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Lesson 6 of 7Developing and Completing the Venture Plan
Unit 4 · Lesson 6 of 7

Financing the Venture

A venture raises its start-up capital from a mix of savings, loans, investors, supplier credit, crowdfunding and grants, weighing the cost of debt against the ownership given up for equity, and lenders judge each request using the five Cs of credit.

5 min read1 quick check9 practice questionsAsk AI about this →

Key things to remember

  1. 1Debt must be repaid with interest but keeps ownership; equity needs no repayment but gives up ownership and a share of profits.
  2. 2Simple interest: , with as a decimal and in years (months ).
  3. 3Total repaid principal interest; equal payment total repaid number of payments.
  4. 4The five Cs of credit: character, capacity, capital, collateral, conditions.
  5. 5Trade credit (e.g. net 30) lets a venture pay a supplier later, moving a payment into a later month.

Ava needs $8,700 to open Ava's Cycle Works, and she has saved $2,700 from part-time work. Where does the other $6,000 come from? Every source of money has a price. Some charge interest, some want a slice of the business, and some come with rules or a competition. Choosing the right mix is part of the financial plan, and the plan itself is what persuades a lender or investor to say yes.

Where start-up money comes from

Where start-up money comes fromDebt (borrowed)Must be repaid withinterest, but you keep fullownership.Bank loana fixed amount repaid ininstalmentsLine of creditborrow as needed, up to aset limitSupplier creditbuy now and pay the supplierlater, e.g. in 30 daysFamily and friends(loan)flexible, but put the termsin writingFuturpreneur Canadanon-profit offering start-uploans and mentoring to youngentrepreneursBDCBusiness Development Bank ofCanada, a federal Crowncorporation that lends tobusinessesEquity (ownership)No repayment, but you giveup part of the ownership andprofit.Personal savingsyour own money invested inthe ventureFamily and friends(shares)money in exchange for partownershipAngel investorsindividuals who investearly, often with adviceVenture capitalfirms that invest large sumsin fast-growing venturesEquity crowdfundingmany small investors eachbuy a shareGrants and awardsNo repayment, but you mustqualify, often compete, andmeet conditions.Summer Company(Ontario)provincial program: start-upmoney and coaching forstudent venturesOther government grantsfor set purposes, e.g.hiring or trainingRewards crowdfundingbackers pre-pay for aproduct or a perkPitch competitionscontests that award cashprizesFamily and friends can lend money (debt) or buy a share (equity). Either way, put the terms inwriting.
Fig 1Sources of financing grouped as debt (repay with interest, keep ownership), equity (no repayment, give up ownership) and grants (no repayment, but conditions apply).
SourceDebt or equityHow it worksWatch out for
Personal savingsEquity (owner's)The owner invests their own money.Shows commitment, but the owner can lose it all.
Family and friendsDebt or equityA loan to repay, or money for a share of the business.Put the terms in writing to protect the relationship.
Bank loanDebtA fixed amount repaid in regular instalments with interest.Needs a strong plan; young owners may need a co-signer.
Line of creditDebtBorrow as needed up to a limit; pay interest only on what is used.Meant for short gaps, not for buying equipment.
Government loans and programsDebt (sometimes grants)Start-up loans, often for young people, sometimes with a mentor.Eligibility rules and a detailed application.
Private investors (angels)EquityIndividuals invest early in return for part ownership and often give advice.They share in profits and decisions.
Venture capitalEquityFirms invest large sums in fast-growing ventures.Rarely funds small local businesses; wants big growth.
Supplier credit (trade credit)DebtBuy now, pay later, e.g. net 30 means pay within 30 days.Late payment can cost the supplier relationship.
CrowdfundingRewards or equityMany people each give a small amount online, often for a perk or pre-order.Platform fees; must deliver the promised rewards.
Grants and youth programsNot repaidMoney for a set purpose, often with coaching.Competitive; strict conditions and reporting.
Common financing sources for a new venture.
Government and youth programs
Federal and provincial governments, and non-profit organizations they support, offer programs for new and young entrepreneurs: start-up loans at reasonable rates, summer student-business programs that combine a grant with coaching, and loans backed by a government guarantee. Rules, amounts and deadlines change from year to year, so check the program's own website before you build it into your plan.

Debt versus equity

ADebt (borrowing)
  • Must be repaid, with interest, on a schedule.
  • Payments are due whether or not the venture makes a profit.
  • The owner keeps full ownership and control.
  • Once the loan is repaid, the lender has no further claim.
  • Interest is a known, limited cost.
BEquity (selling ownership)
  • No repayment and no interest.
  • Investors share in the profits for as long as they own their share.
  • The owner gives up part of the ownership and often part of the control.
  • Investors often bring advice and contacts.
  • The total cost can be far higher if the venture succeeds.

