Types of Funds Available
There are many different types of loans and lenders. The most common are the traditional chartered banks which offer various types of loans, commonly used to purchase equipment and other types of large expenditures. Interest rates range from prime* plus 1% to 3%. Terms are generally 3, 5 or 7 years. Credit lines are available to finance accounts receivable with approximately the same interest rates and are for periods of one year, renewable upon the past year’s performance of the enterprise.
Government assistance can range from grants and loan guarantees to postponement of interest payments (generally 1 to 3 year) to many other forms of assistance (at any one time there are several hundred-government assistance programs across Canada). A complete review of such programs should be a very important first step in a new business or expansion project.
Generally, private investment can be divided into two categories, a loan, or an equity investment. Usually the investor would like some form of active participation. Although attractive, one must consider such things as compatibility between the shareholders / management team and the investor as well as the relative experience of the participants.
Venture capital is usually for small and medium-sized businesses with strong committed management and a unique product, service, technology or market approach with above-average growth potential. Venture capital assistance generally ranges from $500,000 to $2 million and for larger projects up to $5 million. Share in the enterprise can range from a minority interest usually between 10% and 49% to a majority interest of 51% to 55%.
* Prime is established by the Bank of Canada. It is the lowest rate of interest charged by a lending institution to its best-rated customers.