Top Funding Options for Small Business

Learn which funding options best fit your business. This article outlines the differences and advantages of some of the more uncommon methods of accessing capital versus a traditional approach with business loans or share sales. 

Owners looking to grow or expand their business are very familiar with this conundrum. It’s no longer just about getting funding in general, the word of business has evolved and now offers many more avenues to funding than just banks or investors. 

Eligible Business Corporation (EBC) Tax Credit


The B.C. Government has a Small Business Venture Capital Program, which offers tax incentives to investors in the hopes that they will invest in small businesses in B.C. Under the Direct Investment model of the program, businesses can sign up as Eligible Business Corporations (EBCs). They are then added to a list to be paired with venture capital investors. 

To be eligible, your business needs to conduct work in one of the following areas:

  • Goods manufacturing and processing
  • Research and development of proprietary technology
  • Destination tourism
  • Development of interactive digital media products 
  • Clean technology 
  • Commercialization

Investors can benefit from a 30% refundable tax credit, with an annual maximum credit of 120,000. If the investor is a corporation and not an individual, there is no annual maximum credit.


Venture Capital or Private Equity

This is the most traditional way of accessing funds. The business generally gives up a minority or majority stake to the investor in exchange for capital. Depending on the industry and the investor, they may or may not get involved in the day to day operations and strategic business  planning.

There are no predefined eligibility criteria, but generally speaking, VCs will look for the following criteria when making an investment decision. 

  • Value and Competitive Moat 
  • High Growth or Profit Potential 
  • Storytelling 
  • Low Threats and Weaknesses  
  • Compatibility with their mission and vision

The available amount also greatly varies depending on the company valuation and VC risk tolerance. It’s a common strategy to look at VC involvement with the EBC Tax Credit above in mind. 

Industrial Research and Assistance Program (IRAP)

 

The National Research Council (NRC) of Canada established the Industrial Research and Assistance Program (IRAP) to support Canadian businesses in financing technological innovation and research and development. The federal government allocated $250 million in grant funding for the program in 2020. Later, that funding was increased by another $155 million to further support successful recipients expanding their business.

Businesses eligible for IRAP funding are:

  • incorporated, profit-oriented, Canadian businesses 
  • made up of 500 employees or less
  • planning to develop innovative and technology-driven products, services or processes in Canada 
  • committed to completing the project within 12-36 months

Eligible businesses can receive a maximum $10 million in grant funding, with up to 80% of direct labor costs and 50% of sub-contractor expenses.

Scientific Research and Experimental Development (SR&ED) Program

Offered by the Canada Revenue Agency (CRA), the SR&ED program offers tax incentives to eligible businesses conducting SR&ED work. Eligible work must fit under one of these three categories:

  • Basic Research - work intended to advance scientific knowledge without aiming for a specific application
  • Applied Research - work intended to advance scientific knowledge while aiming for a specific application
  • Experimental Development (most common) - work intended to achieve technological advancement to create new or improve existing products or processes

Eligible businesses can get up to 64% of their eligible expenses refunded.

Love Money 

Love money is money lent to you by family and friends. This is a common source of funding for many startups, because loved ones are more likely to see your passion and commitment towards your business as a reason to overlook your not-so-great credit history. 

It’s also a source of money that rarely comes with interest, and if it does come at interest, it’s almost always much lower than the interest on a bank loan. Be weary of mixing family with business though - money has a way of complicating things, and accepting financing from loved ones can cause strain on your relationship. 

Business Loan 

The most simple method of funding. A bank loans the business money in exchange for interest payments. As a small business, banks may often ask for personal collateral to secure the loan, such as property or other assets. Generally, interest rates charged to businesses are significantly higher than interest rates charged on personal loans. 

Depending on the type of business, the current state of operations and the owner’s financial situation, it may be more or less challenging to access a bank loan. 

Final Thoughts

There are a few financing options available to small businesses, but not all fit all businesses. Diversification of credit indicates good financial health, and you might get closer to your startup financing goal with multiple sources of funds. 

Are you a small or medium business interested in securing startup financing? Find out how Requiti’s skilled consultants can help you help you secure funding for your business.