Small Business Financing in Canada – Part 1: Crowdfunding

It’s hard to keep track of the many options for financing a business. We often hear business owners asking what type of financing is available in Canada – and which one is most suited to their needs? We wanted to help provide some clarity into the options that are out there. The environment is complex, so we’ve tried to simplify things as best we can. We’ve broken it up into a 5 part series. The first topic we will cover here is crowdfunding.

We’ll cover the following topics:

Part 1: Crowdfunding

Part 2: Government Grants

Part 3: The Banks

Part 4: Private Investors

Part 5: Alternative Lenders

Let’s dive into crowdfunding.

Crowdfunding originated in the UK and has expanded into many developed nations, including the US, Australia and now Canada. There are many different types, but the major four are as follow:

Equity Crowdfunding

Equity crowdfunding is a great option for companies looking to give up some ownership of their company, in exchange for financing. It was also the first form of crowdfunding to be regulated in Canada, through the Equity Crowdfunding Exemption. Financing can be raised from any Canadian resident, including accredited investors or close friends, family and business associates.

Those looking to run an equity campaign should be prepared to put a significant amount of work, as the business will need to bring a number of their own backers to these platforms during their financing round. Most platforms finance a range between $200,000 – $2,000,000 for businesses with a focus on the Arts and Entertainment, Energy & Environment and Technology sectors.

Debt-based (Peer-to-Peer Lending)

Currently, there is a lot of talk around Debt-based Crowdfunding (also referred to as peer-to-peer lending), both in Canada and abroad.

Lending Loop (that’s us!) is currently the only regulated peer-to-peer lending company in Canada to be offering term loans, that can be financed by retail investors (everyday Canadians). The term loans offered through Lending Loop are for a specific amount, with a fixed interest rate and payback term. The primary difference is that the source of capital is crowdfunded from a number of different investors (including retail investors), rather than being funded by a big bank. As a business pays back the loan, the interest paid by the business goes directly back to investors that helped fund them.

Loans issued through Lending Loop range from $5,000 – $500,000 and can be used for any purpose, including things such as working capital, debt consolidation, equipment purchases, expansion, marketing, hiring employees, and more.

Reward Based Crowdfunding

This is the most traditional option and is very popular for new ideas looking to launch a B2C focused product. A company brings a new product to a reward-based platform that they would like to create. They generate a campaign to generate pre-orders this item, and can also ask for donations.

Once the campaign is funded, the business will then satisfy the orders received during the campaign as soon as they are able to. For the majority of reward-based platforms, there is a minimum required amount needed to be raised before the project moves forward. The purchaser or “backer” does not get any financial return aside from the product itself. There is also no guarantee that the company will be able to produce what they might have promised.

Donation Based 

Donation-based is similar to reward-based crowdfunding. The primary difference between the two is that the former is designed to be used as a charitable contribution. This can be used to help people who are battling illness, help provide support during a natural disaster or help fund someone’s education.

Additionally, the amount of money donated is not paid back and it is seen as a charitable contribution. Donation-based crowdfunding is not particularly appropriate for businesses. But we included it to provide clarification, as it is one of the major crowdfunding models.

Well, that’s part 1. If you’d like to learn more about debt based crowdfunding you can find more about what we offer here.

Continue reading Part 2: Government Grants and Financing!

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