Vancouver, British Columbia · Plan · Capital · Follow-through
LEGATISExecutive Partners
Types of business financing

Every kind of business financing, in plain language.

21 kinds of financing, three tiers of lender, and how equity works. What each one is, what it is good for, where it goes wrong, and who offers it. Written for the owner who has been offered something and wants to know what they are looking at before they sign, and for the owner who wants to know what to ask for. Last checked 29 SEP 2026.

The map

What is the money for?

Financing is chosen by its use first and its price second. Start with what the money is for; the lender follows.

Working capitalMoney for the gap between paying for the work and being paid for it.7 kinds → Term loansA fixed amount, repaid over years, for something that lasts.5 kinds → Equipment and leasingThe machine, the truck or the system pays for itself over its working life.3 kinds → Property and bridgeLong money against a building; short money to get from here to there.2 kinds → Buying a businessA purchase is financed in layers, and each layer has its own lender.4 kinds → Types of lendersA, B and C: the difference is what they lend against.3 tiers → Raising capitalAngels, venture funds, private equity, crowdfunding, and why a registered dealer.6 sources → Before you signThe things that catch people out.12 pitfalls →
Working capital

Money for the gap between paying for the work and being paid for it.

Every growing business has the same problem: wages, materials and rent go out before the customer's cheque comes in. Working capital financing bridges that gap. It comes in six forms, from the cheapest, which needs a track record and security, to the dearest, which needs only six months of bank statements. Most of the expensive mistakes on this page happen here.

Operating line of credit (secured)

A lenders

Revolving credit for the gap between paying for work and being paid for it. You draw what you need, repay when customers pay, and interest runs only on the balance. The bank secures it against your receivables and inventory and caps it at a share of them.

Benefits
  • The cheapest working capital there is, at prime plus one to three
  • Interest only on what is drawn, only while it is drawn
  • Renewed yearly rather than repaid, so it grows with the business
Risks
  • It is a demand facility: the lender can reduce or call it, and usually does when you need it most
  • A line that never comes down is a term loan in disguise, and the lender will say so at renewal
  • The margin formula quietly shrinks the limit when receivables age or a big customer slows down
Who offers it

Banks and credit unions; BDC does not offer operating lines but will term out working capital.

SuitsAny established business that carries receivables or inventory.
How muchCapped at a borrowing base: about 75% of receivables under 90 days, plus up to 50% of inventory, less anything owed to government.
What it costsPrime plus 1% to 3%, plus a standby fee on the unused portion and a monthly account fee.
How longDemand facility, reviewed yearly. Interest only.
SecurityA general security agreement over everything, and a personal guarantee.
Before you sign. A line that never comes down is really a term loan, and is cheaper as one. Lenders notice, and so should you.

Unsecured line of credit

A lenders

A smaller revolving line with no specific asset behind it and no borrowing base to report against. The lender relies on the business's record, your personal credit and your guarantee. Most small-business credit cards and the lines attached to a business chequing account are this.

Benefits
  • No monthly reporting, no margin formula, no field exams
  • Fast to set up, often at the branch on the strength of the account history
  • Useful as a standby for a slow month rather than as the main source of working capital
Risks
  • Small: rarely more than $50,000 to $250,000 for an owner-led business
  • Priced above a secured line, and a credit card far above that if a balance is carried
  • Still a demand facility with a personal guarantee, so the risk to you is not smaller, only the paperwork is
Who offers it

Banks and credit unions, and the credit-card issuers.

SuitsA business with a few years of clean banking that needs a cushion rather than a funding source.
How muchCommonly $10,000 to $250,000, set on the account history and the owner's credit.
What it costsPrime plus 2% to 6% on a line; 19% to 22% on a card balance carried past the grace period.
How longDemand facility, reviewed yearly.
SecurityA personal guarantee, and often a general security agreement anyway.
Before you sign. Unsecured does not mean unguaranteed. Read the guarantee before you assume the house is safe.

Receivables line and asset-based lending

B lenders

A revolving line that rises and falls with your receivables, and sometimes inventory and equipment, from a lender that lends against the collateral first and the financial statements second. It looks like a bank operating line but advances more, watches the collateral harder, and costs more.

Benefits
  • Funds growth faster than a bank will: the limit rises as sales rise
  • Available after a bad year, a turnaround or a start-up phase a bank will not fund
  • The customer is not told; you keep collecting your own receivables
Risks
  • Reporting is heavy: aged lists monthly or weekly, reconciliations, and field exams you pay for
  • Monthly minimums and monitoring fees make it dear if you use less than expected
  • The lender takes a first charge over everything, which can block a bank from lending later
Who offers it

Asset-based lending divisions of the banks, commercial finance companies, and a few credit unions.

SuitsBusinesses growing faster than a bank will fund, or with a year in the statements a bank does not like.
How muchUsually 80% to 85% of eligible receivables, sometimes with inventory and equipment on top.
What it costsPrime plus 3% to 9%, plus a monthly monitoring fee and often a minimum.
How longRevolving, reviewed yearly, with monthly or weekly reporting on the receivables.
SecurityFirst charge over receivables and inventory, and usually everything else.
Before you sign. Budget the time. A facility that needs a day a month of the bookkeeper's time is part of the price.

Invoice factoring: notification and non-notification

B lenders

You sell an invoice rather than borrow against it. The factor advances most of the face value now and pays the rest, less their fee, when your customer pays. In notification factoring the customer is told and pays the factor directly. In non-notification (confidential) factoring the customer is not told: you keep collecting and pass the money on, which factors offer only to stronger businesses with good records.

