Are you facing a lack of liquidity to start your business? Do you have limited knowledge of financing? This guide might help you make sense of it.
Getting off to a good start
The first thing to do is to identify your needs. To do this, you should ask yourself four questions:
- Why? What will the funds be used for?
- How much? What is the estimated cost to complete your project?
- Who? Which financial players can meet your needs and expectations?
- When? When will you need cash flow?
Once your needs are well defined and you feel ready to take action, you’ll need to put together a complete file with all the information required to prepare your financing application. It should include your business model, business plan and financial forecasts. Not only will this allow you to create an accurate picture of your business, but you’ll also be able to showcase it to potential investors. When properly done, a business plan shows how committed you are to your project and could open some doors for you.
What’s next?
Outline your financing strategy and look into the various options available to find what best suits your needs.
When you’re in the early stages, you might consider:
Down payment
A down payment is the money you already have. It’s your personal investment. If there are several shareholders, the down payment amount will be higher. Although a down payment is desirable, it’s possible to do without one, particularly when the startup requires little or no capital.
Always cover your bases
A shareholder agreement explicitly lays out the terms that bind you to the other founders. To create one, you should use a lawyer or notary specializing in commercial law. This agreement can help you:
- Protect and manage the concerns of the various stakeholders
- Maintain harmony by avoiding or limiting potential sources of conflict
- Anticipate or set guidelines for different scenarios that may arise (for example, withdrawal or death of a shareholder, buyout of the company)
Did you know?
When a business relies on the expertise or knowledge of an expert, it could be considered a contribution to the business. You should consult a legal advisor to determine whether the contribution is eligible.
Love money (founder capital)
If you’re asking your family or close friends for help to raise money, whether formally or informally, it’s called love money. If they agree to help out financially, it’s important to set out the terms of the agreement in detail. Is it a gift or a loan? Will they have a say in how the business is managed? Make sure all stakeholders have the same understanding of the situation. Create an agreement and consult a legal advisor to reduce the risk of conflict. Issues can always arise, whether your business ends up successful or not. It’s best to be prepared for anything.
Crowdfunding
With a crowdfunding campaign, you can raise money online from your family, friends and, more broadly, the community. Crowdfunding can come in three forms:
- Donations
Donors contribute to a project without expecting anything in return.
- Preorders
Supporters pay for a particular product or offer that they expect to receive in the future.
Capital
Supporters receive bonds or shares based on their contributions.
A successful crowdfunding campaign not only raises funds, but also increases awareness of your project. It’s a great way to mobilize the community and test the market. But before you get started, you have to take the time to choose the right platform and properly plan your campaign.In this case, the donors are allocated securities such as bonds or shares, based on their contribution.
Desjardins is a proud partner of La Ruche, a crowdfunding platform.
Once your planning phase is over and you’re into the pre-market phase, there are more options available to you.
Grants and competitions
If you’re looking for a grant or a way to raise awareness about your company, competitions can be a great way to do it. Foundations, private companies, educational institutions and even governments issue calls for nominations that could net you a grant to finance or carry out a project. Ideally, your project should stand out on its own, but your presentation of it is just as important.
One competition of note is the Défi OSEntreprendre (link in French only) which showcases thousands of entrepreneurial initiatives every year..
Innovation challenges
Spearheaded by Desjardins, Cooperathon is Canada’s largest open innovation contest. Cooperathon brings together citizens, communities, entrepreneurs, researchers and academic and institutional groups to build a socially responsible future, together.
- The Impact Canada initiative, in collaboration with federal departments, stimulates innovation through challenges launched online. Innovative minds work together to develop solutions to a given economic, environmental or social issue. The selected project may receive several consecutive cash prizes to accelerate the development of the proposed solution
When you’re in the marketing phase and start getting your first repeat sales, you can look to the following types of support:
Accelerators
Designed for startups with strong growth potential, accelerators with an investment fund are a good way to meet a major capital need by launching an initial round of financing with investors.
Learn more about accelerators here.
Grants
Business grants are offered by all levels of government, and they shouldn’t be overlooked. The Réseau accès PME (link in French only), a support service provided by municipalities in Quebec, and the Business Benefits Finder, offered by the Government of Canada, are two useful resources you can use to find them.
Since there are plenty of options, it’s important to make sure you meet all the eligibility criteria for each one before applying. This will help you avoid unnecessary disappointment and focus your energy where it matters.
Hot tip You’ll need to make sure that your accounting is all in order.
If your company is involved in technological innovation, you may be eligible for scientific research and experimental development tax credits through the Canada Revenue Agency. Learn more.
The Créavenir Youth Entrepreneurship Program
In collaboration with its partners, Desjardins is proud to offer the Créavenir Youth Entrepreneurship Program to entrepreneurs ages 18 to 39 who have a viable startup project or business that is less than 3 years old.
Learn more about the eligibility requirements.
Once you’re in the growth phase and your business model has been put to work, you can move on to other types of financing:
Angel investors
Angel investors are generally business owners who have acquired experience and knowledge and have built up a network in their industry. They can play an important role in the growth of your business, because they have a lot of capital to invest and because their involvement isn’t limited to financing. This financial support is also important for potential financial institutions.
Since they want a return on their investment, they might mentor you or introduce you to their network. If you prefer to go solo, you should avoid this option. It’s also important to know that, in the form of preferred shares or convertible debt, this type of investment dilutes shareholder equity to offset the risk taken by angel investors.
Venture capital
When an innovative company has strong growth potential and a significant capital need, it can turn to venture capital funds. A venture capital fund can provide additional resources that aren't limited to financial contributions and may also include access to a network of contacts and shared expertise. Venture capital provides startups with the funds they need to support accelerated growth. It can bean excellent pathway to rapid expansion.
Bank loans
Financial institutions offer various types of loans to meet different needs. For example, a term loan can let you purchase equipment that you’ll pay back according to a structured plan: a fixed monthly amount, over a defined period of time, based on a given interest rate.
A line of credit is more flexible and help you meet variable needs, such as working capital. This means making the minimum monthly payment or, to avoid interest, paying the entire balance each month. In any case, since a bank loan comes with personal guarantees, a repayment deadline and an interest rate, it’s important to have support from your financial institution to fully understand the terms and conditions.
Term loans
Before granting you a loan, a financial institution will review your file to ensure you meet three essential ratios, by having:
- Recurring or predictable revenue streams
- Value in your business (equity)
- Working capital (your assets are greater than your liabilities in the short term)
Given that profit is essential to achieving these ratios, you need to surround yourself with the right people and develop a strong sales force. If your profit margin is low, a high sales volume will have to offset it.
Desjardins Microcredit
In addition to traditional financing products, Desjardins has partnered with a microcredit organization to offer assistance through the Desjardins Microcredit to Businesses program. Members are granted a loan of up to $20,000 that is tailored to their specific needs. It includes hands-on support for starting, expanding or strengthening their business.
Since there are many types of financing, you need to understand the nature of each one so you can choose what’s right for you, at the right time, based on your project and its progress.
If needed, an advisor could help you see things more clearly. However, please ensure you have a detailed file to work with.