Startup business owners and entrepreneurs know the challenging of raising financing in Canada. While many firms are successful in some forms of business financing the reality is that many are unable to obtain the financing they need – we would qualify that comment by saying that are often unable to obtain ‘ all ‘ the financing they need .
Studies done in the U.S. ( Mason Harrison study ) seem to suggest that companies that obtain initial and long term equity from owners and others seem to do better than those that borrowed their way to growth . We will leave that debate for another day.
Start up business financing in Canada revolves around two issues – how much and when. How much funds does the company need at what stage in their growth do they need it. As firms become more successful they can move up the financing food chain because they are viewed as ‘less risky ‘than companies that are in start up or pre revenue mode.
There is an acknowledged pecking order in who provides financing to start ups. That order is as follows:
Friends /Family/Angel investors
Non bank financial institutions
We would also observe that companies tend to move through that process in the exact order as stated above. Obviously not every firm wishes to do a public offering, and in fact many firms never reach the size or financial structure that would allow such a move to a public entity.
Let’s recap a bit of info on the financing participants we have outlined above.
Owners virtually have to have some of their own money invested in their start up business. Financing the entire business on OPM (Other Peoples Money) is highly frowned upon by all outside lenders investors. The key questions often simply become how much is required by the owner, and does he or she have that equity commitment. The more the business owner puts in allows him to borrow less or to give up less ownership.
Angel investors and friends and family utilize their own funds and experience to assist the start up firm. Their role can be passive, or active. (Hopefully that issue is defined upfront!) Angels and friends and family fit because usually the firm does not need larger amounts of capital in the early stage.
Banks for all the obvious reasons tend to be risk averse and start ups bring risk. Canada addresses that issue by, first of all, having some of the most successful (because they are conservative!) banks in the world, by providing loans that are federally guaranteed under the governments Small Business Loan program. Since most start up firms don’t have the proper cash flow, equity and assets the banks focuses on the personal credit and guarantees of the entrepreneur. In the current somewhat recessionary and illiquid financial markets of 2010 this situation is as acute as every – small business owners have a challenge in getting business loans.
Non Bank Financial corporations play a huge role in the Canadian start up business financing environment. They include leasing firms, factoring firms, and asset based lenders. They are an absolute vita piece of the start up financing puzzle, many business owners are not fully aware of the financing potential of these entities.
In summary, business financing in Canada is currently a challenge, for a smaller firm or a start up the challenge is even more acute. Business owners should ensure they are aware of all financing options, as no one option is going to singularly take the company to the next level of success and growth.