Benefits
  • Cash within a day or two of invoicing, with no waiting for 60-day terms
  • Decided on your customers' credit, not yours, so a young or scarred business can qualify
  • Non-recourse factoring takes the customer's credit risk off you, for a higher fee
  • The factor's collections work, if you let them do it, can be worth having
Risks
  • Expensive: 1% to 5% of the invoice every thirty days is an effective annual cost in the twenties or higher
  • With recourse, you buy the invoice back if the customer does not pay, so the credit risk is still yours
  • Notification tells your customers you are factoring, and some read it as distress
  • Whole-book facilities carry minimum volumes and exit fees that make leaving slow
Who offers it

Specialist factoring companies, and the factoring arms of some commercial finance companies; a few credit unions refer to a partner.

SuitsBusinesses whose customers pay slowly but reliably: staffing, trucking, subcontracting, wholesale.
How muchAdvance of 70% to 90% of the invoice, with the rest held in reserve until the customer pays.
What it costsCommonly 1% to 5% of face value per 30 days outstanding, plus wire and set-up fees. On 60-day terms that is an effective annual cost in the twenties or higher.
How longInvoice by invoice, or a whole-book facility with a minimum volume.
SecurityThe receivables are sold, not pledged. The factor registers security over them anyway.
Before you sign. Three questions before signing: recourse or non-recourse, notification or not, and what it costs to stop.

Purchase order and inventory finance

B lenders

Money to buy or make the goods for an order you already hold, repaid when the customer pays. The lender pays your supplier directly, often by letter of credit, and is repaid from the invoice, usually through a factor.

Benefits
  • Lets a small business take an order it could not otherwise afford to fill
  • Sized on the order and the customer's credit, not on your balance sheet
  • Pairs with factoring so the whole cycle, from supplier to customer's payment, is funded
Risks
  • Dear: a few per cent a month, on top of the factoring fee that usually follows
  • The lender controls the supplier payment and often the shipment, so a dispute stops everything
  • Only works with a creditworthy customer and a gross margin of roughly 20% or more; below that the fees eat the order
Who offers it

Specialist trade-finance and purchase-order finance companies; EDC guarantees can support it for exporters.

SuitsDistributors and manufacturers with a firm order from a strong customer and a supplier who wants paying first.
How muchUp to the supplier's cost of the goods, typically 70% to 100%.
What it costsRoughly 2% to 6% of the funded amount per 30 days, plus the factoring cost on the invoice.
How longThe life of the order: usually 30 to 120 days.
SecurityAssignment of the purchase order and the resulting invoice, title to the goods, and a personal guarantee.
Before you sign. Work the margin backwards before accepting the order. An order that makes 15% gross and costs 8% to fund makes nothing once the factoring fee lands.

Merchant cash advance and revenue-based funding

C lenders

Cash today in exchange for a fixed larger amount collected from future sales, usually as a daily or weekly sweep from your bank account or card terminal. It is sold as a purchase of future receipts rather than a loan, which is why it is not quoted as an interest rate.

Benefits
  • Money in a day or two, decided on bank statements alone
  • Available to businesses no bank or asset-based lender will touch
  • In its honest form, a way to close a short, named gap
Risks
  • The dearest money on this page: a factor of 1.30 over six months is an effective annual cost near 100%, not 30%
  • Daily repayment takes the money before payroll and suppliers do
  • Stacking a second advance to service the first is the most common route from a cash problem to an insolvency
  • A confession of judgment or a broad guarantee can be buried in the agreement
Who offers it

Online lenders, payment processors and merchant cash advance companies. No bank, credit union or Crown lender offers it.

SuitsRetail, restaurants and services with steady card sales and thin assets. A short, named gap, and nothing structural.
How muchCommonly $5,000 to $500,000, sized on monthly deposits.
What it costsA factor rate of 1.10 to 1.50 of the advance, repaid over 3 to 12 months; convert it to an effective annual cost before comparing it with anything.
How longThree to twelve months.
SecurityA general security agreement and a personal guarantee, even on small amounts.
Before you sign. Convert the factor rate to a yearly cost with the offer comparison calculator before you sign, and never take a second one to pay the first.

Short-term online loans

C lenders

A fixed-term loan decided on bank data in a day or two, repaid daily or weekly over months rather than years. A cousin of the merchant advance with a stated rate.

Benefits
  • Fast, with little paperwork
  • A stated rate and term, so the cost is at least visible
  • Can bridge a gap to a bank facility that is in progress
Risks
  • Stated rates of 20% to 60% and up, with origination fees on top
  • Daily or weekly repayment, with the same cash-flow strain as an advance
  • Renewals that refinance the balance and charge the fee again
Who offers it

Online and alternative lenders, some in partnership with credit unions and banks.

SuitsA gap with a date on it, when nothing cheaper is available in time.
How muchCommonly $10,000 to $300,000.
What it costs20% to 60% a year and beyond, plus a fee of 2% to 5% at the start.
How longThree to eighteen months.
SecurityA general security agreement and a personal guarantee.
Before you sign. Know what the bank facility that replaces it will be, and when, before taking it.

The offer comparison calculator converts two offers, factor rates and fees included, into the same yearly cost; the operating line calculator prices a line as it is actually used.

Term loans

A fixed amount, repaid over years, for something that lasts.

A term loan is borrowed once and repaid in instalments over a set number of years. It is the right tool for anything with a life longer than a year: equipment, a fit-out, a renovation, a business purchase, refinancing dearer debt. The kinds differ in what stands behind them: an asset, the cash flow, a government guarantee, or nothing but your covenant.

