The options for raising capital in a small business are limited because the full scope of the capital market is not available to the smaller firm. Investors and the investment dealers that put together financing packages in the capital markets shy away from the small business because of the risks perceived in a small business and because the amount of capital required is limited. Capital markets operate as wholesale markets, and require financing deals of a sufficient size to achieve economies of scale. Small business risks may relate only to a lack of understanding of the business by the capital markets, but nevertheless, the small business owner will likely have to raise capital elsewhere.

Debt financing is generally limited to bank operating loans that are used to support liquid current assets and term loans secured by capital assets. The cost of these loans is often several percentage points above the prime rate, unless special government or bank programs are available.

As for equity, options are personal savings, love money (from family and good friends), government assistance, and venture capital funding. The sale of shares (equity) in the capital markets is pretty well impossible in the startup phase of the business. Money from "angels" or venture capital firms is also difficult to access in the firm, on the expectations of rates of return of between 25 to 40 percent annually. Family and friends may have similar expectations.

Canada's Venture Capital and Private Equity Association (CVCA) is a significant source of information on the venture capital business in Canada.

Considering the higher debt costs and the high expectations for equity returns by investors, the cost of capital in the small business will be substantial. This places a significant demand on the returns that need to be achieved by the business. Cost of capital is used to evaluate the desirability of capital investment projects by the firm.

1. Q1: What are the financing options available to the small firm from Small Business BC?
2. Q2: Can you describe two recent venture capital deals with the amounts involved?