Small business funding: What are your options?

Every entrepreneur’s journey is unique, but there is one universal experience: finding business funding. Whether it’s to aid cash flow or support operational costs, weather the storm through low sales or expanding for growth, owners need to acquire cash to support their business goals.

The good news? The options for business funding vary greatly. The variety of loan amounts, repayment terms, interest and benefits that are available allow you to choose an option that aligns with your needs to help drive your small business forward. So how do you obtain capital to help run your business? Let’s explore the most common funding types.

Term Loans

When you think of a traditional business loan, you’re probably picturing a term loan. You’d likely receive your funds in one lump sum and repay it on a fixed schedule.

Who is it best for? Business owners who enjoy predictable, fixed payments. Term loans make managing cash flow easy with no surprises or large costs up front.

What to consider: You may want to come back for a subsequent loan. If you end up needing more funds, you may be able to reapply for a second loan. Your lender may discount the unpaid interest and pay off the existing balance. Ask your lender for qualifying factors.

Small Business Line of Credit

A business line of credit is a revolving source of funding and allows you to draw the funds you need when you need them. Your limit is set based on a credit check, much like a personal line of credit or a credit card.

Who is it best for? Small business owners who need continuous access to capital for everyday needs. A business line of credit provides access to capital on an ongoing basis, making it easy to replenish your inventory, onboard a new employee and more.

What to consider: You may benefit from a line of credit if you need to refinance your existing debt. Depending on your current funding situation, the interest rate may be lower and help you pay off other loans at a lower rate.

Merchant Cash Advance

A merchant cash advance (MCA) is not a traditional loan.  With a merchant cash advance, businesses sell a portion of their future credit and debit card receivables to the funding company at a discount. The funds you receive are based on the future revenue of your business and are assessed as a factor rate.

Who is it best for? Someone who needs flexibility. MCA’s are a great fit for seasonal businesses, or businesses with unpredictable sales.

What to consider: Because repayment is based upon a percentage of daily card sales, the more transactions a business does, the faster they’re able to repay the advance. And should transactions be lower on any given day, the draw from the merchant account will also be less. While an MCA’s range can vary, funding generally ranges from as low as $5,000 up to $300,000.

Canada Small Business Financing Program Loans

A Canada Small Business Financing Program (CSBFP) loan is a financing option provided by the Canadian government in collaboration with financial institutions. The CSBFP does not directly fund loans. Instead, they work with Banks, credit unions and caisses populaires to deliver the loan.

Who is it best for? Someone looking for a long-term loan. Most CSBFP loans have longer repayment periods than other financing options, with the added benefit of lower interest rates.

What to consider: CSBFP loans cannot be used to finance items such as goodwill, working capital, inventories, franchise fees and other expenses. These types of loans are ideal for those looking to purchase land, buildings or equipment for their business.

Small Business Grants

Small business grants are lump sums given to a person, business or corporation, usually from federal, provincial or local governments but sometimes sourced from private businesses and corporations. Grants do not require repayment, so as you can imagine, they’re challenging to come by. Use resources like Canada Startups to identify available grants and see what you qualify for.

Who is it best for? Entrepreneurs looking to supplement their business funding. Small business grants are usually much smaller than what you can receive with other sources of capital, so they are usually pursued in tangent with other with business funds.

What to consider: Most grants have pre-requisites or rules to comply with in order to receive the funds.

Venture Capital

This form of private equity is sourced by investors looking to get in at the ground floor of an up-and-coming start-up. Investors are typically experienced with these types of business opportunities and are supported by a firm or an investment bank. As with traditional types of equity, most investors expect a stake in the company.

Who is it best for? Confident business owners who know how to sell their idea and have the business plan, experience and data to back it up.

What to consider: Venture capital support isn’t always cash. Sometimes it comes in the form of additional resources, technical expertise or managerial guidance.

Angel Investment

Similar to venture capital, an angel investor is a private equity source. The individual usually comes from a high net worth and provides business funds to start-ups or innovators in exchange for equity. The biggest difference between venture capital and angel investments is the latter often has a personal connection with the business owner. Additionally, it’s more common for angel investors to provide seed money or make a one-time investment to help the business get started whereas venture capitalists tend to stay involved.

Who is it best for? Small business owners connected to private investors.

What to consider: If you’re just starting out, it can feel drastic to give away a portion of your company. Make sure you fully understand the angel’s offer and weigh the risk and reward. 

Crowdfunding

Online fundraising platforms like Kickstarter and GoFundMe allow users to campaign for funds from the general public. Entrepreneurs often reward their contributors with products or equity.

Who is it best for? People with a strong social media following or community they’re able to tap into to contribute.

What to consider: The securities laws and rules you’ll be required to follow if offering equity.

How Do I Know What Type of Business Funding Is Right for My Small Business?

There are two key things to consider when deciding what type of funding you chose to help finance your business: the product and the lender. Chose a product that provides sufficient access to credit and a repayment structure that reflects how your business operates. Most importantly, apply for business funds that appropriately cover the true loan amount you need. If you borrow too much, you could be overspending on interest and fees. Borrow too little, and you’ll need to go through the process all over again.

In addition to multiple business funding products to choose from, there are also several different types of lenders that can provide you with a business loan. For example, you can work with a bank, a direct online lender, or a peer-to-peer lender. Each type of lender will offer diverse products and have different requirements for borrowers. Some lenders place more value on good credit while others care more about annual revenue. Carefully researching various business loan providers and their requirements will give you insight into which lenders you’ve got the best chances of qualifying with.

At Journey Capital, we’ve made it our mission to provide Canadian SMBs with access to the working capital they need, quickly and easily. Fill out our simple risk-free application to see how much your business may qualify for and if Journey Capital is the right fit for you.

Edited content. Originally written by Bonnie P.*