Debt financing: capital you owe
Debt financing is borrowed money: term loans, lines of credit, venture debt, revenue-based advances. The lender does not own part of your company — you repay principal plus interest on a schedule, and the obligation disappears when the loan is repaid. For founders who want to keep full ownership, that is the whole appeal.
- You keep 100% ownership and control
- Interest is typically deductible against business income
- Requires serviceable cash flow or security — hard for pre-revenue startups
- Sources in Canada: chartered banks, credit unions, BDC, EDC and private lenders
Equity financing: capital you sell
Equity financing sells a portion of ownership in exchange for capital. Investors are repaid through the company's future success, not on a schedule. Beyond money, the right investor brings networks, hiring and follow-on capital — which is why many founders accept dilution as the price of a stronger cap table.
- No repayment obligation — capital is at risk with the business
- Dilution: existing shareholders own proportionally less
- Often brings strategic help, not just cash
- Sources in Canada: angels, venture capital funds, strategic corporate investors
The tradeoff in one table
Neither option is universally better. The right choice depends on the stage of the business, the predictability of its cash flow, and how much control the founders want to keep.
- Ownership: debt keeps it, equity shares it
- Repayment: debt demands scheduled payments, equity does not
- Cost: debt costs interest, equity costs a share of future upside
- Risk: debt burdens a young company with fixed obligations, equity spreads it with investors
The non-dilutive middle ground
Between debt and equity sits the capital most founders underuse: grants, contributions and tax incentives that require neither repayment nor ownership. Canada's innovation ecosystem is unusually rich here — SR&ED tax credits, NRC IRAP contributions and regional agency programs can fund a meaningful share of R&D spend. Founders often sequence non-dilutive sources first, then debt against predictable revenue, then equity only for what remains.
A rule of thumb
Match the financing to what the money is for. Working capital and equipment can carry debt because they produce measurable returns. Pure R&D with uncertain payback is better carried by grants, credits or equity. A cap table is hard to repair, so treat equity as the most expensive money you will ever raise — and exhaust the alternatives before you sell a share.