Small businesses often need financing, especially in the initial stages of development. Financing has become difficult due to tightened lending criteria. Depending on where you live, your government may provide financial aid for small businesses. In Canada for instance, you could quality small business grants Ontario. The most basic types of financing include equity financing, debt financing, and government grants.
A good example of debt financing is purchasing a house or car using a credit card. You take a loan from a lending institution with a pledge to pay it back with interest. Even if you borrow from banks, you are likely to be charged the minimum IRS interest.
Nonetheless, debt financing comes with many advantages. Firstly, you have autonomous control over your venture. Your relationship with the lender ends immediately you pay the loan back. Next, debt financing makes it easier to forecast the expected expenses as loan payments do not fluctuate. Finally, the interest you pay is tax-deductible.
Debt financing depends on your future ability to pay the loan back. Your business may hit a hard time in the future, and end up experiencing a meltdown. It may also fail to grow as fast as you projected. Debt financing is an expense that you have to repay regularly. That way debt financing can hinder your company’s ability to grow. Even though you may be having a limited liability company, you may still be required to guarantee your loan with personal assets.
You could offer your shares to investors, relatives, and friends in exchange for equity financing. You could also present business ideas to venture capitalists in an attempt to secure finances. The most interesting thing with equity financing is that risks are shared equally. As such, you do not have to endure the risks alone. With equity financing, you have more cash available for expansion as you do not have to pay the loan back.
However, the downside to equity financing is that you have to give a percentage of your company to the investor. You will have to involve your new partners in the decision-making process and share profits.
Governments provide capital to startups in form of grants that don’t cost any equity and don’t need to be paid back. Entrepreneurs often claim that getting capital is the most challenging aspect of starting a business. If you are looking forward to start a business in Canada, you need to learn about different government grants for small businesses. Through small business grant Ontario, startups in Canada can fund a portion of their overheads as government grants do not need to be paid back. If you need more information, Ontario Centres of Excellence may be able to provide you with additional resources on their website.
Which funding option suits your business?
Equity financing is difficult to secure especially for a small business in the beginning stage. Investors are looking for businesses with global reach. According to an article released by Enterpreneur.com, venture capitalists are often looking to take a 50% stake in your company and invest a minimum of $300,000, especially if it is in the beginning stages. Therefore, if your startup does not need large-scale financing, debt financing could be the best option, and perhaps the only option. If you are just getting started, debt financing is probably the best option. As your business grows, equity financing may become a viable financing option. Although government grants don’t need to be paid back, the application process is quite involving and distracting. Sometimes the grants come with constraints such that you have to use it for a specific purpose.