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The first step in finding small business financing is knowing what kind of financing you need. Are you looking for debt financing (money you borrow to run your business) or equity financing (money acquired from investors and/or savings)?
When it comes to debt financing, most Canadian small businesses turn to our traditional financial institutions, such as banks and credit unions, to find small business financing.
Some take out short-term business loans, which need to be repaid (with interest) within a set period such as 180 days. These are sometimes called demand loans, because they can be called in by the lender (the bank) at any time.
Longer term business loans are also frequently used as small business financing. Term loans are usually used to finance particular assets, such as building renovations or capital equipment.
Other businesses depend on lines of credit for their small business financing.
Through agreement with the financial institution, your business has a set amount of credit that you can draw upon. While a line of credit gives you the flexibility to pay day-to-day expenses or meet cash flow crises, whatever amount of money you use has to be paid back, and you pay interest on the outstanding balance.
Many financial institutions now offer credit cards especially designed for small businesses - and credit cards are a popular way for small businesses to finance startup and operating expenses. In fact, according to a 1998 study of small- and medium-sized enterprises by Thompson Lightstone and Company, 41 percent used personal credit cards as their main source of small business financing!
However, credit cards are some of the most expensive small business financing available, in terms of their interest rates. They're best used as a convenience for day to day expenses, if you pay off the balance in its entirety each month.
Traditional sources of small business financing are not available to all small businesses. Start up businesses may have an especially difficult time meeting bank requirements for debt financing. Let's look at the different types of equity financing that a business might pursue. Continue on to the next page to read about sources of equity financing.
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