How to Get the Best Financing for a Startup Business in Canada

So, you have a great business idea or service, and you think the startup model might be just the right business model for it? But how do you go about getting the initial capital needed to get your startup off the ground?

In this article, we'll be taking you through Canadian startup funding to help you to kickstart your business.

What is a startup business?

A startup is a young company that starts with limited capital but is built to scale - fast. Typically it starts with a small team of individuals who have an innovative product or service. To grow fast, startups adopt alternative business models and look for funding from various sources. In this article, we’ll be taking you through funding for startups and small businesses.

How do you get funding for a startup?

The first step to getting startup funding is to decide what funding best aligns with your business. Then you can find out about the application process.

In an ideal world, your startup will receive funding from various sources. Having a diverse source of incoming funds offers more stability.

Here we'll take you through some of the main funding sources to help you decide which combination may be best for your startup.

Personal financing

Bootstrapping is a business model that relies predominantly on business revenue and personal finances to grow a business. As a startup founder or partner, investing some of your personal funds (such as your cash or other personal assets) can help convince others to support your project. It proves to investors that you are committed to the project and are aware of the risks.

Family and friends

Naturally, most people don't have a huge amount of cash lying around. So when personal funds are limited, they may need to turn to family or friends for the initial capital. Asking friends and family for startup funding is great as there aren’t any negative financial implications. That being said, there is the potential for personal disputes if your business doesn’t perform as well as expected.

Venture capital

Venture capital is funding provided to young companies in exchange for equity - therefore it is a form of equity financing. Venture capitalists manage their own money and the money of others (private and public). For startups to receive funding from venture capitalists, they must demonstrate a high-growth potential and potential longevity.

The main advantage of being backed by venture capitalists is access to significant funding (as well as valuable strategic advice from experienced members). The main downside is that the equity required by venture capitalists can be high. Over time founders may have to request more funding, which will mean giving up an additional stake in their company.

On average, venture capitalists own 50% of equity on exit.

Angel investors

Angel investors are wealthy individuals who invest their own money and offer consultancy to startups and other early-stage businesses. As angel investors are only investing their own money, they are able to choose high-risk projects. As a result, angel investors are a great option for very young startups who may still be in the idea phase of their business and may struggle to convince venture capitalists.

In return for the risk and mentorship, angel investors expect equity (typically less than 25%). While most venture capitalists require significant access to all aspects of business operations and complete transparency, each angel investor has their own preference. Some angel investors have a hands-off approach, while others are very much involved. Finding an angel investor whose expectations and preferences align with your own is essential.

Crowdfunding

Crowdfunding is an excellent option for startups with innovative products or services. Most crowdfunding platforms favour an all-or-nothing system. This means that if the target sum is raised, fans and followers may gain small amounts of equity in addition to access to the service or product. On the other hand, if the project doesn’t reach its funding goal, those that pledged some money will have their money returned to them.

Grants

Grants are funds provided by an institution to help support businesses that provide some form of economic or societal benefit. These institutions tend to be governmental, but can also be charity organizations or specialized corporations. The main advantage of this type of funding is that a young business can receive free money without having to give up equity. No equity, no capital, no interest. Of course, this makes competition for grants extremely fierce. Additionally, the institution that provides the grant may have detailed clauses regarding how the grant can be spent.

Loans

A business loan is money borrowed from an institution (e.g. a bank or governmental organization) that has to be paid back in an agreed period, with interest. Business loans allow startups to keep control of their business, build credit and access lower interest rates. However, obtaining a business startup loan can be a challenging process, as banks tend to have a long list of requirements that businesses must meet before they can qualify.

What are the steps for getting a business startup loan?

