10.3: Business Financial Needs
To raise capital for business needs, companies primarily have two types of financing as options: equity financing and debt financing. Most companies use a combination of debt financing and equity financing, but there are some distinct advantages to both. Equity financing carries no repayment obligation and provides extra working capital that can be used to grow a business. Debt financing, on the other hand, does not require giving up a portion of ownership. A company would choose debt financing over equity financing if it doesn’t want to surrender any part of its company. A company that believes in its financials would not want to miss out on the profits it would have to pass to shareholders if it assigned someone else equity. Which one a business needs depends on the business goals, tolerance for risk, and need for control. Many businesses in the startup stage will pursue equity financing, while those already established and those that have no problem with debt and possess a strong credit score might pursue traditional debt financing types like business loans.[1]
Debt Financing
Some sources of debt financing are:[2]
- Term loans
- Business lines of credit
- Invoice factoring
- Business credit cards
- Personal loans, usually from a family or friend
- Peer-to-peer (P2P) lending services
- SBA (small business) loans
The ability to secure debt financing is largely based on your existing financials and creditworthiness.
Equity Financing
Some sources of equity financing are:[3]
- Angel investors
- Crowdfunding
- Venture capital firms
- Corporate investors
- Listing on an exchange with an initial public offering (IPO)
Securing equity financing can be simpler than debt financing, but you need to have an extremely attractive product or financial projections, as well as be willing to surrender a portion of your company and often a good amount of control.
Sources of Funding
Refer to Table 10.1 for a list of funding sources where businesses can secure either debt or equity financing:[4]
| Source | Description |
|---|---|
| Big Five Banks | The big banks — Chartered Banks — in Canada, including BMO, CIBC, RBC, Scotiabank, and TD Canada Trust, offer a large variety of banking products. Banks can provide loans and lines of credit as well as other funding options. |
| Credit Unions | Credit unions are cooperative savings institutions owned by members, who often have a common interest and receive a share of the profits. They offer almost anything that a chartered bank offers — savings accounts and loans, chequing accounts, home and car loans, credit cards, and even some commercial loans. |
| Trust Companies | A trust company safeguards property, funds, and estates entrusted to it. It may serve as a trustee, transfer agent, and registrar for corporations, and provide other services as well. In recent years, trust companies have declined in importance. |
| Online Banks | Online banks have significant advantages over their traditional counterparts. They have developed a business model that provides customers with the best of both worlds: low — and even no monthly fees, along with accessible customer service administered remotely. Examples in Canada include Tangerine, EQ Bank, Neo Financial, Simplii Financial and Manulife Bank. |
| Finance Companies | Finance companies are non-deposit institutions because they do not accept deposits from individuals or provide traditional banking services, such as chequing accounts. They do, however, make loans to individuals and businesses, using funds acquired by selling securities or borrowed from chartered banks. Those that lend money to businesses, such as General Electric Capital Canada Inc., are commercial finance companies, and those that make loans to individuals or issue credit cards, such as PCFinancial, are consumer finance companies. Some, such as General Motors Acceptance Corporation of Canada, Ltd., provide loans to both consumers (car buyers) and businesses (GM dealers). |
| Insurance Companies | Insurance companies sell protection against losses incurred by illness, disability, death, and property damage. To finance claims payments, they collect premiums from policyholders, which they invest in stocks, bonds, and other assets. They also use a portion of their funds to make loans to individuals, businesses, and government agencies. Manulife is the leading Canadian life insurance company, and it has an international presence. |
| Brokerage Firms and Factoring Companies | Companies like Commercial Capital LLC, which buy and sell stocks, bonds, and other investments for clients, are brokerage firms (also called securities investment dealers). A mutual fund invests money from a pool of investors in stocks, bonds, and other securities. Investors become part-owners of the fund. Mutual funds reduce risk by diversifying investments because assets are invested in dozens of companies in a variety of industries, so poor performance by some firms is usually offset by good performance by others. Mutual funds may be stock funds, bond funds, or money market funds, which invest in safe, highly liquid securities. Finally, pension funds, which manage contributions made by participating employees and employers and provide members with retirement income, are also non-deposit institutions. |
| Venture Capital Firms | Venture Capital Firms provide private equity financing or funds to start-ups, early-stage, and emerging companies that have been deemed to have high growth potential or that have demonstrated high growth. Venture capital generally comes from wealthy investors, investment banks, and other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. Financing a new and untested venture can be risky for investors who put up funds. However, the potential for above-average returns is an attractive payoff. |
| Government Financial Institutions and Granting Agencies | The Canadian government provides funding support to businesses across the country. This funding support comes in the form of government grants, government loans, tax breaks, tax credits and other types of financial contributions. A number of provincial agencies also provide funding to developing business firms in the hope that they will provide jobs in the province. There are both federal and provincial programs supporting the agriculture industry and providing grants to business operations. Some examples of federal agencies include: The Business Development Bank of Canada (BDC), the Government’s Export Development Corporation (EDC), the Canada Mortgage and Housing Corporation (CMHC), the Crown-Indigenous Relations and Northern Affairs Canada (CIRNAC), Indigenous Services Canada (ISC), and Futurpreneur Canada. |
| Pension Funds | A pension fund is any plan, fund, or scheme that provides retirement income in the future to subscribers. Pension funds typically have large amounts of money to invest and are the major investors in listed and private companies. |
Overcoming Entrepreneurial Financial Challenges
While there has been an increase in the success of the Indigenous economy, Indigenous small businesses are faced with a higher number of financial barriers than their non-Indigenous counterparts. These institutional barriers hinder Indigenous business owners from seeking financial aid through common avenues, whether through government programs or loans via centralized banks. Evidence suggests that over 50% of Indigenous entrepreneurs struggle to keep their businesses afloat due to inadequate access to debt financing. To aid First Nations, Metis and Inuit (FNMI) businesses, Indigenous-led financial institutions such as Aboriginal Capital Corporation have been launched, though few Indigenous entrepreneurs are cognizant of their services. Indigenous entrepreneur Kat Pasquach emphasizes the importance of seizing every available option, and Sarah Hopkins-Herr, founder of Three Sisters Consulting, speaks of positive experiences when seeking financial resources to keep their businesses operational.
Watch the Indigenous Lifeways in Canadian Business video “Overcoming Entrepreneurial Challenges.”
Transcript of “Overcoming Entrepreneurial Challenges” video [PDF–New Tab]. Closed captioning is available in the video player.
Source: “Overcoming Entrepreneurial Challenges” by University of Windsor, is licensed under CC BY-NC-ND 4.0, available in Indigenous Lifeways in Canadian Business by Russell Evans, Michael Mihalicz, and Maureen Sterling, licensed under a CC BY-NC 4.0 license, except where otherwise noted.
Media Attributions
“Woman in Gray Coat Holding White Printer Paper” by RDNE Stock Project, used under the Pexels license.
- Maverick, J. (2024, June 13). Equity financing vs. debt financing: What’s the difference? Investopedia. ↵
- Maverick, J. (2024, June 13). Equity financing vs. debt financing: What’s the difference? Investopedia. ↵
- Maverick, J. (2024, June 13). Equity financing vs. debt financing: What’s the difference? Investopedia. ↵
- Daddey, F. & Newton, R. (2022). The Fundamentals of Business: British Columbia Edition 2024. Douglas College. ↵
A method of raising capital by borrowing money that must be repaid over time, usually with interest. It does not require giving up a portion of ownership in the company.
A method of raising capital by selling shares of a company to investors. It carries no repayment obligation and provides extra working capital that can be used to grow a business, but it does mean sharing profits and decision-making power with shareholders.