Secured term loan

A lenders

A fixed amount over a fixed period, repaid in instalments, secured against what it bought or against the business's assets generally. The workhorse of business borrowing.

Benefits
  • The cheapest term money: prime plus a small margin, or a fixed rate off the bond of matching term
  • Payments match the life of what was bought, so the asset pays for itself
  • Builds the borrowing record that every later loan is read against
Risks
  • Covenants: a coverage ratio or a leverage limit tested yearly, with the loan callable if breached
  • Prepayment penalties on fixed-rate loans, sometimes the whole interest differential
  • Security over everything, plus your guarantee, so a default reaches past the asset
Who offers it

Banks, credit unions, BDC and Farm Credit Canada.

SuitsEquipment, leasehold improvements, a fit-out, a renovation, buying a business's assets, refinancing dearer debt.
How muchTypically 65% to 90% of the cost of what it finances, sized to cash flow covering payments about 1.25 times over.
What it costsPrime plus 0.5% to 3% floating; fixed at the matching Government of Canada bond plus 2% to 4%.
How longTwo to ten years, up to twenty-five on property.
SecurityA charge over the asset, usually a general security agreement, and a personal guarantee.
Before you sign. Ask for the covenants in writing before you sign, and test them against a bad year.

Unsecured term loan

A lenders

A term loan with no specific asset behind it. The lender relies on cash flow, the record and your personal covenant. Rarer than owners hope, and smaller.

Benefits
  • No asset to pledge, so it can fund things with nothing to secure: software, hiring, marketing, a move
  • Leaves the assets free for a secured lender later
  • Faster, because there is nothing to appraise
Risks
  • Higher rate and shorter term than a secured loan on the same business
  • Almost always guaranteed personally, so 'unsecured' describes the lender's position, not yours
  • Small: a lender without security lends what it can afford to lose
Who offers it

Banks and credit unions for established clients; BDC's working capital and small business loans are the usual source for an owner-led business.

SuitsA profitable business with a few years of clean statements and a use the balance sheet cannot secure.
How muchCommonly $50,000 to $500,000; BDC's online small business loan runs to $350,000.
What it costsPrime plus 3% to 7%, or a fixed rate of 8% to 12%.
How longTwo to six years, sometimes with an interest-only start.
SecurityA personal guarantee, and often a general security agreement even without a specific asset.
Before you sign. Compare it with a secured loan on the same asset before accepting the higher rate for the convenience.

Government-guaranteed loan (Canada Small Business Financing Program)

A lenders

Your own bank or credit union lends, and the federal government reimburses 85% of the lender's loss if the loan fails, so the lender can say yes to a business it would otherwise decline: a start-up, a first purchase of equipment, a fit-out with no history behind it.

Benefits
  • Available from day one, with no trading record
  • Up to $1.15 million per borrower, on a term of up to fifteen years
  • The rate is capped: floating at most prime plus 3%, fixed at most the lender's residential mortgage rate plus 3%
  • Purchases in the previous year can be included
Risks
  • A 2% registration fee, plus the lender's own set-up fees
  • Only for hard assets, leasehold improvements, property and a capped amount of working capital and intangibles; never for shares
  • The lender still takes security on what it finances and may take a personal guarantee, typically 25% of the loan and sometimes more
Who offers it

Every bank and most credit unions; the lender decides, and the government is not involved in the application.

SuitsStart-ups and small businesses with under $10 million in revenue financing equipment, leaseholds, property or a franchise.
How muchUp to $1.15 million: term loans to $1 million (equipment and leaseholds to $500,000, of which working capital and intangibles to $150,000) plus a line of credit to $150,000.
What it costsAt most prime plus 3% floating (7.45% today) or the residential mortgage rate plus 3% fixed, plus the 2% fee, which can be financed.
How longUp to fifteen years; banks amortize to fifteen, and to twenty or twenty-five on property.
SecurityA charge over what it finances, and a personal guarantee at the lender's option.
Before you sign. The guarantee protects the lender, not you. You owe the whole loan whatever the government reimburses.

Cash-flow lending

B lenders

A loan sized on what the business earns rather than on what it owns, usually a multiple of EBITDA. It is how service businesses, software companies and acquisitions are financed when there is little to pledge.

Benefits
  • Funds a business with earnings but few assets, which a secured lender cannot
  • Sized on the whole cash flow, so it can be far larger than the assets would support
  • The standard senior layer in a business purchase
Risks
  • Tight covenants, tested quarterly, because the cash flow is the only security
  • Priced above a secured loan, and higher again from a non-bank
  • A bad year can breach the covenants and trigger repricing or repayment on a business that is still profitable
Who offers it

BDC, the commercial banking arms of the banks for larger and stronger borrowers, and private credit funds.

SuitsEstablished, profitable businesses with two or three years of clean statements: acquisitions, buyouts, growth.
How muchCommonly two to three times EBITDA from a bank, up to four from a private lender, less any existing debt.
What it costsPrime plus 2% to 5% at a bank; 9% to 14% from a private credit lender.
How longThree to seven years, sometimes with a balloon at the end.
SecurityA general security agreement, guarantees, and covenants on coverage and leverage.
Before you sign. Run the stress test: a 20% fall in EBITDA should still cover the payments, or the loan is too big.

Mezzanine and subordinated debt

B lenders

A layer between the bank's loan and your own money. It ranks behind the bank, which is why it costs more, and it is often interest-only with the principal at the end. Some of the return is taken as a share of the equity or a fee tied to the value of the business.

