Personal Savings

Personal Savings: The Most Common Form of Equity Investment

You’ll likely get most of your start-up funding from your personal savings, inheritances, friends, or family. In fact, according to Statistics Canada’s Survey of Financing of Small and Medium Enterprises 2007, 76% of small businesses in British Columbia financed their business with personal savings.

Aim to fund 25% to 50% of your business from your own pocket. This shows prospective lenders and investors that you are personally assuming some risk, and are committed to your business success. It’s also a requirement for many small business loans, which are usually secured (i.e. backed by assets).

Throughout the course of your business, try to keep a personal investment of at least 25% in your business to increase your equity position and leverage. The more equity your business has, the more attractive it makes you to banks that can loan you up to three times your equity.

Debt Financing

1. Government Funding

Typically, the most sought-after type of financing is government grants because it’s free money that you don't have to pay back. Unfortunately, a grant might not be an option for your business because not only are there very few grants available, most are geared towards specific industries or groups of people such as youth, women, or aboriginal owners.

The majority of government funding programs are typically loans, for which you'll be required to repay the principal amount plus interest.

In 2007, only 2% of businesses obtained some sort of government funding or assistance. You can find information about government funding programs for free: 

• Search the Canada Business Grants and Finances section, which lists available government programs across Canada.
• Refer to our Overview of Government Financing document, which provides a description of the various federal and provincial government programs available to B.C. businesses, eligibility criteria, and contact information.
• Contact your industry association to find out if they know of any grants you might be eligible to receive.

Since the application process varies from program to program, you should contact the coordinator of the program that you’re interested in to find out what the specific application requirements and process are.

2. Commercial Loans

Commercial or personal loans from financial institutions account for the second most common form of financing at 44%.

• Long-term loans. Use long-term loans for larger expenses or for fixed assets that you expect to use for more than one year, such as property, buildings, vehicles, machinery, and equipment. These loans are generally secured by new assets, other unencumbered physical business assets, and/or additional stakeholder funds or personal guarantees.
• Short-term loans. Short-term loans are usually for a one-year term or less, and can include revolving lines of credit or credit cards. These are generally used to finance day-to-day expenses such as inventory, payroll, and unexpected or emergency items, and can be subject to a higher base interest rate.

Getting Your Loan Approved: What do Potential Lenders Look For?

Many lenders will look for the four “C’s of Lending” when evaluating a loan application:

1. Cash flow. Your ability to repay the cash you are borrowing. This is measured using the cash flow forecast that you created for your business plan. 
2. Collateral. The value of assets that you are willing to pledge for assurance that you will repay your loan. A dollar amount will be placed on these assets and that will be compared to the amount of the loan you requested. 
3. Commitment. The amount of money that you're committing to your business. You can’t expect to obtain a loan without contributing a fair share yourself.
4. Character. Your personal credit score and history with the financial institution. Your credit rating or score is calculated from your history of borrowing and repaying bank loans, credit cards, and personal lines of credit. Without a good credit rating, your loan prospects decrease significantly.

A lender might determine how much to lend you by evaluating your cash flow, collateral, and commitment. They will then subtract your existing debt to arrive at a final amount. Note that lenders look at the limit on your credit cards, not the amount you're currently using.

Typically, start-ups are not rich in assets so you may be required to secure your business loans with personal collateral such as your house or vehicle(s).

The difference between a private lender and a government program is the relative importance of these four C’s. A bank might place more importance on “collateral” and “commitment”, whereas a government program can often decrease the need for these by providing a government guarantee to the lender.

Make a Good Impression With Your Lenders

You can increase your chances of securing a loan by:

• Having strong management and staff
• Showing steady business growth potential
• Showing reliable projected cash flow
• Offering collateral
• Having a strong personal credit rating
• Always making your loan and interest payments on time, and never missing a payment