A founder asks the bank to fund research and development. There is no collateral and no cash flow behind it, so the answer is no, and the founder concludes that financing is impossible. The founder knocked on the wrong door; the project was not the problem. A profitable contractor, meanwhile, spends six months preparing a pitch for investors, who politely reply that the business is excellent but not investable.
When you set out to finance a business, the amount of money matters less than its form, its timing and the order in which you ask for it. That is the thesis of Financing a Business, the fifth book of The Modern Business Encyclopedia, the La Machine business library by Pierre Vinet. You can read it free on maveco.ca. Here is what to take from it.
What is business financing, and what is it not?
The book defines financing as money a business gets from somewhere other than its sales, in exchange for a claim on its future. Every source therefore creates an obligation:
- a lender has the right to be repaid, with interest, on a schedule, whatever happens;
- an investor owns a share of what the business becomes, with no schedule and no guarantee;
- a public program sets conditions: spend as approved, report, sometimes repay;
- a customer who pays a deposit has the right to receive what was paid for.
Financing is not revenue. Borrowing does not make a business viable if it loses money on every sale; it only loses money for longer. It is not a cure for a simple cash timing gap, and it is not a valuation: what an investor pays for a share is the price negotiated in one specific round.
The book suggests reading every offer along three lines: cost, claim (what the source can demand) and control (what it can decide or block). People compare rates, yet the claim is what shapes the next five years.
How much money does a business need?
The need is not chosen; it is derived from the business plan. The book splits it into three parts, each suited to different money:
- capital spending (equipment, tooling, certification);
- the cash trough (inventory bought before it sells, salaries paid before revenue catches up);
- a buffer, sized by a stated method and tested with a scenario.
The book follows a fictional company, Hydrosentinelle inc. of Sherbrooke, which sells connected water-leak detectors. Its figures are illustrative. Its 24-month need: $165,000 of capital spending, $427,500 for the trough and a 10% buffer of $59,250, for a total of $651,750. The book itself points out that this buffer is thin: Book A2 calls a buffer of 20 to 30 percent common, and Chapter 7 tests it with a scenario method before any file goes to a lender.
Each line has a date. A tax credit paid in month twenty cannot cover a cost incurred in month two.
In what order should you ask for money? The financing ladder
The book ranks sources from the least to the most demanding in control. It is not a strict sequence, since a business often uses several rungs at once, but it is the order in which to ask:
- Your own money, keeping a personal reserve the business cannot touch.
- Customers' and suppliers' money: deposits, prepayments, annual plans, payment terms.
- Debt: startup loans, guaranteed term loans, lines of credit.
- Programs and tax credits, beside debt: inexpensive but conditional.
- Equity, the only source that gives up a share of ownership.
- Alternatives: crowdfunding, revenue-based financing, leasing, factoring. They sit at different heights depending on their form.
Here is Hydrosentinelle's ladder, again with illustrative figures:
- founders' savings: $80,000;
- 30% deposits on 60 pre-orders at $4,800: $86,400;
- Futurpreneur loan and BDC co-loan: $25,000 and $50,000;
- guaranteed-type term loan for the tooling: $85,000;
- refundable research tax credit (35% of $180,000): $63,000.
Total before any equity: $389,400, about 60% of the need. A gap of $262,350 remains, which the founders plan to close with a $300,000 angel round in exchange for 20% of the company.
Deposits do double duty: they finance and they prove demand. But a deposit is a debt owed to the customer until the product is delivered, not revenue.
Debt or equity: which business should sell shares?
In the small business financing survey the book cites (Innovation, Science and Economic Development Canada, 2023 data), 49% of businesses requested external financing, 26% requested debt, and 1% requested equity. Of the debt requests, 90.9% were approved in whole or in part. Equity is a specialized instrument.
Four questions separate a lending candidate from an equity candidate:
- Can the need be serviced from cash flow or secured by assets?
- Can the business become large, and fast?
- Will the founders share control and aim for an exit?
- When is the money needed: before or after cash flow exists?
A solid, profitable business bounded by its region is often an excellent candidate for a loan and a poor candidate for equity, and that is perfectly fine. Hydrosentinelle, by contrast, spends mostly on certification and early losses, with nothing to seize: only $95,000 of tooling out of $651,750 interests a lender. Hence equity, for the gap only.
One point to remember: selling shares to anyone outside the founding team is regulated by securities law, and the sale must rely on a prospectus exemption. Talk to a lawyer before you sell the first share.
What does each source of financing really cost?
The book insists: convert everything into an annual rate, or into dollars at exit.
- A 2% discount for paying in 10 days instead of 60 works out to about 14.90% a year. A supplier can therefore offer the cheapest money or the most expensive, depending on whether you read the terms.
- A 10% discount on an annual plan paid in advance works out to about 26.47% a year, more than three times the book's illustrative 8.5% term loan rate.
- A personal guarantee: the founders negotiated theirs down to $42,500 each instead of $85,000, limited to that one loan. Incorporating does not cancel a guarantee.
- Shares cost nothing until the business is sold, then a great deal. At an illustrative $6,000,000 sale, investors who put in $300,000 receive $1,200,000.
- A participating preference would shift $140,000 to the investors in a $1,000,000 sale without changing the headline price, so offers should be compared at three exit values (below the post-money value, near it and well above it).
The book adds a rule of prudence: looking for money with only three months of runway costs you every advantage, and Hydrosentinelle set its own trigger at twelve months. Every provider can see how long you can wait, and prices it.
How MAVECO can help
Building a financing file takes time, method and an outside view. Here is what MAVECO does for small and mid-sized businesses:
- business planning, the starting point for working out the need;
- grant applications to fund a launch or an expansion;
- profitability analysis of products and services, and pricing optimization;
- accounting, through partners.
📘 Read the book free: Financing a Business.
📅 Let's talk about your project: book a meeting with a MAVECO representative. In 30 minutes, we will tell you frankly where to start.
Frequently asked questions
Where should you start when financing a business? With the need, worked out from the business plan in three parts: capital spending, the cash trough and a buffer. Then climb the ladder, starting with your savings and your customers' and suppliers' money.
Do you have to sell shares to finance growth? Not necessarily. In 2023, only 1% of small businesses requested equity. A profitable business bounded by its region is often better served by a loan.
Why doesn't a tax credit solve an immediate cash need? Because it is paid after the spending it rewards. In the book's case, the $63,000 credit arrives around month 20, and another source has to cover the wait.
Is the book free? Yes. Financing a Business is free to read on maveco.ca.
General information for educational purposes only. This article is not legal, tax, accounting or financial advice. Consult a qualified professional before acting.
