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Financing Business 1 – Canada Visa IN
Financing a Canadian startup company capital structure corporation, bank loans, venture landing, private placement, seed capital, entrepreneur personal resources, government sources, angels

Business Financing in Canada

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Financing Your Business

  

  

DISCLAIMER The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.

  

1. Capital Structure of Corporation

  

Many startup companies require capital beyond the means of their founders in orderto finance continued growth. Expenses quickly add up, and a business thatcannot manage its cash flow will not survive.?Because startup companies typically have a limited operatinghistory and are considered to be risky ventures, obtaining even simplefinancing arrangements can be a difficult task.

   

Theoretically, financing alternatives includedebt or equity financing. Debt financing is borrowing money with a finalobligation to repay the debt.?Equityfinancing is selling to investors an opportunity to own part of the company. Inreality, however, an early stage enterprise is limited to raising moneythrough equity financing. A new company just starting operationswill have difficulty obtaining a bank loan without substantial cushion ofequity financing. As far as a bank is concerned, a startup has little provencapability to generate sales, profits, and cash to pay off a loan. Even theunderlying protection provided by a startup’s assets used as loan collateral maybe insufficient to obtain bank loans. Asset values can erode with time, and in theabsence of adequate equity capital and good management, they may provide littlereal loan security to a bank.

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Having chosen an equity financing an entrepreneur can sell two types of equity securities in acorporation ?common shares and preferred shares. Common shares are a securitythat gives its holders the right to participate in management control of acompany by choosing the directors and by voting on fundamental changes.?Also, common shareholders have the right toreceive declared dividends and to share in the distribution of net assets ifthe business is dissolved.?Althoughcommon shareholders have a claim to the net assets of the business if thebusiness is dissolved, that right is subordinate to the business's debtors andthe preferred shareholders.

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Preferred shares are asecurity that has some characteristics of equity capital and somecharacteristics of debt. Preference shares are used in situations where theinvestor wishes to be in a position somewhere between that of a full equityshareholder (common shareholder) and that of a creditor who becomes entitled torepayment of the debt due to him before repayment to any capital of anyshareholder of any class. Depending upon the rights attached to the shares, aholder of preferred shares may be in a preferred and safer position than thecommon shareholder, but not quite as safe as a holder of debt financing. For a startup, preferred shares may be one way to obtain equity capitalwithout diluting the control of the common shareholders or diluting theirparticipation in the growth of the business.

  

Generally, preferred shareshave the right to a preferential dividend entitling the holder of such sharesto the payment of a specified dividend before any dividend is paid upon commonshares. Preferential shares may provide for a further participation over andabove the cash dividend in the earning of the corporation after the specifiedpreferential dividend has been paid. Preferred shares may have cumulative ornon cumulative dividends. Cumulative dividends, if not paid, continue toaccumulate and must be paid for all periods in arrears before dividends oncommon shares. In the case of non cumulative dividends, the right to receivedividends in each year expires at the end of the corporation’s fiscal year, andif a dividend is not declared, the shareholder forever loses the right todividends.

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A corporation may structurepreferred shares to be redeemable.?Where redemption is included as a right of the holder of preferredshares, the corporation will be entitled to require the shareholder to sell hisor her shares to the corporation at a price pre determined and established inthe share conditions. Similarly, the shareholder will be entitled to requirethe corporation to purchase his shares at a price pre determined andestablished in the share conditions. Redemption rights are usually triggeredupon the expiration of a five to seven year period following the date ofpurchase.?Preferred shares may beconverted into common shares at a predetermined ratio.?Preferred shares typically do not havevoting rights. However, often a voting right will be granted to holders ofpreferred shares during a period in which preferred dividends are in arrears.  

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