Financing Your Business

Published: Sep 7, 2010
Last Updated: Jun 8, 2017

What good is a million dollar idea without a few thousand dollars of working capital? Finding a source of financing for your new small business shouldn't be such a challenge, but for many potential entrepreneurs, the difficulty of obtaining the financial support to transform dreams into realities can be a source of frustration and angst.

With proper planning, however, and a few resources to guide you on your way, identifying and securing the financing to start your business becomes a much smoother and gentler process. Here's a brief step-by-step introduction to financing your business, starting with a few basic questions to ask yourself:

  • How much will I need? Try to predict all possible expenses that your business will incur during its initial start-up stage. Consider how much you can personally inject into your business (cash savings, investments, gifts, other employment income), then subtract that amount from your initial projection. This should give you an idea of how much you will need to finance from external sources.
  • How much am I likely to receive? While it's always good to dream large, if your financing needs are not realistic and feasible you may end up receiving less than anticipated. Consider your personal financial situation before applying for financing. Have you managed your personal credit history well? Does your current personal debt overshadow your personal assets (not sure how to calculate your net worth)? And how about your business plan. If your plan only demonstrates a need for $40,000, you will have a hard time securing financing for $60,000. It is also important to consider whether you or your business qualify under any special financing programs.
  • Where should I apply? Consider the financial institution where you conduct your personal banking. Do you want to build on that existing relationship, or start a new one elsewhere? Many business owners prefer to deal with their existing institution based on positive relationships and past service. Others prefer to keep their business and personal banking distinctly separate. There is no right or wrong decision here, and often times (depending on the geographic location of your operations) the convenient options may be limited to one or two financial institutions. 'Bundling' your personal and business banking with one institution often carries other benefits, such as improved lending and investment rates and having to remember fewer online banking passwords!
  • When should I apply? Although you might not be formally 'applying' for a loan until your business is at the stage where the $$$ is required, it's always a good idea to approach your personal banking officer with your business plans and requirements as early as possible. Aside from providing financial advise on bank specific products, they might recommend or refer you to a small-business banking specialist if appropriate for your needs. Applying for a business loan (regardless of the institution or type of loan) always takes some time - it's a lengthier process than you might expect, often taking days/weeks/months depending on the complexity of your needs or the situation. 
    According to the Canadian Federation of Independent Business, aprox. 1 in 5 (19.3%) of all business loan applications were declined in Canada during 2009.  Or, looking at it the other way,  80.7% were approved.
    Source: CFIB, 2010.

Which leads to the next important question: Will my application be approved?

This can be a gray area at the best of times. Here are a few simple tips to consider, and possible obstacles to plan for:

  • Documentation is the key! If you have registered your business in British Columbia as a sole proprietorship, you will be required to present your approved registration documentation. If you have already incorporated (not sure how?), a copy of your certificate of incorporation as well as your complete articles of incorporation are the first documents needed to start the process (as they verify the existence of your business). Next, be prepared to present detailed personal financial information about yourself, and or any business partners or co-owners involved in the loan application. This might include (but is certainly not limited to) bank statements for all of your accounts, tax documents such as past T4s and NOAs (notice of assessment) for the past 3 years, property assessments to verify your personal assets, and other miscellaneous documents as requested by your lender.
  • Your business plan. A well written business plan is a critical difference-maker in securing approval for new business financing. Don't have a business plan, or not sure if your plan needs to be improved? There are many places to get advise on crafting an effective business plan, here's a good place to start
  • Present yourself and your business in a professional manner. Although the banking officer who submits your loan application will rarely hold the final decision on whether or not your financing proposal is approved, he/she is an important intermediary. Provide all requested and relevant information that could possibly improve your loan application. An application submitted by a lender who strongly supports you and your business plan has a much greater chance for approval than one without.
  • Time permitting, establish a credit history for your business (if incorporated). Obtaining a business expense Visa/Mastercard (with a low limit) before your business even opens its doors (as long as incorporation documentation has been obtained)  is often possible - just ask. A few months of positive credit history for your business can help.
  • Know your options! Although you prefer to deal with a particular institution, it's a good idea to plan for a backup. All banks and credit unions are not created equal, especially when it comes to business lending. Beyond the credit unions and large chartered banks you will also find the Business Development Bank of Canada (BDC), a bank mandated to provide financing and consulting services to small/medium size businesses in Canada. If your business does not fit the lending guidelines of your financial institution, consider BDC as an alternative, as their unique lending requirements (focused more on the viability of the business idea than you the borrower) often provide financing when the banks are unwilling or unable. 
  • Know what financing products are available. A revolving credit facility (aka 'line of credit') might be easier to repay during the early stages of your business, but a loan with a fixed term (2,3,4 years) ensures regular repayment, and most financial institutions prefer to start you off with this sort of 'fixed' repayment as it carries less risk to the lender. Another consideration to consider is whether a government guaranteed loan is right for your business.
  • Exhaust all financing options before applying for a loan. The more of your own resources you are willing to invest in the business, the better your application will look. If you need $100,000 to start your business, but are only willing to invest $5000, there's a good chance you will be turned down. Few lenders would consider financing more than 90% of your business start-up costs, particularly as this is the minimum requirement for the government to guarantee your loan  - so 10% or higher is useful to consider as a benchmark amount. You may also consider equity financing as a way to raise initial capital, if you're willing to release 100% ownership of your business.

To summarize these points: Locate your documentation, polish your business plan, present a professional image, take micro-credit steps when available, be open to different institutions, know what products exist on the marketplace, and (lastly) demonstrate your financial commitment to the business! Hopefully these tips will point you in the right direction and will assist you in better understanding the process of financing you new business.

Related articles or for more information:

Get Closer to Your Bank - CFIB
Consider Your Financing Options - CFIB
Banking on Better Service - CFIB (PDF-16 pages)
Financing Your Small Business - US-based resource, but contains useful general information (PDF-20 pages)

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