Here are 5 steps to follow to help you to get a business loan for your startup:

1. Have a business plan: Your business plan will be a bank’s introduction to your startup’s mission and goals. Make sure you clearly reference how the business loan you receive will help you to meet your business goals.
2. Decide how much money you’ll be asking for: You need to be able to justify the amount you are asking for, so coming up with a random figure won’t do. Take the time to go through your business plan, and look at your cash flow and future projections to help you to come up with a figure. The number should be grounded in reality and justifiable. The lender will scrutinize these numbers carefully to assure that you’ll be in a position to pay back your loan.
3. Research available loans: As there are many different loans available for startups and small businesses, you’ll have to do thorough research to ensure you get the best deal. Here’s a guide to the best small business loans in 2024. This guide allows you to compare Canadian startup loans and check your eligibility for them.
4. Gather documentation: Once you know which startup business loan you want to apply for, you can begin the process of compiling all the documents that the bank may ask for. From details of your personal and business credit scores, to tax return sheets, the list of documentation you need can be extensive. You can send out an email introducing your business and asking each lender what documents they’d like you to present.
5. Apply for your startup loan: Most lenders will now allow you to submit your application online, so you can follow the application process step-by-step.

How hard is it to get a business startup loan?

The quality of your application will determine how hard it will be to obtain a loan for your startup. If you meet the eligibility requirements and have a strong credit score you’re more likely to receive a larger loan with a more favourable interest rate. Lenders care about the industry experience of your team and how realistic your business plan and financial projections are.

How long does it take to get a business loan approved?

Lenders need some time to go through all the documentation submitted and transfer the requested funds. Some lenders offer express loans which can be processed in under 3 working days. However, most loans take between one and three months. As some lenders may require additional records and checks, it’s always best to apply well before you need access to the funds.

What do banks ask for when applying for a business loan?

Every lender has its criteria for approving a business loan. For business startup funding, lenders are likely to ask for:

• Cash flow projections: Lenders will ask for records of incoming and outcoming finances during a specified period to get a snapshot of the financial health of a business.
• A business plan: Lenders want to see a well-thought-out mission, and how the loan will help your startup meet your business goals.
• Collateral: As most business loans have low-interest rates, lenders may ask for an item of value (assets, equipment or property). These items may be seized in the event that the borrower is unable to keep up with their loan repayments.
• Personal and business credit scores: A credit score is a number somewhere between 300 and 850, that represents a borrower’s creditworthiness. If in the past you missed some credit card repayments, or have never borrowed money before, you will have a lower credit score, and as a result, will be considered a higher risk.

What credit score do you need for a startup business loan?

Each lender has its own credit score requirement, but typically, a credit score of 680 and above will qualify you for most business loans. Of course, there are still additional requirements that may need to be met, but if your credit score falls below 560, you’ll be very limited in the number of loans, business or otherwise, you can consider.

How much can you borrow with a business loan?

For business loans, through the Canada Small Business Financing Loan (CSBFL) program, a maximum loan of $500,000 is possible for the purchase of equipment and/or improvements on a leased property. For purchasing a commercial property, the program offers a maximum loan amount of up to $1 million. Variable and fixed rates are both available with amortization of up to 15 years.

Non-traditional lenders and financing programs may have higher maximums but may be difficult to get without an established business track record and/or giving an equity stack in the business.

Are their provincial programs for startup loans and grants?

The first resource you can check out for funding for startups in Canada is this governmental site. It provides information on grants, loans and private and public sector financing, as well as information on leveraging personal assets.

However, in addition to nationwide grants and loans, there are also some province-specific programs available. We’ve compiled some popular programs below.

Grants are usually extremely selective and competitive. Even with a grant or favourable lending program, most businesses will still need other sources of financing. ready to see options on startup business loans?

To grow fast, startups can rely on their growing client base, community funding, or external funding. Business loans are a great option for all startups. Using a small business loan comparison tool can give you an idea of what’s out there and what you need to qualify.

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Alexandre Desoutter

Alexandre Desoutter has been working as editor-in-chief and head of press relations at HelloSafe since June 2020. A graduate of Sciences Po Grenoble, he worked as a journalist for several years in French media, and continues to collaborate as a as a contributor to several publications.