It costs money to start a business. Funding your business is one of the first — and most important — financial choices most business owners make.
How you choose to fund your business could affect how you structure and run your business. Putting all your eggs in one basket is never a good business strategy. This is especially true when it comes to financing your new business. Not only will diversifying your sources of financing allow your start-up to better weather potential downturns, but it will also improve your chances of getting the appropriate financing to meet your specific needs.
Keep in mind that bankers don’t see themselves as your sole source of funds. And showing that you’ve sought or used various financing alternatives demonstrates to lenders that you’re a proactive entrepreneur. Whether you opt for a bank loan, an angel investor, a government grant or a business incubator, each of these sources of financing has specific advantages and disadvantages as well as criteria they will use to evaluate your business.
Here’s an overview of six typical sources of financing:
1. Bootstrapping With Personal Fund
Self-financing or personal investment is the best way of financing used by several business start-ups. Even when you take a loan or ask a venture capitalist or government entity to provide funding for your start-up, they still have this question; how much capital you shall be investing in your start-up? Investing your own savings is the best option for first-time entrepreneurs. In the later stages of business, you can easily opt for business loans and lenders shall not have a reason to deny it, as they will consider the stability of business, as it will be a low-risk factor for them.
2. Contemplate Friends and Family
Initially, asking for financial support from close relatives and friends might be nerve-wracking. Before asking for outside help, it’s good to start by talking to individuals you know and trust. Additionally, there’s no harm in asking. Even if you don’t have the money, your family may be impressed enough to assist you to get your new dog-owner social network off the ground.
However, preparing a business strategy in advance of approaching family and friends for financial assistance would be beneficial. This is the best way for them to provide you with a loan, investment, or gift. What is your company about, and how will it generate revenue? (i.e., whether or not they should expect to get back any money they put into your business, and if so, how much).
3. Get Venture Capital from Investors
Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company. Venture capital differs from traditional financing in a number of important ways. Venture capital typically:
- Focuses high-growth companies
- Invests capital in return for equity, rather than debt (it’s not a loan)
- Takes higher risks in exchange for potentially higher returns
- Has a longer investment horizon than traditional financing?
Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.
4. Crowdfunding to Fund Your Business
Crowdfunding raises funds for a business from a large number of people, called crowdfunders. Crowdfunders aren’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money.
Instead, crowd funders expect to get a “gift” from your company as thanks for their contribution. Often, that gift is the product you plan to sell or other special perks, like meeting the business owner or getting their name in the credits. This makes crowdfunding a popular option for people who want to produce creative works (like a documentary), or a physical product (like a high-tech cooler).
Crowdfunding is also popular because it’s very low risk for business owners. Not only do you get to retain full control of your company, but if your plan fails, you’re typically under no obligation to repay your crowdfunders. Every crowdfunding platform is different, so make sure to read the fine print and understand your full financial and legal obligations.
5. Getting a loan may be in your best interests
Earn sure that you have some money and that a bank loan would assist you to make more. Some well-known banks in the area continue to lend to small companies. If you’re seeking money between $5,000 and $500,000, this may be a viable alternative. There isn’t a solution that works for everyone, as far as we know. To increase your chances of securing a loan, you should have a business plan, expense sheet, and financial projections for the next five years. These tools will give you an idea of how much you’ll need to ask for, and will help the bank know they’re making a smart choice by giving you a loan.
6. Peer-to-Peer Lending
Peer-to-peer lending is a type of money borrowing where no intermediaries are involved in the whole process. Lenders lend money to borrowers as their investment and borrowers get money at their disposal to invest in their Start-up. In this process, lenders can earn from borrowers, as the interest rate offered is higher, as compared to banks, NBFCS and MFIs. Peer-to-peer lending institutions are regulated by RBI for the betterment of both lenders and borrowers. For start-up enterprises, peer-to-peer lending is a type of loan, whereas for the lender it becomes an investment.
Even while securing the first capital for your company may be difficult, it can also be quite gratifying. As long as you’ve saved enough, gotten authorised for a loan, or found other individuals who want to assist you to start your ideal job, you may go back to or start your dream career. As a small company owner, having individuals who can assist you keep going is essential. Friends, angel investors, or venture capitalists might all be involved. We wish you the best of luck!