Benefits
  • Fills the gap between what a bank will lend and the price, without giving up control
  • Interest-only years leave cash in the business while it grows
  • Cheaper than selling shares if the business does well
Risks
  • 12% to 20% all-in, and the equity kicker can cost far more than the interest did
  • Ranks behind the bank, so the bank's consent is needed for almost everything
  • A balloon at the end has to be refinanced, and the business has to be worth it by then
Who offers it

BDC Capital, private mezzanine and growth-debt funds, and a few credit unions and family offices.

SuitsAcquisitions, buying out a partner, succession, and growth that outruns the security available.
How muchSized on cash flow, commonly one to two times EBITDA on top of the senior loan.
What it costsRoughly 12% to 20% all-in, with a fee at the end or a small share of the equity attached.
How longFour to seven years, often interest-only with the principal at the end.
SecuritySecond-ranking security, a shareholders' agreement, reporting, and sometimes a board seat.
Before you sign. Price the equity kicker at the value you expect the business to reach, not at today's.
Equipment and leasing

The machine, the truck or the system pays for itself over its working life.

Anything with a serial number and a resale market can be financed on its own, without touching the operating line. The choice is between borrowing to own it and leasing to use it, and inside leasing there are three kinds with very different endings. Ask which one you are signing.

Equipment loan and conditional sales contract

A lenders

You borrow to buy the machine, truck or system and own it from the start; the lender holds security on it until the last payment. A conditional sales contract is the same thing with the seller or its finance arm holding title until you have paid.

Benefits
  • You own the asset, depreciate it, and keep it at the end without a buyout
  • Cheaper than a lease on the same asset when you will use it for its whole life
  • Manufacturers' finance arms subsidize the rate on new equipment
Risks
  • A down payment of 10% to 25% is usual
  • Fixed-rate loans carry prepayment penalties
  • The asset is worth less than the loan for the first years, so you are underwater if the work dries up
Who offers it

Banks, credit unions, BDC, the finance arms of manufacturers and dealers, and independent equipment finance companies.

SuitsEquipment you will run for its full life: production machinery, vehicles, medical and dental equipment, kitchens.
How muchUp to the invoice, sometimes plus freight and installation.
What it costsRoughly 7% to 12% at a bank or credit union, sharper on a manufacturer's programme, higher from an independent.
How longTwo to seven years, matched to the asset's life.
SecurityThe equipment itself, and a personal guarantee on smaller deals.
Before you sign. Match the term to the useful life. Financing a five-year asset over seven leaves two years of payments on something that has been replaced.

Leasing: capital, operating and sale-leaseback

B lenders

A lessor buys the asset and you pay to use it. A capital (finance) lease runs the asset's whole life and ends with a nominal buyout, often one dollar, so it is a loan in another form. An operating (fair market value) lease is shorter and ends with a choice: hand the asset back, renew, or buy it at its market value. A sale-leaseback sells equipment or property you already own to a lessor and leases it back, turning the asset into cash.

Benefits
  • Little or nothing down, and payments spread over the asset's use
  • An operating lease keeps the asset off the balance sheet in some reporting and lets you upgrade when it ends
  • A sale-leaseback raises cash from assets you already own, without a bank
  • Lease payments are usually fully deductible as they are paid
Risks
  • A closed lease cannot be paid out early; breaking it can cost every remaining payment
  • A fair-market-value buyout can be a large surprise at the end, or the asset simply goes back
  • Wear, mileage and return conditions on operating leases are billed at the end
  • A sale-leaseback converts an owned asset into a fixed obligation at a higher rate than a mortgage or loan would have cost
Who offers it

Independent lessors, the leasing arms of the banks and credit unions, manufacturers' captive finance companies, and vehicle fleet lessors.

SuitsCapital lease: equipment you will keep. Operating lease: vehicles, technology and anything replaced every few years. Sale-leaseback: a cash need with assets to spare.
How muchUp to the invoice on new equipment; 60% to 80% of appraised value on a sale-leaseback.
What it costsRoughly 7% to 15% implicit, depending on the asset and your credit; the rate is rarely stated, so ask for it.
How longOne to seven years; a sale-leaseback of property can run ten to twenty.
SecurityThe lessor owns the asset; a personal guarantee is usual on smaller deals.
Before you sign. Open or closed, and what happens at the end. Get both answers in writing before you sign, and ask for the implicit rate.

Vehicle and fleet financing

B lenders

Loans and leases for trucks, vans and cars, from one vehicle to a fleet. A fleet lease line lets you add vehicles under one agreement; a TRAC lease (terminal rental adjustment clause) is a commercial vehicle lease where you carry the risk of the vehicle's value at the end.

Benefits
  • Manufacturer programmes and fleet lessors price vehicles sharply
  • A fleet line adds vehicles without a new application each time
  • Maintenance, fuel cards and replacement can be bundled for a business that would rather not manage them
Risks
  • Mileage and condition charges at the end of an operating lease
  • A TRAC lease can leave you owing the difference if the vehicle is worth less than assumed
  • Fleet agreements carry cross-default clauses: a problem with one vehicle is a problem with all
Who offers it

Manufacturers' finance arms, fleet management companies, banks, credit unions and independent lessors.

SuitsTrades, delivery, transportation, field services, sales fleets.
How muchUp to the vehicle's price; fleet lines are sized on the business's credit.
What it costsRoughly 6% to 12%, sharper on a manufacturer's programme.
How longTwo to six years.
SecurityThe vehicles, and a personal guarantee on smaller fleets.
Before you sign. Read the end-of-term terms before the start of the term.
Property and bridge

Long money against a building; short money to get from here to there.

A commercial mortgage is the longest and cheapest debt a business will carry, because the building outlives the loan. Bridge and private lending is the opposite: short, secured, expensive, and only safe when the way out is already in writing.

