"THIS NEW SoHo" Episode Guide

Finding sources of financing with the Internet is not simply restricted to finding people willing to lend you the money-- financing via the Internet also involves:

• finding out about government programs aimed at small business
• learning about labour-sponsored funds
• finding firms that specialize in matching up small businesses with sources of financing
• talking with other entrepreneurs about leads for finding start-up capital

Using the research tools available on the Internet, it is possible to narrow down the search to find the companies and institutions that can meet your small business needs.

• Internally generated funds (the money you have stashed away underneath your mattress)
• Debt capital (the Bay Street word for loans, whether it be from wealthy relatives, private investors, government programs, or venture capitalists)
• Equity capital (more expensive and complicated than debt capital, you exchange a share of your business for financing)

The easiest source of funding for the new business (presumably if you have it) is your own money. Often this is necessary to create some deliverables with which to attract other investors, such as the prototype for your new invention, or carrying out marketing research. Or this funding may simply be going towards covering your living expenses, so that you can quit your 'day job' and devote all your time to the new business. If you don't have wads of cash stuffed underneath the sofa, there are other sources of seed capital you can pursue. You can generate the needed funds by mortgaging personal assets (such as the house or car), borrowing from friends or relatives, using personal bank loans, or maxxing out the credit card-- one savvy group of entrepreneurs finance a yearly art exhibition completely on their credit cards!

The cheapest and most obvious source of outside financing is your local bank. However, the banks generally prefer to lend to businesses with very little debt and a high cash flow-- so if you are already saddled with loans or your business is not generating a steady stream of revenues, you may be out of luck. Those companies that do qualify for loans will often use short-term debt, which must be paid back in less than one year (on average within 30 to 40 days), or a line-of-credit, which can be drawn upon as needed, as long as regular interest payments are made on the principal outstanding balance. However, the companies that do qualify may have restrictions, or covenants, placed upon them in order to remain eligible for the loans, such as minimum cash balances, restrictions on issuing equity to outside investors, or the filing of monthly financial documents. Another financing option from banks and financial institutions would be asset-based financing. In this scheme, the business would pledge its accounts receivable (money owed the company from its customers) or inventory in exchange for financing-- a small Toronto-based Christmas ornament manufacturer finances its seasonal labour requirements with its confirmed orders as collateral.

One popular source of outside financing is wealthy individuals, whether it is your wealthy Aunt in Florida, your family doctor, or millionaires in the neighbourhood. You may even know some of these people indirectly through your friends and acquaintances. To approach these people, you will definitely require a well-written business plan, as well as legal counsel for drafting up the proper paperwork. Furthermore, these wealthy individuals may want a say in the business, which may be good or bad depending on their level of expertise, and often are unable to come up with additional funds when needed for unexpected contingencies. On the other hand, these wealthy individuals are often willing to invest in new businesses too small for venture capitalists to bother with (investments less than $500,000), or unable to meet the rigid requirements at the bank.

Venture capitalists invest in many different businesses and look for companies capable of delivering high returns (50-60%). The financing that they provide can be in the form of pure debt (loans), equity, or a mixture of both. But because of the risk, the cost of this financing will be higher to you. However, they often provide advice to the companies they invest in, and because of their extensive experience in start-ups, they can be of tremendous help in overcoming the growing pains of your new business. On the other hand, venture capitalists prefer to make larger investments, in excess of $500,000, and may specialize in certain areas or industries, such as high tech or biotechnology, which may not be applicable to your start-up.

This list is by no means exhaustive. There are government programs available to provide loans for the new entrepreneur, in addition to training and other resources. And if your venture has the potential to be seen by many people and attract media attention, such as an arts & crafts show or concert, it may be possible to find corporate sponsors, who will offer financial assistance for certain aspects of your business (such as advertising), in exchange for logo or product placement. The money is out there... you just have to know where to look.

Want to learn more about the topics covered this week? Then check out these great web sites and resources:

And for those thinking of expanding into the United States and abroad, here are some more sources of financing...