Sources of Funds For Entrepreneurs

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Here's an overview of typical financing sources:

1. Personal investment
When borrowing, you invest some of your own money—either in the form of cash or
collateral on your assets. This proves to your banker that you have a long-
term commitment to your project.

2. Love money
This is money loaned by a spouse, parents, family or friends. A banker 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—be sure you don’t give this
away
 a business relationship with family or friends should never be taken lightly

3. Venture capital
The first thing to keep in mind is that this funding source is not necessarily for all
entrepreneurs. Right from the start, you should be aware that venture capitalists are
looking for technology-drivenbusinesses 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.
4. Angels
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 million.

In return 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, the Canadian International Angel Investors and Anges Québec can put
entrepreneurs in touch with angels.

Learn more about finding angel investors for your business.

5. Crowdfunding
Crowdfunding is a form of fundraising where a business asks the public for a
contribution, usually in exchange for equity in the company.

It usually entails a private company asking large numbers of people for small
contributions. This differs from the more conventional practice of raising money
through angel investors or venture capitalists, where a handful of actors inject larger
sums into your business.

In return for investing in your business, supporters will receive equity, albeit with less
liquidity than what do would get with public stocks. There are also more relaxed rules
governing crowdfunding than IPOs.

There are various forms of crowdfunding, including:

 Equity crowdfunding, where, in exchange for their money, investors receive


shares in a company or the right to a portion of revenues or profits from a specific
product.
 Debt crowdfunding, where investors lend their money to a company at
relatively high interest rates, thus mitigating their overall lending risk by spreading a
large amount of money in small increments across a large number of loans.
 Donation/rewards-based crowdfunding,where a company sets a fundraising
target and asks for donations—in exchange for some kind of token or receipt of the
eventual product or service to be developed.

6. Business Incubators
Business incubators (or "accelerators") generally focus on the high-tech sector by
providing support for new businesses in various stages of development. However,
there are also local economic development incubators, which are focused on areas
such as job creation, revitalization and hosting and sharing services.

Commonly, incubators will invite future businesses and other fledgling companies to
share their premises, as well as their administrative, logistical, and technical
resources. For example, an incubator might share the use of its laboratories so that a
new business can develop and test its products more cheaply before beginning
production.

Generally, the incubation phase can last up to two years. Once the product is ready,
the business usually leaves the incubator’s premises to enter its industrial production
phase and is on its own.

Businesses that receive this kind of support often operate within state-of-the-


art sectors such as biotechnology, information technology, multimedia, or industrial
technology. Businesses that were supported by an incubator have a better success rate
over five years.

7. Grants and subsidies


It’s not always easy to bring innovations to light so government agencies provide aid
to Canadian companies. You may have access to this funding to help cover expenses,
such as research and development, marketing, salaries, equipment and productivity
improvement.

Technically, a grant is a sum of money conditionally given to your business that you
don’t have to repay. However, you’re bound legally to use it under the terms of the
grant, or otherwise you may be asked to repay it. As well, once you are granted
money from one government source, it is not uncommon to receive further funding
from the source if you meet program requirements.
Criteria

Getting grants can be tough. There may be strong competition and the criteria for
awards are often stringent. Generally, most grants require you to match the funds you
are being rewarded and this amount varies greatly, depending on the granter. For
example, a research grant may require you to find only 40% of the total cost.

Generally, you will need to provide:

 a detailed project description, including location


 an explanation of the benefits of your project
 a detailed work plan with full costs
 details of relevant experience and background on key managers
 completed application forms when appropriate

Most reviewers will assess your proposal based on the following criteria:

 Significance
 Approach
 Innovation
 Assessment of expertise
 Need for the grant

Some of the problem areas where candidates fail to get grants include:

 The research/work is not relevant.


 Ineligible geographic location.
 Applicants fail to communicate how their ideas will be addressed.
 The proposal makes without a strong rationale.
 The research plan is unfocused.
 There is an unrealistic amount of work.
 Funds are not matched.

The Government of Canada’s Business Benefits Finderprovides sources of financing,


including government grants and subsidies.

8. Loans
Loans are the most commonly used source of funding for small and medium sized
businesses. Consider the fact that all lenders offer different advantages, whether it’s
personalized service or customized repayment. It's a good idea to shop around and
find the lender that meets your specific needs.
In general, start-ups have a harder time accessing loans than do established
businesses. Entrepreneurs with a solid business plan and a good credit rating are more
likely to be able to access loans.

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