Commercial mortgage

A lenders

A loan secured against commercial property, underwritten on the building and its leases first and on you second. Includes owner-occupied premises, where your own business is the tenant.

Benefits
  • The longest and cheapest debt a business carries, amortized over twenty to twenty-five years
  • Buying the premises turns rent into equity and protects against a landlord's plans
  • Insured and government-guaranteed programmes reach further for an owner-occupier
Risks
  • Down payment of 25% to 35%, and appraisal, environmental and legal costs before any money flows
  • The property and the business are now tied together; a bad year in the business threatens the building
  • Fixed-rate breakage penalties can be large; a renewal at a higher rate can be larger
Who offers it

Banks, credit unions, BDC for owner-occupied premises, life insurers and mortgage investment corporations.

SuitsBuying or refinancing premises the business occupies, or an investment property with leases in place.
How muchTypically 65% to 75% of appraised value; up to 85% or more on owner-occupied premises under insured or guaranteed programmes.
What it costsFixed at the matching bond plus 1.5% to 3%; floating at prime plus 0.5% to 2%.
How longFive-year terms, amortized over twenty to twenty-five years.
SecurityA first mortgage, an assignment of leases and rents, and usually a guarantee.
Before you sign. Hold the building in a separate company from the operating business if you can. It makes the business easier to sell and the building easier to keep.

Bridge loans and private lending

C lenders

Short-term money from a private lender or a mortgage investment corporation, usually against property, to get from here to a defined exit: a sale that has not closed, a refinancing in progress, a project part-built. Priced on the security, decided in days.

Benefits
  • Speed: days, not months
  • Decided on the asset and the exit, so a business with a bad year can still borrow
  • Buys the time to arrange cheaper money properly rather than in a panic
Risks
  • 10% to 15% and up, plus a lender fee and a broker fee of one to three points each, often with interest prepaid
  • Without a proven way out it becomes the permanent financing, at bridge pricing
  • The lender may take control of the exit: a power of sale, a forced listing, a step-in right
Who offers it

Private lenders, mortgage investment corporations and bridge funds, almost always through a mortgage broker.

SuitsA purchase that cannot wait for a bank, a refinancing that is approved but not funded, a project between phases.
How muchSized on the security, usually 50% to 70% of appraised value, not on the business.
What it costs10% to 15% and up, plus fees of two to six points all-in.
How longSix to twenty-four months, interest only.
SecurityA registered charge, personal guarantees, and sometimes control of the exit.
Before you sign. Have the exit in writing before you take it: the bank's commitment letter, the signed sale agreement, the takeout.
Buying a business

A purchase is financed in layers, and each layer has its own lender.

Almost no business is bought with one loan. The price is covered by your own money, a senior loan from a bank or BDC, the seller carrying part of it, sometimes a mezzanine layer or an investor, and a working capital line ready on day one. The order matters: each layer ranks behind the one above it, which is why each costs more than the last. The acquisition financing calculator models the stack.

Senior acquisition loan

A lenders

The largest layer in a business purchase: a term loan from a bank or BDC that ranks first, secured on the business's assets and sized on its cash flow. Banks lend against the assets and a conservative multiple of earnings; BDC will lend further, including against goodwill, on a longer term.

Benefits
  • The cheapest layer of the stack
  • BDC's change-of-ownership financing funds part of the goodwill a bank will not, with flexible early repayment
  • Sets the discipline: if the senior lender will not fund it, the price is probably wrong
Risks
  • Rarely covers more than half to two thirds of the price, so the rest has to come from somewhere
  • Covenants tested against a business you have just taken over and do not yet know
  • Requires the target's accountant-prepared statements, a quality-of-earnings look and your own equity in
Who offers it

Banks and credit unions for the asset-backed portion; BDC for cash-flow and goodwill lending; the CSBFP for an asset purchase under $1.15 million.

SuitsBuying an established, profitable business with clean statements.
How muchCommonly 40% to 65% of the price, sized at two to three times EBITDA less other debt.
What it costsPrime plus 1% to 3% at a bank; BDC prices higher for the goodwill portion.
How longFive to seven years; up to ten on some BDC facilities.
SecurityA first charge over the business's assets and shares, and personal guarantees.
Before you sign. Get the senior lender's term sheet before you sign the purchase agreement, not after.

Vendor take-back and seller financing

B lenders

The seller of the business lends you part of the price and you repay them over a few years, usually ranking behind the bank. The commonest second layer in an owner-to-owner sale, and the cheapest.

Benefits
  • Typically 4% to 8%, below anything else in the deal, because the seller wants the sale
  • Keeps the seller interested in the handover working
  • A seller who will carry part of the price is telling the bank the business is sound
Risks
  • The bank will require a postponement, so the seller cannot be paid if the bank is not
  • Often secured on the business and personally guaranteed, like any other loan
  • A seller can use a default to take the business back
Who offers it

The seller. Arranged in the purchase agreement and documented like a loan.

SuitsAny business purchase, especially where the senior lender will not fund the whole price.
How muchCommonly 10% to 30% of the purchase price.
What it costsTypically 4% to 8%.
How longThree to seven years, sometimes with a payment holiday at the start.
SecuritySecond-ranking security and a postponement to the bank.
Before you sign. A seller who will not carry any of the price is telling you something about the business.

Earn-out

B lenders

Part of the price is paid later, only if the business hits agreed targets: revenue, gross profit or EBITDA over one to three years. It is not a loan, but it finances the purchase the same way, by deferring what you pay.

