Area of Law: Business Law
Answer # 231
Raising money for a businessRegion: Ontario Answer # 231
Companies often need money from external sources to operate or expand. There are five main ways to raise money for a business:
1. Investing your own money
First, you can invest your own money in the business. If you do not have the necessary funds saved, you may be able to raise money yourself by taking out a mortgage on your home, or by getting a personal bank loan.
2. Borrowing from friends and family
Second, you may be able to borrow money from your friends and family. If you borrow money, you must decide with the people you borrowed from whether they are going to be lenders or shareholders. You will owe a different legal obligation to them depending on whether they are a lender or a shareholder. If they are lenders, then the business will probably be responsible to pay them the amount loaned, together with interest. If they are shareholders, then they will also be owners in the business. As an owner, they will not recover any money unless the business is successful. However, if the business is successful, they will share in the profits.
3. Borrowing from a bank or other lender
Third, you may be able to borrow money from a bank or other lender, such as a trust company. Lenders will probably want to take the business assets as security before processing a loan. This means that if the business does not pay back the loan, the bank can seize the assets, sell them, and take the money it is owed from the proceeds.
Any money left over must be returned to you. The bank will likely also require a personal guarantee from the owners of the business. This means that if the loan is not repaid by the business, the bank will be able to collect the money from the owners and their personal assets.
4. Issue and sell shares
Fourth, if your business is a corporation, you can issue and sell corporate shares. However, when you sell shares, your percentage ownership in the corporation is reduced. Before issuing and selling shares you should consult a lawyer to discuss the ramifications and best choices in your particular situation.
5. Government funding
Finally, you may be eligible to receive financing from a government sponsored program designed to help businesses. Contact your provincial government, or view the federal government Small Business Services – Ontario Financing a Business Guide to find out what programs are available for businesses in Canada.
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