What are the different financing options for startups?

5 mars

Loans

A loan is the most common and well-known type of financing, and also the one mostly used by entrepreneurs. With a loan, a company receives funds from a bank or from a private lender and commits to reimbursing them over a certain period of time with interest.

This type of financing comes with certain benefits: it is known to be more flexible in regards to amount and length, it is possible to negotiate the reimbursement modalities, and the business’ equity doesn’t get diluted.

One must note that when launching a business, getting a loan can be hard if you don’t provide personal guarantee.

Convertible Loan

Convertible loans are often preferred by entrepreneurs, as they come with great flexibility for investors. But what is a convertible loan, exactly? It is when a business receives funds from a private lender or investor with the option, at the end of the loan, to either convert the amount in equity or to reimburse the entire thing with interest.

One must note that the terms of a convertible loan can be negotiated, meaning an entrepreneur can discuss with potential lenders or investors the loan’s term, interest rate, reimbursement modalities, the share price, if there will be a rebate or not, or even the conversion modalities.

As mentioned before, this type of financing comes with great flexibility for the entrepreneur: it also allows one to seek strategic investors who can support the growth of the business from its very early days.

If, at the end of the loan, the lender decides to convert the amount in equity, they will officially become shareholders of the business. This means that you have to include in the convertible loan’s terms that once the lender becomes a shareholder, they will have to consent to the shareholders’ convention. If you haven’t created such a convention, now is probably the time to do so.

Venture Capital and Investment Funds

Venture capital and investment funds are often perceived by entrepreneurs as a strategic financing option: not only will the business receive a substantial amount (the typical minimum investment is $1M), investments funds can also provide knowledge, expertise, and a vast contact network.

These types of investment are usually risky ones with high returns: investment funds will therefore try to maximise their profitability. These firms will do everything they can to maximise their investment and help you grow your business.

This type of financing, however, usually comes with strict and very precise conditions: if you are considering venture capital of investment funds, make sure you fully grasp the conditions and their implication (for example - double dip, special rights on other shareholders, right to information, etc.).

Are you intrigued by this type of financing? If so, we encourage you to consult the website of well-known funds based in Quebec: Investissement Québec, Anges Québec Capital Inc, Inovia Capital inc.

Incubators and Startup Accelerators

Incubators are also a great source of financing. First, being part of an incubator will allow you to easily get loans from big banks. Some incubators even have agreements with banks in order to provide their members a privileged access to loans with lower interest rates.

These incubators can also give you access to interesting bursaries - some going for as much as $30,000. And most importantly, incubators give you privileged access to important resources such as trainings, coaches, other entrepreneurs who can support you in developing your product, and even shared offices.

Finally, you will be exposed to investing opportunities, as incubators give you access to several platforms where you can pitch your business project to serious potential investors.

For more information, we recommend you to read the conditions related to all these programs. This list gathers different notorious incubators in Quebec: let it be your starting point in your research.

Crowdfunding

Crowdfunding allows you to finance your project by soliciting a large number of people through an online platform. There are different types of crowdfunding: the one which relies on donations to help you kickstart your startup, one that relies on consumers actually buying your product in presale with a small discount, and another one where it is possible for non-accredited investors to buy equity in one’s company.

While crowdfunding sounds like the easy financing option, you must be careful: every type of financing has its own obligations which can, in some circumstances, be harmful for a business if not well-executed. Make sure to seek the advice of a lawyer at this stage to fully understand the different obligations.

No matter which type of financing you will go for, make sure you truly get the implications of each option, from the right to information through to personal liability. If you are a startup, bear in mind that there is a vast array of alternative financing options out there for up-and-coming businesses: we would be delighted to walk you through them and establish with you the best-suited option for you and your company. Contact us for a free 30-minute consultation, and we will assess your current and upcoming needs.

Notice: the content is this article does not constitute legal advice. The reader must not make any decision solely based on this article: they must seek instead legal advice adapted to their needs.

Contact

Catherine Gosselin is the Founder and President at CGB Legal, a business law firm specialised in legal services for entrepreneurs of today and tomorrow.

Catherine Gosselin