Benefits
  • Bridges a gap between what the seller believes the business is worth and what you can prove
  • Pays for growth out of the growth itself
  • Keeps the seller motivated through the transition
Risks
  • Disputes: the definition of the target, the accounting for it, and who controls the decisions that affect it
  • A seller who is still in the business and watching the number may resist changes you need to make
  • The bank may not count an earn-out as equity, and may restrict paying it
Who offers it

The seller, through the purchase agreement; the accountants and lawyers on both sides earn their fees here.

SuitsBusinesses whose value depends on things not yet proven: a new contract, a new location, a founder's relationships.
How muchCommonly 10% to 30% of the price.
What it costsNo interest, but the price paid if the targets are hit.
How longOne to three years.
SecurityNone for the seller beyond the contract, which is why sellers prefer a vendor take-back.
Before you sign. Define the measure, the accounting and who decides what, in the agreement, in numbers, with an example.

Mezzanine, investor equity and management buyouts

B lenders

When the senior loan, the seller and your own money do not reach the price, the gap is filled by a mezzanine lender, an investor taking shares, or both. In a management buyout the team buying the business typically puts in a little equity and borrows the rest against the business itself, with a mezzanine layer or a private equity partner filling the middle.

Benefits
  • Makes a purchase possible that debt alone cannot
  • A private equity partner brings governance, a network and a plan for the next sale
  • Mezzanine keeps control with you, at a price
Risks
  • Mezzanine at 12% to 20% plus an equity kicker; equity at a share of everything the business becomes
  • An investor's exit horizon of five to seven years becomes your deadline
  • Layers of security, consents and reporting that a small business has to staff for
Who offers it

BDC Capital, private mezzanine funds, private equity funds, family offices, and search funds for a management-led purchase.

SuitsLarger purchases, management buyouts, and a buyer with experience but limited capital.
How muchThe gap: commonly 10% to 30% of the price.
What it costsMezzanine 12% to 20% all-in; equity, a share of the business.
How longMezzanine four to seven years; equity until the next sale.
SecuritySecond-ranking security for mezzanine; a shareholders' agreement for equity.
Before you sign. Model the whole stack, with every layer's payments, against the target's cash flow in a bad year before you make the offer.

The acquisition financing calculator models the whole stack against the target’s cash flow, and the Buying a Business report restates the target the way a buyer and a lender read it.

Types of lenders

A, B and C. The difference is what they lend against.

Every lender in Canada sits in one of three tiers. It is not a judgement on them or on you: it is a description of what they can look at, what that costs them, and therefore what it costs you. The colour on each kind of financing above says which tier usually offers it. Who lends in BC names them.

A lenders

Banks, credit unions and the Crown lenders.

The big banks, BC credit unions, BDC, Farm Credit Canada, and anything carrying a government guarantee. Regulated, deposit-funded, and by a distance the cheapest money a business can borrow.

What they want
  • Two to three years of accountant-prepared statements
  • Cash flow covering payments about 1.25 times over
  • Debt within a normal multiple of earnings for your industry
  • Security they can register and realize on
  • A personal guarantee from every owner of any size
  • A clean record: no arrears with CRA, no unexplained losses

What it costs. Prime plus roughly 0.5% to 3% on a secured facility, a little more unsecured. Fixed-rate term lending is priced off the Government of Canada bond of a matching term plus a spread.

How long. Two weeks to two months, depending on how complete the file is when it arrives.

What to watch. Covenants. The loan is cheap because you have promised to keep the business inside certain ratios, and the annual review is where those promises are checked.

Use it for. Anything predictable: equipment, premises, an operating line, an acquisition with clean numbers.

B lenders

Asset-based, specialty and alternative lenders.

Commercial finance companies, asset-based lenders, equipment lessors, factors, mortgage investment corporations and the alternative arms of some banks. Not deposit-funded, so their own money costs more, and they lend against an asset they can value and monitor rather than against the statements.

What they want
  • An asset they can value, register and sell: receivables, inventory, equipment, property
  • Monthly, sometimes weekly, reporting on that asset
  • A first charge over it, and usually everything else
  • A story that explains the bad year, if there is one
  • A personal guarantee

What it costs. Broadly 9% to 20% a year, plus set-up and monitoring fees. Factoring and asset-based lines are quoted per invoice or per month rather than as a yearly rate, so convert before comparing.

How long. One to four weeks.

What to watch. The fees and the minimums. The rate is only part of the cost, and a facility used less than planned can cost more per dollar than a merchant advance.

Use it for. Growing faster than a bank will fund, a bad year in the statements, a turnaround, or an asset a bank will not lend against.

C lenders

Private, online and revenue-based lenders.

Private lenders, online short-term lenders, merchant cash advance providers and bridge funds. They underwrite the bank statements of the last six months, or the property, and very little else.

What they want
  • Six months of bank statements
  • A personal guarantee, and often a general security agreement
  • For a bridge, the property and the exit
  • Very little else

What it costs. Effective annual cost commonly 25% to well over 60%, and sometimes into three figures. Almost never quoted that way: expect a factor rate, a flat fee, or a rate per month.

How long. One to seven days.

What to watch. The repayment tempo and stacking. Daily sweeps take the money before payroll does, and a second advance to service the first is the beginning of the end.

Use it for. A genuine short-term gap with a date on it that you can name and close. Nothing structural, and nothing you would still be carrying in a year.

