Finding Financing

Getting financing

You’ve now estimated how much it will cost to set up the business. It’s now time to get the start-up capital. You have a number of options:

Your own money

  • Many people get the start up money they need by mortgaging or re-mortgaging their homes, or selling property or possessions
  • Banks and other lenders rightfully expect you to make a personal financial commitment – this is called putting “skin in the game”.

Family and friends

  • If you’re fortunate enough to have them believe in your ability to succeed, family and friends may be willing to provide a business start up loan
  • Never, ever approach friends and family unless you have a detailed business plan that will demonstrate why your business will succeed.
  • If you cannot factually demonstrate how your business will succeed, and how you’ll repay them, you are just throwing their money away
  • We’ve seen this scenario play out, which results in broken friendships and strained family relationships

Canada Small Business Loan Program

  • Administered by Industry Canada. Although you borrow the money from a bank, the Canadian government basically guarantees that the bank will be repaid in the event your business fails
  • Provides up to $500,000 of financing
  • You must be carrying on business for profit with gross annual revenues of $5 million or less
  • Loan proceeds can only be used to purchase business equipment, leasehold improvements to leased premises, or to purchase land for business operations
  • You cannot use the proceeds to finance working capital, like inventory or accounts receivable
  • You apply by completing a loan application at your bank. If the bank decides to grant you a loan, they register it with Industry Canada
  • If you give a personal guarantee, you’re only personally liable for 25 percent of the initial amount borrowed. This is a big advantage over conventional loans, which usually require you to personally guarantee 100 percent of the loan borrowed by your business

Canadian Youth Business Foundation

  • This is a national charity that provides young entrepreneurs (18 to 34 years) of up to $15,000 in start up capital
  • There is a mandatory 2-year mentoring program where you are matched up with an experienced businessperson to allow knowledge sharing and a higher business success rate

Business Development Bank of Canada (BDC)

  • BDC is a Crown corporation owned by the Government of Canada
  • Its goal is to support small businesses in Canada, by providing consulting and financing services
  • Its “Co-Vision” loan program can provide up to $100,000 in financing, which can be repaid over 6 years. If needed, borrowers can postpone principal payments for 12 months
  • The program targets businesses in manufacturing, distribution, services and tourism
  • Loan proceeds can be used to finance working capital, fixed assets, marketing and start-up costs as will as purchasing an existing business or a franchise
  • Must be able to demonstrate realistic market and sales potential
  • Must also be able to demonstrate relevant experience and knowledge about your industry
  • Must be able to give personal and financial references

WHAT IS THE BEST LEGAL STRUCTURE?

Most people start their businesses on a small scale and operate initially as sole proprietorships. You only need to register your business name through Service Ontario, either at one of their kiosks or online. As of this writing, the registration fee is $60.00.

However, if you expect your business to regularly incur debt as part of its operations (e.g., purchase of inventory on credit terms, leasing of equipment) or your industry is known to be highly litigious (i.e., there may be a good chance you can be sued someday), then we advise you to incorporate from the outset.

So what is a corporation anyway? A corporation is a legal person, just like you. It can purchase assets, incur debt, file lawsuits or be sued just like a “natural” person. It has many of the same rights as a natural person. Corporations exist as virtual or fictitious persons, granting limited protection to the actual people involved in the business of the corporation. This limited liability is the major advantage of incorporating your business.

So why is the protection “limited” and not “absolute”? Because a director of a corporation (who is usually also the shareholder who owns the company) has personal exposure to certain statutory business debts, such as:

  • GST collected by your business but not remitted to Canada Revenue Agency
  • Payroll taxes deducted from your employees’ wages, but not remitted to Canada Revenue Agency
  • Employer premiums for EI and CPP
  • Up to 6 months unpaid wages and vacation pay of your employees
  • Retail Sales Tax collected by your business but not remitted to the Ontario Ministry of Finance