Ava's final mix is $2,700 of her own savings, a $3,000 interest-free loan from her family (with a written agreement to repay $1,500 in October and the rest next year) and a $3,000 youth start-up loan at 6% simple interest for two years. She also has an offer from a neighbour who would invest $3,000 for 25% of the business. The worked examples compare the two.

SourceAmountShare of capital
Ava's savings$2,70031.0%
Family loan (interest-free)$3,00034.5%
Youth start-up loan (6% simple, 2 years)$3,00034.5%
Total financing$8,700100.0%
Ava's Cycle Works financing exactly matches its $8,700 start-up capital.
VideoWatch for the trade-off: debt must be repaid with interest, while equity costs a share of ownership and profit.Watch on YouTube

What lenders look for: the five Cs of credit

CThe lender asksAva's evidence
CharacterCan we trust this person to repay?References, a record of paying bills, bike-repair experience.
CapacityWill the business earn enough cash to make the payments?The cash-flow projection: the $140 payment is covered every month.
CapitalHow much of their own money has the owner put in?$2,700 of savings, 31% of the total.
CollateralWhat can we claim if the loan is not repaid?Tools and stands worth $2,400, and a co-signer.
ConditionsWhat is the loan for, and what is happening in the market?Equipment for a seasonal business in a town with growing cycling demand.
The five Cs of credit, applied to the youth start-up loan.

Working out the cost of a loan

Simple interest: I is interest, P is principal, r is the annual rate as a decimal, t is time in years.

With simple interest, interest is charged only on the original amount borrowed (the principal). For the youth loan, . Ava repays in total, which over 24 months is a month. That is exactly the loan payment in her cash-flow projection. When time is given in months, divide by 12 to convert it to years.

Quick checkTry it before you read on
1
Ava draws $1,000 on a line of credit at 9% simple interest per year and repays it after 2 months. How much interest does she pay?
$

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
Ava's youth start-up loan is $3,000 at 6% simple interest per year for 2 years, repaid in 24 equal monthly payments. Find the interest, the total repaid and the monthly payment.
Example 2
A neighbour offers to invest $3,000 for 25% of Ava's Cycle Works instead of Ava taking the youth loan. Using the projected net profit of $3,105 a season, compare the cost of the two options over two seasons.
Example 3
A bank officer reviews Ava's loan application. For each fact, name which of the five Cs it supports: (a) Ava's cash-flow projection shows positive closing cash every month; (b) she has invested $2,700 of her own savings; (c) her tools and repair stands can be pledged against the loan; (d) she has two years of experience fixing bikes at a community shop and good references.

Where marks get lost

  • Forgetting to convert months to years in : 2 months is of a year, not 2.
  • Using the rate as a whole number (6 instead of 0.06), which makes the interest 100 times too big.
  • Thinking equity is "free money" because there is no interest. Investors take a share of every future profit and often a say in decisions.
  • Asking for venture capital for a small local service business. Venture capital firms look for ventures that can grow very large, very fast.
  • Borrowing from family or friends on a handshake, with no written terms for the amount, repayment dates or what happens if the venture fails.

Flashcards 9

Debt financing
Equity financing
Angel investor
Venture capital
+ 5 more

Practice

1
A venture borrows $5,000 at 7% simple interest per year for 3 years. How much interest does it pay?
$
2
The same $5,000 loan ($1,050 of interest) is repaid in 36 equal monthly payments. What is each payment, to the nearest cent?
$
3
A venture uses $2,400 of its line of credit for 3 months at 8% simple interest per year. How much interest does it pay?
$
4
Which is the biggest drawback of equity financing for an owner?
5
Match each of the five Cs of credit to the question a lender asks.
Character
Capacity
Capital
Collateral
Conditions
6
A supplier's invoice says "net 30." What does that mean?
7
Which financing source is LEAST likely to fund a student-run bike-repair shop?
8
What is the name for an asset a borrower pledges to a lender, which the lender can claim if the loan is not repaid?
9
Put the steps of getting a small business loan in a sensible order.
  1. 1Accept the loan agreement and receive the money
  2. 2The lender assesses the five Cs of credit
  3. 3Make the payments on schedule
  4. 4Calculate start-up capital and how much must be borrowed
  5. 5Complete the venture plan, including the cash-flow projection
  6. 6Meet the lender and present the plan

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