Grants, Loans or Equity? How to Choose Funding for Your Business
Outside funding for a small business generally comes in three forms: grants you do not repay, loans you repay with interest, and equity, where investors put in money in exchange for part of the business. Each has a different price, and the option that looks cheapest on paper is not always the best fit.
Choosing well starts with three questions: what the money is for, how much you need and when you need it. Here is how the options compare and how to decide which mix suits your stage.
Grants: money you do not repay, with conditions
A grant is non-repayable funding, usually from a government or a non-profit organization, for a defined purpose. That makes grants attractive, but they are rarely quick or simple.
Narrow purpose. Programs usually support specific activities, such as staff training, technology adoption, exporting or research, and only certain costs within them.
Cost sharing. Many programs pay only part of the eligible costs, so you fund the rest from your own money or other sources.
Paid after you spend. Funding is often paid as a reimbursement after you spend the money and submit a claim with receipts and progress reports, so you still need cash to carry the project.
Timing rules. Costs incurred before approval or before the agreed start date are often ineligible. In Alberta, for example, the Canada-Alberta Productivity Grant partially reimburses employers for staff training, and employers must apply before the training begins.
Tax treatment. Government assistance generally must be reported as income or as a reduction of a related expense or asset cost, so ask your accountant how this applies to you.
To find programs, try the Government of Canada's Business Benefits Finder. It asks a short series of questions about your business, then lists federal, provincial and territorial programs that may match.
Loans: keep ownership, take on repayment
A loan lets you keep full ownership of your business. In return, you repay the principal plus interest on a set schedule, whether sales are strong or slow.
What lenders assess. Expect a close look at whether your cash flow can cover the payments, your personal and business credit, available collateral and how much of your own money is in the project.
Personal guarantees. Lenders commonly ask small-business owners to guarantee a loan personally, which can put personal assets at risk if the business cannot repay.
Where loans come from. Banks and credit unions are the usual starting point. The Business Development Bank of Canada (BDC), a Crown corporation owned by the federal government, also lends to entrepreneurs.
Best fit. Loans tend to suit businesses with steady revenue and a clear use for the money, such as equipment, renovations or working capital.
Equity: trading ownership for capital
With equity financing, investors such as family members, friends, angel investors or venture capital funds receive a share of ownership in exchange for their money. There are no loan payments, but the trade-offs are significant.
You give up part of the business. Investors share in future profits and any growth in value, and later rounds of investment can shrink your percentage further.
You gain partners. Investors usually expect input on major decisions, and some ask for a board seat.
They expect growth and an exit. Outside investors look for strong growth potential, and they plan from the start how they will eventually sell their stake.
You need a corporation. Only corporations issue shares, so a sole proprietor usually needs to incorporate before bringing in equity investors.
Securities law applies. Provincial securities laws generally require a prospectus, a formal disclosure document, before you sell shares, unless an exemption applies. Commonly used exemptions include those for family, close friends and business associates and for accredited investors. Many require filing a report with the regulator after the sale. The Alberta Securities Commission and Saskatchewan's Financial and Consumer Affairs Authority publish guidance, but speak with a securities lawyer before you approach potential investors.
Options that blur the lines
Some funding does not fit neatly into one box:
Interest-free repayable contributions. PrairiesCan, the federal department that supports economic growth in Alberta, Saskatchewan and Manitoba, runs a Business Scale-up and Productivity program that gives growing incorporated businesses interest-free funding they must repay. It covers only part of a project's costs.
Government-backed loans. The Canada Small Business Financing Program makes it easier for small businesses to borrow from financial institutions by sharing the risk with the lender. You still borrow from, and repay, the lender.
Tax incentives. The federal Scientific Research and Experimental Development (SR&ED) program offers income deductions and investment tax credits for eligible research and development work done in Canada.
Your own investment. Money you put in is equity too, and lenders and funding programs often want to see it.
How to choose the right mix
You can combine sources, such as owner investment and a loan for equipment with a grant for a training project. Before you apply, work through these questions:
What will the money pay for? Match the funding to the purpose. Equipment and other long-lived assets often suit a term loan, a defined project may fit a grant program, and plans that need large sums long before profits arrive may point to equity.
How much do you need, and by when? Grant reviews and investor discussions take time, and reimbursements arrive after you spend, so build those delays into your timeline.
Can your cash flow carry repayments? A monthly cash flow forecast shows whether loan payments are realistic, including in your slowest months.
How much control are you willing to share? Decide in advance how much ownership and decision-making you would give up, and on what terms.
What can you document? Every funder will want a clear plan, financial statements or projections, a project budget and a plain explanation of how the money will be used.
How First Global Citizen can help
We help founders and small-business owners get ready for funding: reviewing which types of funding fit your plans, researching programs you may be eligible for, building cash flow forecasts and financial projections, and preparing business plans, grant and loan applications and investor materials. We do not lend money, arrange loans or give investment advice, and since funders make the decisions, no one can promise approval.
Each engagement is quoted as a fixed fee in a written proposal, and any government or registry fees, such as incorporation fees, are passed on at cost. When you need legal, tax, accounting or securities advice, we coordinate with independent licensed professionals. Learn more about our business plan and funding readiness services or book a free consultation.
This article is general information only. It is not legal, tax, accounting or financial advice. Fees and requirements can change, so confirm current details with the relevant government agency or registry. For advice about your situation, consult a qualified professional.
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