A lendersB lendersC lenders
WhoBanks, credit unions, BDC, FCCAsset-based and specialty finance, lessors, factors, MICsPrivate, online and revenue-based
They lend againstHistory, cash flow and securityAn asset they can value and monitorThe last six months of deposits, or the property
Typical costPrime + 0.5% to 3%9% to 20%, plus fees25% to 60%+ effective, often far more
How longTwo weeks to two monthsOne to four weeksOne to seven days
What they needStatements, forecast, security, guaranteesThe asset, and reporting on it monthlyBank statements and a guarantee
The catchCovenants and an annual reviewFees, monitoring and minimumsRepayment tempo and stacking
Use it forAnything predictableGrowth or a bad year in the statementsA short gap with a date on it
Raising capital

Equity: selling a share of the business instead of borrowing.

Debt has to be repaid whatever happens. Equity does not, and that is exactly why it costs more: the investor is paid in a share of everything the business becomes, and has a say in how it gets there. Most owner-led businesses in BC never raise equity from outsiders, and should not; the ones that should are the ones whose plan needs more money than the cash flow can ever borrow, and whose upside is large enough to share. Selling a share of your company is also a trade in securities, and in British Columbia that is regulated in a way most owners discover late.

Friends, family and your own money

The first equity in almost every business. Often documented badly, and often the source of the dispute that ends the business or the friendship.

What they give. Small amounts, patience, and belief in you.

What they want. Their money back one day, and usually not to be told how the business is doing.

Watch. Paper it: a shareholders' agreement or a loan agreement, a price for the shares, and what happens if someone needs out. It is the private issuer exemption at work, and it has conditions.

Angel investors

Individuals investing their own money, often in a group like VANTEC or a regional angel network, in businesses at the idea-to-early-revenue stage. They invest for a return, and many invest for the involvement.

What they give. Commonly $25,000 to $250,000 each, and a group can assemble $250,000 to $1.5 million; experience, introductions, and a first board.

What they want. A large return on a few of the companies they back, because most will fail; in BC, a company registered as an Eligible Business Corporation, so their investment earns the 30% provincial tax credit.

Watch. Angels are accredited investors, and the paperwork is real: a term sheet, a subscription agreement, a shareholders' agreement and a report of the distribution filed with the regulator. Pitch fees and pitch events are the front door; the paperwork is the back.

Venture capital funds

Professional managers investing a pool of other people's money (pension funds, institutions, wealthy families) in companies that can grow ten times or more in five to seven years: software, life sciences, clean technology, and little else. They buy preferred shares with rights and protections, take a board seat, and expect a sale or a listing that returns the fund.

What they give. $1 million to $20 million and more per round, in rounds named seed, series A, B and so on; a network, later rounds, and a path to an exit.

What they want. A very large market, a product that scales without adding people at the same rate, and a founder willing to sell or list the company. A twenty-per-cent growth business is not a venture business, however good it is.

Watch. Preferred shares carry liquidation preferences, anti-dilution rights and vetoes that can leave a founder with little at a modest exit. Read the term sheet with a lawyer who has seen a hundred.

Private equity

Funds that buy a majority or a large minority of an established, profitable business, usually using borrowed money alongside their own, improve it, and sell it in three to seven years. The buyer of many owner-led businesses with $2 million and more of EBITDA, and a partner for owners who want to take money off the table without selling everything.

What they give. A price for part or all of the business, often at a higher multiple than an individual buyer pays; a second bite at the sale for an owner who keeps a stake; governance and management depth.

What they want. Predictable earnings, a management team that is not only the owner, a plan to double the business, and a clear route to selling it again.

Watch. The debt they load on the business is the business's to repay, and the shareholders' agreement decides everything about your remaining stake: what it is worth, when you can sell it, and who decides.

Strategic investors and family offices

A supplier, customer or larger company in your industry taking a stake, or a wealthy family's investment office backing a business it likes. Slower and less formulaic than a fund, and often the natural buyer later.

What they give. Capital, plus a contract, a channel or a technology a fund cannot offer; longer patience than a fund.

What they want. A strategic stake: first refusal on a sale, exclusivity, information rights, and sometimes a say in who else you can sell to.

Watch. A strategic investor is also a competitor or a customer with a seat at your board table. Limit what they can see and what they can block.

Crowdfunding

Raising small amounts from many people through a registered online portal. Under the start-up crowdfunding rules a company can raise up to $1.5 million in a twelve-month period, with each investor limited to $2,500, or $10,000 where a registered dealer has advised that the investment is suitable. Reward crowdfunding (pre-selling a product) is not a securities offering at all.

What they give. Up to $1.5 million a year, and a crowd of small shareholders who are also customers and advocates.

What they want. A product people can understand and want to own a piece of, and the work of a campaign.

Watch. Hundreds of small shareholders are a burden at every later round and every sale; a later investor may insist on cleaning them up. The offering document is short, but it is still a securities filing.
The rule owners discover late

Why an exempt market dealer, and why a finder is not enough

Selling shares, a convertible note or a simple agreement for future equity is a distribution of securities. The law starts from the position that it needs a prospectus, and lets a private business skip the prospectus only under an exemption: the private issuer exemption (family, close friends, close business associates and accredited investors, up to fifty holders), the accredited investor exemption, the offering memorandum exemption, or start-up crowdfunding. Each has conditions, and most require a report filed with the regulator within ten days of the money arriving.

The second rule is the one owners miss. Anyone who is in the business of trading in securities, which includes finding investors for a fee, has to be registered with the BC Securities Commission. A consultant, broker or well-connected friend who takes a success fee for introducing investors without registration is breaking the law, and the regulator has pursued exactly that. It also puts the company at risk: a raise done through an unregistered finder can be unwound, and the shares carry the problem into the next round and the eventual sale.

