Debt is money that you borrow to run your business, which must be repaid in full, usually in instalment payments with interest. The lender takes the risk that the loan may not be repaid and charges an interest rate based on that risk. Debt is usually considered a non-dilutive method of financing a business, meaning that it does not reduce your ownership position. However, if the debt does not get repaid by its due date, the lender will essentially have rights to operate your business for the purpose of recovering the loan amount.
Lenders take collateral in the form of business or personal assets to secure the loan. An asset is simply something of measurable value such as equipment, inventory or receivables, or your personal home. If your business does not grow and you cannot repay the loan from the cash flow, the lender can sell the secured assets in order to generate cash to repay the loan.
Since early-stage technology businesses usually do not have business assets that financial institutions recognize as collateral, obtaining debt for these businesses can prove difficult (even more so in a slow market). Intellectual property is not an asset that lenders recognize for collateral purposes. Therefore lenders will often require a personal guarantee from the business owner, pledging personal assets as collateral for the business loan.
The Government of Canada’s Sources of Financing Database supplies a comprehensive list by specific geographic region of all organizations that provide financing of all types. It offers a valuable resource for entrepreneurs considering financing alternatives and trying to identify potential lenders for their business.