Putting all your eggs in one basket is never a good business strategy. This is especially true when it comes to financing your new business. Not only will diversifying your sources of financing allow your start-up to better weather potential downturns, but it will also improve your chances of getting the appropriate financing to meet your specific needs.
Keep in mind that bankers don’t see themselves as your sole source of funds. And showing that you’ve sought or used various financing alternatives demonstrates to lenders that you’re a proactive entrepreneur.
Whether you opt for a bank loan, an angel investor, a government grant or a business incubator, each of these sources of financing has specific advantages and disadvantages as well as criteria they will use to evaluate your business.
Here’s an overview of seven typical sources of financing for start-ups:
1. Personal investment
When starting a business, your first investor should be yourself—either with your own cash or with collateral on your assets. This proves to investors and bankers that you have a long-term commitment to your project and that you are ready to take risks.
2. Love money
This is money loaned by a spouse, parents, family or friends. Investors and bankers considers this as “patient capital”, which is money that will be repaid later as your business profits increase.
When borrowing love money, you should be aware that:
- Family and friends rarely have much capital
- They may want to have equity in your business
- A business relationship with family or friends should never be taken lightly
3. Venture capital
The first thing to keep in mind is that venture capital is not necessarily for all entrepreneurs. Right from the start, you should be aware that venture capitalists are looking for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications and biotechnology.
Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business.
BDC has a venture capital team that supports leading-edge companies strategically positioned in a promising market. Like most other venture capital companies, it gets involved in start-ups with high-growth potential, preferring to focus on major interventions when a company needs a large amount of financing to get established in its market.
Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge. Angels tend to finance the early stages of the business with investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer larger investments, in the order of $1,000,000.
In exchange for risking their money, they reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.
Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels. The National Angel Capital Organization (NACO) is an umbrella organization that helps build capacity for Canadian angel investors. You can check out their member’s directory for ideas about who to contact in your region.