growth enterprises. In his study on informal finances, he found that there is three times more “love money” than capital from angel investors being invested annually, most of it going into the manufacturing and retail sectors. “It can be intimidating to ask friends and family for money because you’re asking them to take a leap of faith,” says Mark Evans, principal of ME Consulting. “But if you can show them your business plan and you’re clear about the risks, there’s nothing wrong with asking.”

The cleanest way to go about it is to ask for a loan with a promissory note stating repayment terms. Or give a slice of ownership and offer straight-up equity. Starting in May, Ontario startups can sell equity to family and friends (this option is already available in other Canadian provinces), but both parties are required to sign a risk-acknowledgment form. Things can get tricky, since startup valuations are hard to determine, plus friends and family aren’t typically experienced business investors. Evans recommends getting a lawyer to create an equity structure.

Regardless of your approach, pals offer a big payoff, because they also build traction you can use later to get further funding. “No one wants to be the first to buy into a product, but if you can validate what you’re doing, then you’ve demonstrated to the market that you have something unique,” says Evans.

2. Government Funding

The first half of 2014 saw $5.86 billion of government funding injected into Canadian businesses, and yet this pocket is often overlooked. “Government funding is like the low-hanging fruit,” says Sahar Ansary, lead funding consultant at Fundica. “Small businesses find it mysterious, because they don’t know where to look or if they’re even eligible.” That’s why Fundica was created: to provide entrepreneurs with a free online search tool that uses intelligent filtering to match a company’s profile and funding needs with a host of available government programs. According to Ansary, hiring and innovation projects typically have more access to government funding.

3. Bootstrapping

It’s the least sexy approach of the bunch, and it barely gets any spotlight. Bootstrapping is do-it-yourself financing that requires rigorous budgeting and operating on minimal costs before taking any outside capital. Mark Graham, the founder of Rightsleeve, a Toronto-based promotional products company that makes custom-branded swag like Red Bull toques and Koodo action figures, started his business in 1997 with $3,000, a home office and zero employees. He stayed on top of his cash flow by collecting receivables and charging clients up front. As a products-based business, he made sure not to sit on inventory. It wasn’t until a year later, when he started making revenues of $100,000, that he spent money on basics like a website and office space. Since then, he’s bootstrapped his business to sales of $5 million without ever shaking hands with a venture capitalist. “This way, we get to grow organically and never have to give up any equity or worry about too much debt,” says Graham.

4. Credit Unions

Banks deal with cold, hard numbers, which is why so many entrepreneurs get the cold shoulder. “Banks don’t invest in ideas. They want a product and a business,” says Evans. Alternatively, look to credit unions, which actually outperformed all the banks when it came to meeting the financing needs of small- and mid-size businesses. 

5. Angel Investors and Venture Capitalists

Somewhere in the world, there is a high-net-worth individual who wants to give you money, even if you don’t have any yourself. These are the angel investors and venture capitalists who invest anywhere from $10,000 up to $20 million in ideas. There are also angel groups that help facilitate co-investments with multiple angels, or arrange syndicated investments with other angels and venture capital providers. 

“With angel investors and venture capitalists, they generally accept that some investments are not going to do well, but they also know the ones that do very, very well will more than compensate,” says Janet Bannister, partner of Real Ventures, a Montreal-based venture fund that invests in early-stage businesses. Her company finances startups that have barely launched, including (in a meta fashion) FundThrough, a Toronto-based marketplace that connects small businesses with lenders. Online platforms AngelList, FundersClub and Gust connect entrepreneurs with accredited active angels and VCs by market and region, while search engines like Fundica and The Funding Portal can help owners find more private backers.