Financing a start-up company

The start-up phase is the most difficult part of any business creation project. This fundamental stage requires start-up capital. How can you find the funds you need to launch your business? Here’s a summary of the best solutions for financing a business start-up.

What is start-up financing?

Obtaining financing is a sine qua non for starting up a business, but what does it involve?

Understanding start-up financing

Also known as initial or seed financing, start-up financing refers to the financial resources mobilized to create a business and launch your professional activity.

These financial resources cover the initial costs, i.e. rental of premises, purchase of equipment, running costs, staff salaries, marketing campaigns, etc. It also contributes to the smooth running of the business until the first profit is achieved.

What laws govern start-up financing?

The Business Corporations Act, or BCA, governs the creation, modification and regulation of business corporations in Canada. The federal law dictates share issuance requirements, shareholder protection rules and issuer obligations.

The Securities Act sets out requirements for the offer and sale of securities, and investor protection rules.

The Canada Cooperatives Act (CCA ) sets out requirements for the creation and management of cooperatives, and the issue and sale of cooperative shares.

Foreign project sponsors wishing to invest in Canada are subject to the Investment Canada Act (ICA). It governs the projects of foreign investors in Canadian businesses.

What are the different sources of start-up financing?

Each source of financing has its own characteristics and strengths. Your choice will depend on your needs and the nature of your start-up business.

Socio-financing

Socio-financing is similar to fund-raising. The method boils down to asking a group of individuals for small contributions, in exchange for their participation in the running of thecompany.

The project begins with the launch of a socio-financing campaign. You persuade a handful of individuals who share your objectives, point of view, vision and belief to contribute to the launch of your company.

Socio-financing takes many forms:

• • equity financing: investors receive shares in the company, and are entitled to a share of revenues or profits in exchange for their financial contribution;

• • loan financing: the project owner lends money to investors at a high interest rate;

• • socio-financing through donations or rewards: the company asks for donations in return for a fee or the receipt of a product or service.

You can choose from a range of socio-financing search platforms, such as : La Ruche, GoFundMe..

Angel investors

Angel investors are retired corporate executives and wealthy individuals with a passion for entrepreneurship who wish to invest in SMEs. They have extensive expertise and several years’ experience in the field. They also benefit from an extensive network of contacts.

Angel investors are prepared to invest between $100,000 and thousands of dollars in a start-up project, in exchange for management oversight, a seat on the board of directors , and a guarantee of total transparency in financial, administrative and human resources management.

You have access to platforms that put you in touch with angel investors, such as Anges Québec, Canadian International Angel Investors..

Business incubators

Business incubators focus on start-ups in the high-tech sector, such as biotechnology, information technology and industrial technology.

Incubators offer companies the opportunity to share administrative resources, premises and logistical and technical resources.

As a general rule, a start-up company stays in an incubator for 2 years. Once its products or services have matured, it leaves the incubator to stand on its own two feet.

Government subsidies

The government has everything to gain from the contribution of project owners. That’s why it offers subsidies to entrepreneurs through programs designed to inject funds into companies. Government subsidies cover expenses related to research and development, salary payments, marketing campaigns and equipment acquisition, as well as productivity enhancement.

Payment is subject to certain conditions:

• • provide a detailed work plan outlining the costs involved in setting up the business;

• • deliver a project description;

• • explain the benefits of the project;

• • describe the experience and background of the management..

Each application is assessed according to the innovative nature of the project, the applicant’s needs, approach and know-how.

Grants may also be refused on the grounds of :

• • the company is located in an ineligible region;

• • a lack of precision in the research plan;

• • an unrealistic project;

• • a lack of justification for the request..

You have several choices of government agencies, such as BDC and Futurpreneur, to finance your business start-up.

Financial assistance from private banks

Private banks and credit unions also play their part, offering commercial loans to entrepreneurs. Loan conditions depend on the lending institution. In most cases, lending institutions require you to put up assets as collateral (such as your car or house). The absence of collateral reduces the chances of financing.

In addition to a financial boost, lenders also provide personalized services, flexible repayment terms and a solid business plan..

Love money

Love money is money from people close to you : your partner, a family member or a friend. Your friends and family can become shareholders in your project. In institutional jargon, this investment model is known as patient capital. In other words, the sum lent can be repaid later and progressively as the company generates profits.

Financial experts advise entrepreneurs to draw up a precise shareholders’ or loan agreement to avoid later conflicts. Some lenders may also require a stake in the company. Intensive prior consultation and exchange between the lender and the project owner are essential.

Venture capital

Venture capital comes from investors who wish to invest in high-tech and promising companies in the communications, information technology and biotechnology sectors. Investors ask for a stake in the company in return for financing its development.

Unlike angel investors, venture capitalists are prepared to disburse millions of dollars in exchange for a high return.

Best practices for obtaining financing for a start-up company

Obtaining financing requires know-how. You also need to avoid mistakes that could jeopardize your application.

What you need to do to secure start-up financing

Before applying for financing, knock on the right door. Choose a financing solution based on your needs, the nature of your business and your financial capacity.

Equity capital, i.e. personal funds, money from relatives and government grants, is non-dilutive. In other words, their repayment will not impact your future profits. These solutions are suitable for start-ups.

The resources of financial institutions are essential for companies with a solid foundation, which are already generating sufficient profits to cover their debts.

What’s more, the entrepreneur needs to have good communication skills and be able to convince his banking institution through a solid business plan.

Mistakes to avoid when applying for start-up financing

Entrepreneurs can’t afford to misjudge the return on investment. They need to be sure of the soundness of their idea and the feasibility of their project.

Another common mistake is underestimating the amortization period (the time needed to repay the loan). It’s in the project owner’s interest to anticipate possible delays in business financing, and the complications and unforeseen events along the way that could disrupt repayment.

Conclusion

The launch of a business depends on obtaining the necessary financing. Whether it’s grants, venture capital, socio-financing, business incubators, loans or love money, the stakes are high. Regardless of the financing model you choose, you face a major legal challenge.

Whatever your decision, it’s essential to have a business lawyer on your side to provide strategic advice on start-up financing.