Development capital and venture capital: an overview

Entrepreneurs who need additional capital can resort to
non-traditional financing options.

Daniel Fortier | Desjardins group

Financial institutions are the main source of external financing for businesses. They provide capital to businesses in the form of secured loans based on the value of the tangible assets the business provides as collateral (inventory, equipment, vehicles, real estate assets, etc.)

This source of financing obviously has a maximum limit that is equal to the loan value. Beyond the loan value, some financial institutions also offer financing based on repayment ability, which, in banking jargon, is referred to as a “cash flow loan”.

This type of loan also quickly reaches a maximum limit once certain credit parameters are met. When both these sources of bank credit are exhausted, a business can seek additional financing from non-traditional investors.

Additional financing: development capital or venture capital

Entrepreneurs who need additional capital can resort to non-traditional financing options, either in the form of subordinated debt or equity. When this type of financing is granted to a business that has not yet reached its break-even point, it’s called “venture capital”. When a business has reached and is exceeding its break-even point, it’s referred to as “development capital”.

Since these forms of financing mean that non-traditional investors assume more risk than financial institutions as no assets are provided as collateral, the required return will be higher.

Profile of the desired entrepreneur

Obviously an entrepreneur who is looking for equity must be comfortable with the idea of a partnership and of the new investor becoming a business associate. The entrepreneur must therefore agree to hand over part of his business. He should also be okay with a form of governance being put in place, either by way of an advisory committee or board of directors adapted to the size of the organization.

The goal of these two forms of governance is to help the entrepreneur step back and expand his circle of advisors, so that his entire organization can benefit from strategic and more long-term thinking. The entrepreneur and his new investment partner should also share the same vision and values.

An entrepreneur who is seeking financing in the form of subordinated debt won’t have to transfer a part if his business to the new investor. However, he should also see his relationship with his investor as a partnership.

Types of projects sought

Capital régional et coopératif Desjardins (CRCD) is a publicly traded company managed by Desjardins Business Capital régional et coopératif. CRCD contributes to the economic development of Quebec by offering both development capital and venture capital. It can offer financing from $50 K to $50 M for business projects such as:

  • mergers and acquisitions
  • expansions and modernisation
  • business transfers
  • innovations
  • working capital improvements

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