You awoke in the night with a brilliant idea for the greatest small business the world has ever seen.
We can’t wait to see what you have in store! But first, to get your business up and running, you’re going to need some initial funding. Between startup costs, marketing, web design, inventory, lawyers, insurance, and other costs, funding can make a big impact on how you start your business.
The idea of finding the money to fund a business can be a little overwhelming. Cash doesn’t grow on trees, after all (if you find that tree, give us a call!). But don’t give up on your genius idea just yet. There are a few common ways to fund your business, and plenty of resources to take advantage of.
How to Prepare for Funding
There are multiple ways of raising money to bring your business idea to life. At their core, financing options all come down to this: You can either use your own money or ask someone else for it. Depending on which route you take, there are a few steps you should work through before hitting the pavement.
1. Write up your business plan
You’re going to need a solid business plan to win investors over and show that you have a clear idea for a great business and cash flow.
Once investors see that you know what you’re talking about, their trust in your idea increases. Your business plan should have details about marketing, finances, team members, and product development.
Here are a few things you should include in your business plan:
- Executive summary: a few paragraphs providing an overview of your business
- Mission statement: a brief overview of your company’s goals and what you aim to accomplish
- Market research: includes an overview of your audience, where you plan to operate, and the size of your potential customer base
- Competitor analysis: an overview of existing companies that you plan to compete against, along with a SWOT analysis about how you can compete
- Sales and marketing strategies: how you plan to build brand awareness and your sales strategy for hitting your goals
- Financial projections: includes financial statements, balance sheets, and sales forecasts
- Team overview: an overview of your existing team and the roles you eventually plan to hire. This could be just yourself or a small number of individuals as you’re starting out.
2. Understand your financial needs
Before asking for funding, you need a clear picture of your financial needs. Take the time to calculate your expected overhead and potential costs. The minimum amount of money you need to start your business depends on your industry, working capital, taxes, and where you operate. If you don’t know what your business’s startup costs are, we recommend working with accountants or CPAs who can help you put a budget together.
When building your financial projections, here are a few basic things to look for:
- Sales forecasts: Include projections for your first year of sales.
- Expense budgets: Determine how much you’ll likely spend on expenses like mileage, food, office supplies, and software to meet your business goals.
- Fixed costs: The costs for office space, labour, software, insurance, and marketing can add up over time. Calculate your fixed costs to see where you’ll need funding to start your business.
- One-time costs: Starting a business can be costly. By including one-time costs, you can accurately determine how much money you’ll need to get your business off the ground.
Entrepreneurs commonly ask for about a year of funding. As a rule of thumb, it’s advisable not to ask for funding for more than a year and a half. This amount of time should be enough for your business to stabilize and become financially independent. It also shows investors that you are confident about your business’s growth and increases your chances of securing funds.
3. Rehearse your pitch
Once you have your business plan in order, it’s time to prepare the pitch you’ll use to convince investors to fund your business. In general, you want your pitch to be around 45–60 seconds long—about the length of an elevator ride between floors (hence the term “elevator pitch”).
It’s not enough to rehearse your pitch mentally. It may feel silly at first, but practice in front of a mirror and see if your facial expressions and delivery tie in with the pitch’s tone.
You can always rely on friends, family, and mentors to get feedback on where your pitch could improve. Once you’ve practiced the pitch a few times, record yourself. You don’t have to post it on social media, but you can use the recording to see where there are opportunities to improve.
Funding Method 1: Take a DIY Approach to Funding
If you want to start your own business, there are many ways to secure funding. One of them is “Do it Yourself” (DIY) funding. Here are a few examples of how you can self-finance your startup.
Use your own money
Not all business owners can afford to start a business with their hard-earned money. If you’re one of the lucky 39% of individuals who use their own cash to fund their business, then you’re good to go. Most people in this demographic typically use their savings or retirement accounts to fund their new businesses.
If you have some savings that you can spend on your business’s startup costs, you can tap into that. However, we advise against spending all your savings on starting your business. You’ll want to keep a good portion of your savings for life’s other big moments. Work with your CPA to determine how much of your money is safe to invest in the business and make up for any differences with other funding sources.
0% APR business credit cards
If taking that second mortgage is too risky or you don’t want the hassle of contacting investors, 0% annual percentage rate (APR) business credit cards might be for you.
These types of cards offer easy credit to cover startup costs. The BMO CashBack Business MasterCard is a great example. These business credit cards also help you separate your business and personal finances for easy bookkeeping (and we love it when things are easy!). If you want to explore your options, there are dozens of credit cards available for businesses that can meet your specific needs.
To apply for business credit cards, you’ll need to ensure your business is registered with the CRA (Canada Revenue Agency) and local government agencies. Once you have your business fully set up, you can start applying.
A lot of startup businesses have successfully raised money for their foray into entrepreneurship via crowdfunding. Simply put, crowdfunding is a virtual way to get money from individuals who believe in your product. You put your business plan on a crowdfunding platform like Kickstarter, GoFundMe, or Indiegogo, and people can donate whatever amount they want to your new business.
Incentives for investors usually include early access to your product and special one-time bonuses to thank them for investing.
Crowdfunding sites work best for businesses selling unique and innovative products. By fundraising online, you have plenty of ways to display why your products are amazing and why people should invest. You can reach millions of potential investors who can crowdfund your business.
