Starting and funding a business in Ontario often requires the company to consider various financing options. However, navigating the commercial lending landscape can take time and effort for entrepreneurs and business owners. The ultimate choice will depend on several factors, such as the structure and nature of the business, its specific financial needs, and its future growth trajectory.

Whether you own a small start-up or a large corporation, understanding the legal aspects of business lending is crucial for corporate growth and success. This blog will explore business loans and other forms of corporate financing available for your company.

Understanding Business Loans and Debt Financing

Debt financing is a traditional form of financing available to businesses obtained through a loan from a financial institution or a private lender. Generally, these loans are paid back to the lender on a predetermined schedule with interest. Debt financing is a common type of financial assistance utilized by businesses that require a large amount of capital upfront.

There are several ways for a Canadian business to obtain traditional financing. For example, banks, trust companies and credit unions are often the most common and accessible financial lenders. The federal Bank Act regulates domestic chartered and foreign banks operating in Canada. Specialty lenders in Canada can also provide financial assistance through mortgage, leasing, factoring, floorplan or other asset-based loan programs. Some examples of debt financing available to businesses include:

• Term loans: Term loans provide a business with a fixed amount of capital to be repaid over a fixed period. These loans are often based on a fixed interest rate and generally require guarantees.
• Operating loans: Operating loans help businesses finance their day-to-day operations and are often repayable on demand. They are usually based on a floating interest rate and may be secured against the borrower’s real and/or personal property.
• Lines of credit: Lines of credit offer flexible borrowing availability based on the needs of the business and generally allow the company to repay the borrowed amount at their own pace, with interest.
• Equipment financing: Specific loans, such as equipment financing, allow a business to purchase and utilize equipment without paying for it in full on the date of purchase.

In most cases, a business will need to be incorporated to access debt financing. Lenders may require a business to provide collateral, such as property or equipment, if the business defaults on loan repayments. Some small business loans may also require a personal guarantee to be personally liable for the debt if the business cannot repay the loan.

Alternative Forms of Business Financing

Aside from traditional business loans, there are various types of financial assistance options available to corporations, some of which are discussed in further detail below:

Equity Financing

Equity financing refers to a business investment from a company or individual in exchange for an ownership interest in the business. As a result, an equity investor can make decisions in the business as a part owner.

Angel Investors

Angel investors are experienced and affluent individuals who are leaders in the business world. They invest their money in start-ups and early-stage businesses and obtain an ownership interest in return. Aside from funding, angel investors often offer companies valuable expertise, mentorship, and networking opportunities.

Venture Capital Firms

Venture capital firms invest money in start-ups and early-stage companies with high-growth potential in exchange for equity ownership. They typically provide larger funding amounts than individual angel investors, and, in many cases, they take an active role in guiding the company’s strategic direction. However, venture capital firms are often very selective about the companies they invest in and often expect a high return on their investment.

Private Equity Firms

Private equity firms invest in established businesses that have growth potential, as well as companies that are undergoing corporate restructuring. In contrast to venture capital firms, private equity firms deal with more mature businesses and often provide funding at later stages for buyouts, expansions, or acquisitions. These financial investments are usually made in exchange for significant ownership stakes.

Equity Crowdfunding

In today’s modern business world, crowdfunding is a popular financing option for start-ups. Equity crowdfunding platforms enable businesses to raise capital from numerous individual investors in exchange for equity stakes. In Ontario, equity crowdfunding is regulated by the Ontario Securities Commission, which allows small businesses to build capital from a broad pool of investors, while remaining compliant with regulatory requirements.

Each of these equity financing options has advantages and disadvantages, which can be impacted by the maturity of the business, its growth trajectory, and specific financing needs. Overall, equity financing allows a business to obtain capital without the need to repay the funds, and investors often offer business mentorship and expertise. However, such financial assistance can be challenging to qualify for, and companies must be prepared to give up an ownership interest to their investor(s).

Government Grants and Subsidies

In some cases, a business may be eligible for a grant or subsidy provided by the government. These types of financial assistance do not need to be repaid, as they are intended to encourage economic growth throughout Canada. However, obtaining a government grant or subsidy can be difficult, as only a limited number of recipients will be selected.

The amount of funding and number of available funding opportunities will depend on various factors, including the nature of the business, the purpose of the financing, and the revenue the company earns. To be eligible to apply for a specific grant or subsidy, certain criteria must be met. More details about government financial assistance can be found on the Business Benefits Finder.

Selecting the Right Financing Solution for Your Business

Entrepreneurs and business owners in Ontario should carefully evaluate their options and seek professional assistance to determine the best equity financing strategy for their ventures. Before obtaining a business loan or other form of financial aid, a business must consider factors such as:

• Loan and repayment terms;
• Interest rates;
• Lender fees;
• Eligibility requirements; and
• Ownership interests.

To learn more about the debt financing and business loan options available to you, it can be helpful to consult with an experienced business lawyer who can help you identify the right financial solution for you.

The Business Lawyers at Willis Business Law in Windsor Offer Comprehensive Business Advice and Debt Financing Assistance

Whether you are a small business owner considering incorporation or looking into your business financing options, working with a trusted business lawyer who can help you understand your options and potential risks before making a significant decision is essential. The team of experienced Windsor business lawyers at Willis Business Law understand the importance of these decisions and will work closely with you to understand your business and identify a strategic approach to meet your business needs. To schedule an initial consultation with one of our team members regarding your business matter, contact us by phone at 519-945-5470 or reach out to us online.