There are numerous types of funding that companies can access throughout all stages of business, from the earliest stages, as the company grows and scales up, and finally as an established company. Grants or loans, particularly funding that is available through government sources, can be a valuable way to undertake new research, commercialization, and development activities, while lessening the risk of large upfront costs. Equity financing provides the necessary resources to establish, expand, and scale up a business, with the potential to access large amounts of funding and a shared-risk partnership.
While certain types of funding may seem more beneficial than others, there are advantages and disadvantages to each, with differences in the amount of funding offered and repayment terms, the level of involvement the financer possesses, and the additional resources provided along with the financial support. Ultimately, funding requires commitment, both with respect to upfront time and resources, and continuous efforts to follow the stipulations of the funding terms.
Grants
Grants are non-repayable, meaning that provided all the conditions of an agreement are met, then a company does not have to return any funding. While grants may be offered through private companies, there are fewer opportunities for for-profit businesses in this area. Notable grant programs delivered through governmental organizations include the Industrial Research Assistance Program (IRAP), the Global Innovation Cluster, Innovative Solutions Canada (ISC), and more.
Despite the clear benefits of grants, programs are often competitive, with no guarantee of funding. Moreover, it’s critical to ensure that the project corresponds to the original application; significant changes to the project can result in rescinded funding, making reconciliation and reporting a key part of the grant process. While it’s easy to envision grants as free money, it’s important not to underestimate the amount of time invested in applying for grants, tracking spending, and meeting the goals set out by project guidelines.
Pros:
- No repayment required
- Sometimes comes with additional benefits (e.g., additional resources or guidance)
- Reduces financial burden with minimal risk
- Retention of full ownership
Cons:
- Programs are often competitive
- Long, often multi-step application processes with no guarantee of funding
- Limited to program requirements in terms of how funds can be used
Loans
Loans provide an avenue for businesses to fund their projects with greater funding needs. While loans must be repaid, there are several programs available through the federal and provincial governments which offer low interest rates, long repayment terms and sometimes loan forgiveness if certain conditions are met. Notable programs which offer loans on favorable terms include the Southwestern Ontario and Eastern Ontario Development Funds (SWODF and EODF), FedDev, ACOA’s Business Development Program, and PacifiCan’s Business Scale-up and Productivity Program.
Pros:
- Retention of full ownership
- Repayment terms are clearly laid out
- Easier to obtain than many other types of funding
- Government loans often have favourable repayment terms
Cons:
- Requires repayment, and most often that includes interest
- Can strain cash flow, especially in smaller businesses
- Can limit borrowing capacity for future loans
Tax Credits
Tax credits are financial incentives which reduce the amount of tax a business owes. These credits can be refundable, where you receive a tax refund if your total taxes reach a negative number, or non-refundable, where you receive the credit, but no refund. Notably, the Scientific Research and Experimental Development (SR&ED) program provides credits of up to 35% for R&D projects.
More recently, the Clean Economy investment tax credits were legislated, offering rates between 15%-60% for costs incurred in carbon capture, usage, and storage; clean technology property; costs to produce clean hydrogen; and equipment upgrades for clean technology manufacturing.
Many tax credits are also available to film and television productions in Canada, benefiting both local and foreign companies in undertaking productions here. The main federal programs, PSTC and CPTC, are delivered along with provincial support such as DAVE, FIBC, and OFTTC. Credits available to digital media companies include the Interactive Digital Media Tax Credit (IDMTC) and the Ontario Interactive Digital Media Tax Credit (OIDMTC)
Pros:
- Refundable credits can offer cash benefits
- Reduced taxes can improve cash flow
- Retention of full ownership
Cons:
- Complex application processes
- Eligibility restrictions limits who can apply, and for what projects
- Project costs must be invested upfront prior to receiving the credit
Equity Financing
Equity financing allows companies to raise capital by selling equity. This can be through individual investors unconnected to the industry; angel investors, who invest in the early/seed stages of a company; or venture capitalists, who make larger investments as a company grows.
Pros:
- No repayment required
- Access to large amounts of funds
- Often comes with benefits such as mentorship, networking, or other resources
Cons:
- Loss of ownership
- Profit sharing with investors
- Equity dilution, especially over multiple rounds of funding
- Can be difficult to find investors
Crowdfunding
Crowdfunding through platforms such as GoFundMe and Kickstarter enable businesses, usually startups, to raise capital while taking on minimal risk. Sometimes, businesses raising funding in this way will offer incentives to investors, which may involve early access to new products, or offers of equity.
Pros:
- Access to a large number of potential financers
- Fits into marketing strategies
- Can provide early customer feedback and market validation
Cons:
- Time consuming to promote
- No guarantee of funding
- A percentage of funding may go to the crowdfunding platform
- May not fit in with business objectives
What Type of Funding is Best for my Business?
There are several aspects to consider when deciding what type of funding is right for your business. Some businesses prefer to avoid taking on debt, eliminating options such as loans; however, others may prefer loans to equity financing to retain full control of the company. And while grants and subsidies are great opportunities for companies with limited cash flow, the time invested in the application may not be feasible for some companies. Most businesses seek funding from a variety of sources at different points in time, for different types of projects. Understanding how funding benefits your business, and how it suits your needs at any given time, are key to achieving business growth and financial success.
If you’re wondering what type of funding is right for your business, contact a NorthBridge expert to learn more about how equity financing, grants, loans, and tax credits can help you undertake new projects, develop your workforce, and scale your business.