An exempt market dealer (EMD) is the registered dealer built for private-company raises. It can sell securities to investors under the exemptions; it is required to know its clients, know the product it is selling and judge whether the investment is suitable for each investor; it prepares or reviews the offering documents and the subscription agreements, handles the money through a trust account, and files the reports. Its fee is usually a percentage of what is raised, and it is disclosed. The result is a raise that stands up when a buyer's lawyer looks at the share register three years later.

Legatis is not a dealer and does not sell securities. Where a client raises equity, we prepare the business, the plan and the numbers the way an investor reads them, and the raise itself runs through a registered dealer, with the referral arrangement disclosed in writing before any introduction. That is what the Legal and Compliance page describes, and it is what keeps the client's raise clean.

Privately held or publicly traded

Almost every business in British Columbia is privately held: its shares do not trade, its owners are named in a shareholders' agreement, and an investor gets out only when the company is sold or someone buys their shares. A public company's shares trade on an exchange, which is what gives its investors a way out and gives the company a currency for acquisitions. The price of that is disclosure, and it is high.

Privately heldPublicly traded
Who owns itYou, your partners and the investors named in the shareholders' agreement; up to fifty holders under the private issuer exemption, more under other exemptionsAnyone who buys a share on the exchange, plus the founders and insiders, who are named and regulated
How an investor gets outA sale of the company, a buyout by the other shareholders, or a right in the agreement; there is no marketSells on the exchange, subject to escrow and insider rules
What it costs to be oneAccountant-prepared statements, a minute book kept up, filings under the exemptions usedAudited statements, quarterly reporting, continuous disclosure, an independent board, exchange fees; commonly $300,000 a year and more, before management's time
How you get thereIncorporate; you are already oneAn initial public offering, a listing on the TSX Venture Exchange or the Canadian Securities Exchange, a capital pool company, or a reverse takeover of a listed shell, each through an investment dealer
Who it suitsNearly every owner-led business; the buyers and lenders on this site all work with private companiesA business that needs public capital repeatedly, a resource or technology company whose investors want liquidity, or an owner using shares as acquisition currency
The catchIlliquidity: a share is worth what someone will pay when you need to sell itThe market prices you daily, insiders cannot sell when they like, and a small listed company can spend more on being public than it raises

The Pitch Deck Outline is the fourteen slides an investor expects, and the start-up page has the angel networks, the venture capital tax credit and the securities rules for a first raise.

Before you sign

12 things that catch people out.

None of these are unusual. All of them are avoidable by asking one question before signing.

  • Comparing a factor rate to an interest rateA factor of 1.25 is not 25% a year. If it is collected over six months the effective annual cost is roughly double that, because you are paying the full amount on money you have already largely repaid. Convert everything to an effective annual cost before you compare two offers.
  • Counting the fees as separate from the rateSet-up fees, monitoring fees, standby fees, wire fees, renewal fees and broker fees are all interest under another name. Add them to the year's cost and divide by the average balance. On a small facility they can double the rate.
  • StackingIf an advance cannot be serviced, the answer is a conversation with the lender, not another lender: the second advance is how a cash problem becomes an insolvency.
  • Ignoring the repayment tempoA daily or weekly sweep takes your money before your suppliers and your payroll do. A facility that is affordable monthly can be impossible daily, and no covenant will warn you.
  • Signing a general security agreement without reading what it blocksA GSA gives the lender a charge over everything the business owns, now and later. It is standard, and it also means no other lender can take security without this one's consent. One small facility can block a large one.
  • Not knowing what your personal guarantee coversUnlimited or limited, joint with a partner or several, on this loan or on every facility the lender ever grants: guarantees differ, and the difference is your house. Ask for the guarantee to be limited to the facility and to an amount.
  • Prepayment penaltiesA fixed-rate loan or a closed lease can cost more to leave than to keep. Ask what it costs to repay early before you sign, and get the formula, not the reassurance.
  • Breaking a covenant without noticingCoverage and leverage covenants are tested on the year-end statements, months after the year that broke them. Test them yourself quarterly, and call the lender before the statements do.
  • Applying everywhere at onceEvery application is a credit inquiry, and lenders see the others. Choose the right door first, take a complete file to it, and take the same file to one other. The lenders page says which door.
  • Letting the cheapest rate decideThe cheapest facility with the wrong term, the wrong tempo or the wrong covenants is the most expensive one you will ever have. Match the money to the use, then negotiate the price.
  • Raising equity through an unregistered finderA success fee for introducing investors makes the introducer a dealer in the law's eyes, and an unregistered one. The raise can be unwound and the shares carry the problem into every later round. Use a registered exempt market dealer, or stay inside the private issuer exemption with no one paid to find the money.
  • Signing a term sheet you have not pricedPreferred shares, liquidation preferences, ratchets and an equity kicker on a mezzanine loan are all worth something, and it is usually more than the headline rate or the headline valuation suggests. Have someone model what you keep at three exit values before you sign.

Our free offer comparison calculator converts two offers into the same yearly cost, fees included, and tells you which is cheaper.

Indicative, not an offer.

Pricing here is indicative and moves constantly. Variable facilities are quoted against the bank prime rate, 4.45% on the date at the foot of this page. Nothing on this page is an offer of credit, a recommendation, or advice on any particular business; what any one business is offered depends on that business, its security and the day.

Who actually lends these in British Columbia is on our lenders page: the banks, the credit unions, BDC and the rest, with what each one suits. Every start-up loan and grant with its terms is on the start-up page.

Been offered something and want a second pair of eyes before you sign? Send it to us. We will tell you what it really costs, whether or not you use us to arrange something better.

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Request a call back.

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