How to Finance a Startup Business: Non-bank Options

When it comes to starting a business, “How do I pay for all this?” is a question that comes up early in the process.

While banks are certainly the traditional option for many, they aren’t the only ones.

Here is a list of several non-bank financing options to consider before starting your dream business.

Commercial Loan Providers

Commercial loan providers operate similarly to banks in terms of the structure and rates of the loans they provide.

The main difference between the two? The lending criteria are more understanding in commercial loan providers, offering loans to those with less collateral and lower credit ratings. A great example is the BDC – Business Development Bank of Canada. The BDC finances working capital to give entrepreneurs peace of mind and extra cash to expand their businesses and invest in technology.

Social and Community Lending

For a more affordable loan, community lending through a credit union is a great option. While they provide less money, credit unions offer more flexible repayment options and more benefits for disadvantaged groups, such as minorities and those with disabilities.

Partner Financing

Partner financing involves teaming up with someone in your industry of choice that is already well established.

In exchange for funding most of your project, the partner gains access to some agreed-upon concessions, such as distribution rights.

While recruiting a partner from your field offers an advantage through the services the partner can provide, you also run the risk of being overpowered and indebted to your partner down the line. Partner financing is an uncommon choice for this reason.

Venture Capitalists

Startups with high growth potential and competitive edge that are lacking collateral should consider venture capitalists.

Dealing with venture capitalists involves funding your project by selling off part ownership of the project to a group of investors.

These groups are often well connected and have an abundance of experience, making up for the loss of control of your business.

Angel Investors

Angel investors are very similar to venture capitalists in that once again, it is an investor or investors financing a project for a stake in the ownership.

They differ in the types of projects they finance, as angel investors help smaller and less established businesses with lower growth potential.

Angel investors tend to take more of a hands-on approach when assisting startups, using their experience to help guide the business growth.

Invoice Financing

To receive invoice financing, you must first have unpaid client invoices. By presenting these invoices to a service provider, they will supply a sum of money equal to the outstanding invoice. Once the invoice is paid, that money is used to repay the service provider.

Invoice financing is useful for hitting the ground running and reducing downtime between projects, allowing your startup business to speed up its early growth.

Government Grants

A government grant is a great way to get your business off the ground if you meet one’s requirements.

The Canadian government offers hundreds of grants that provide financial aid to small business owners. The trick is finding the one that best applies to you and your business, as most grants have a very rigid set of requirements you must meet to be eligible for them.

Crowdfunding

For a more outside the box way of financing your startup business, crowdfunding is a potential path to take. Websites like Patreon and Kickstarter allow you to create profiles for your business idea that people can donate towards.

An essential part of financing something through crowdfunding is providing tangible benefits to those supporting your project based on the amount of money they commit to it. It helps to provide unique and exciting incentives for those who donate significant sums.

Also, much of a crowdfunded business’s success is determined by the hype surrounding it. So whether through advertising or social media, excitement for the project must be kept high for the funding duration.

Friends and Family

Borrowing money from those close to you can be tricky business if done incorrectly.

Even when dealing with family, It’s essential to agree and over-communicate expectations before money changes hands-on things like how the funds will be repaid (if at all) and what precisely both parties will be receiving and be responsible for.

Merchant Cash Advances

A merchant cash advance is a high-cost loan where a financial provider exchanges a large amount of money to a business for a percentage of all future debit and credit card sales.

While this provides some short term capital for the startup, it can result in considerable losses in the long run. Because of this, it’s recommended that merchant cash advances be avoided and only turned to as a last resort.

Looking to Explore Your Financing Options? CHI Real Estate Can Help

The goal is always to keep as much equity as possible during the financing process. The majority of the non-traditional financing options we mentioned can help you secure the capital you need to build your next business.

Need help deciding what form of funding is best for your business? Get in touch with our team of commercial financing experts today.