Financial Literacy Series - Topic 4: Advantages & Disadvantages and their Focus for Different Funding Options

Advantages and Disadvantages of each funding option along with their focus

The following is a list of some different funding options (this by no means is exhaustive) along with their advantages and disadvantages and what their focus is when lending. One key point to make is DO NOT become focused on seeking funding. Remember at some point you have to generate income.

·      Banks

Focus:   Cashflow and repayment ability. Do not exaggerate or make unrealistic forecasts.

(+): Least expensive of the conventional options, takes no ownership of the business.

(-): Loans done on a demand basis which means that they could be called at any time.

·       Leasing Companies

Focus: Buy equipment that they lease to you and your repayment ability. They will check your ability to make the payments as they become due.

(+): Some down-payment may be required but they tend to be more flexible in their financial requirements as you do not own the equipment until the last payment is made. If you don’t miss a payment, they are usually low maintenance.

(+): Preserves your cashflow

(+): You can get better or new equipment

(-): More expensive than bank financing.

(-): Total cost may be more

·       Government Agencies

Focus: Varies by mandate. Growing businesses within different geographical areas, industries, or specific demographics. Government funding can come by way of loans, grants, and tax breaks.

(+): Often easier to qualify for.

(-): If you are applying for a government loan then usually more expensive than the bank equivalent. If a grant or tax break, then usually no major downsides.

(-): Can be a lengthy approval process

·       Private Money

Focus: Future value of the business. Looking for growth, higher returns, and how they will cash out.

 (+): They tend to be more tolerant of early stage businesses.

 (+): Can be more flexible

(-): Expensive, as you give up a stake in the future value of your business. Give up a degree of control going forward.

·       Venture Capital

Focus: Future value of the business. Looking for a solid management team and structure in the hope to take the company public and cash out big. Will have involvement in the day-to-day and also expect to have additional rounds of investment.

(+): Can grow your business fast as they have access to resources and if chosen wisely, they can bring a lot of knowledge and contacts to your business.

(-): Similar to private money, it is expensive as you give up a stake in the future value of your business, as well as a lot of control in your business going forward, which can be to your detriment.

Whatever financing source you choose, make sure when applying that you relate you application to the mandate of the source you are applying to.