Turn your friends and family into investors
Your friends and family are generally your first cheerleaders when you start a new business. These people are likely willing to support your small business financially as well. But there are pros and cons to asking the people close to you for money, and things can get bitter if you don’t have a plan. Your business idea may be genius, but is it worth an awkward Thanksgiving?
On the upside, you might be able to persuade friends and family to be flexible with loan repayment terms (just make sure you follow through on your part of the deal). If they believe in your business, convincing them won’t be hard.
Funding Method 2: Apply for Small Business Loans
While there are numerous new ways to raise capital for your startup business, most small businesses still go for traditional ways to secure funding. Applying for small business loans or bank loans is a popular option. Here’s how to go about it:
Check your credit score
When you apply for a small business loan, lenders might check your personal credit history in addition to that of your business. It’s advisable to check your credit rating before applying for a loan. Make sure that you’re applying with a good credit score because it makes a good impression on lenders. If you see any errors in your credit report, contact the relevant agency and get your credit report fixed ahead of time.
Remember, a good credit score shows that you’re responsible with money. This increases your lender’s trust in you, which positively impacts your chances of securing a loan. Free tools like Credit Karma make it easy to check your score at any time and receive personalized loan and credit card offers.
Show personal investment
When applying for a business loan, you need to convince your lenders that you are 100% dedicated to the project so their loans won’t be a waste. Be sure to include details about your investment and business assets to build a stronger case.
Attach a personal financial statement with the application that highlights your net worth from your assets and liabilities. This helps lenders devise their loan payment plan and set collateral for the agreement.
Present your business plan
A business plan is a detailed summary of your business structure, and it’s one of the most important parts of starting a new company.
When applying for a loan, you should include your financial projections and estimated expenses in your business plan. Your plan should also list your business’s operations and execution finances so that lenders have a clear idea of your business’s structure. This will also make a few things clear to you and your lender, like how much money you need, how fast you can repay the loan, or your projected sales.
Funding Method 3: Small Business Programs
Entrepreneurs can get a lot of support from other corporations and government programs. These types of funding opportunities can offer fantastic interest rates. Some aren’t loans at all—they’re grants that won’t require you to pay back any money. Pretty sweet deal, right?
Government programs and grants
You’d be surprised how many government programs are available for entrepreneurs. In Canada, the Canada Small Business Financing Program is the leading government agency for small business loans. They can provide loans of up to $1million for small businesses. This can vary depending on where you are, who you are, and what type of business you run. Through the CSBFP, businesses can get loans at great interest rates with generous payback periods. However, they do have strict requirements for qualification.
There are tons of opportunities like this, so we created a separate, in-depth guide to small business grants and resources.
Corporate programs and sponsorships
If government funding programs don’t work for you, you can turn towards private investors for financial assistance. Many Fortune 500 companies also offer grant programs. For example, the FedEx Small Business Grant gives out $200,000 in grants every year.
Alternatively, you could opt for a business incubator program like Y Combinator or Techstars. These companies offer mentorship and expertise to help you take your business to the next level. Keep in mind that incubator programs vary dramatically in what they’re looking for.
Companies like Y Combinator are looking for startups that aim to be publicly-traded corporations one day. Regional incubators focus more on businesses that can serve their local communities.
Funding Method 4: Options for High-Growth Companies
Dozens of high-growth tech companies like Uber, Facebook, or Airbnb raised billions in funding and eventually became some of the world’s most valuable companies. If you’re aiming to end up on the Toronto Stock Exchange one day, a small loan from your friends and family may not cover your aspirational goals.
For businesses looking to go from small business to the “next big thing,” there are several unique funding opportunities available.
Angel investors are individuals who invest between $5,000–$25,000 per investment. Many angel investors have previously worked at companies that grew rapidly so they know how to grow businesses. They also know whether or not your business is worth the dough. Working with angels can often give your business the jumpstart it needs to hit big growth milestones.
Angel investment stands out from other funding options because an angel investor is always looking to invest in the next big thing. Successful companies that started on an angel investment include Yahoo, Google, and DoorDash.
This is a two-way street, however. You give an angel investor equity in your company by accepting their investment. But if you’re serious about becoming publicly traded or think you may one day be acquired by another company, angel investors can give you the capital and network you need to achieve high-growth targets.
Like angel investors, venture capitalists look to invest in up-and-coming businesses that have the potential to be big. A venture capital (VC) firm typically seeks equity in your company in return for a large investment. VC firms will often demand to have a say in the direction your company is headed as they seek some control in your business.
When it comes to pitching to a VC firm, remember that they’re interested in metrics like revenue and user growth. You have to prove to them that your growth is sustainable and that you need the funding to scale your business to incredible heights.
Venture capitalists typically invest an amount north of $100,000, so they expect millions in profit from your company. The typical order in which entrepreneurs usually ask for investment is 1) friends and family, 2) angel investors, and 3) venture capitalists. If staying small and local is your style, VC funding may not be a good fit.
Ready, Set, Goals!
Finances can be a pressing source of concern for any new business. Now that you know a few basic places to look for funding, you can start dreaming up your elevator pitch. Don’t get discouraged if one option doesn’t work out. There are a lot of paths out there for you to explore—maybe even one that we haven’t thought of yet! Now get out there and make your dream into a reality.