Andy asked:

How can I raise the $1.5 million I need to begin operations as a start up service business with a binding commitment from my principal client for $2 million payable only when the service is up and running?

Michael Corbiere answered:

It is always difficult to provide a relevant answer with such little info, but I'll give it my best shot. . .

There are two forms of capital, of course, debt and equity.

First, let's look at debt. Since you used the word "raise", as opposed to "borrow", I'll assume you already know that banks will likely not be an option (for the full amount anyway). It's not clear as to what type of service you are seeking to provide, but if a significant portion of the capital you require is for equipment, you might be able to finance some of it - and it won't be from your bank on the corner. It will likely come from a straight "asset-based lender" (e.g. GE Capital) - and they will likely only finance a certain percentage (e.g. 60%). In addition, if the assets you require will depreciate quickly (e.g. computers), it will be better to lease them. Leasing will decrease the amount of start-up capital you require, so you may want to re-crunch your start-up costs with leasing in mind.

Now, let's consider equity. A million dollars will be out of the scope of angel investors. Angel investors typically invest anywhere from $10K to $250K. You could try to find multiple angel investors, but it is not recommended, as finding one is usually a task in-and-of itself. Finding 10-20 of them will prove to be almost impossible.

Venture Capital in Canada is scarce, and is typically given to high-tech companies with global potential, as investors are looking for 5 to 10 times return of their initial investment.

This leaves the option of an unlisted public share offering. Doing so will require the services of professionals who will ask for some very hefty fees. Most important is that it is very difficult for a start-up small business to begin their journey half way up the ladder, unless they have some very significant capital resources they are willing to risk. If this was your own $1.5 million, would you want to risk it all at once? Or would it be better to start small, learn the ropes of your industry, and build up your company over time?

About the author

Michael Corbiere is an Account Manager at the Business Development Bank of Canada's (BDC) North York office. He specializes in financing companies in the high-tech sector, as well as young entrepreneurs.

 
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