Setting up a new business can be tough. If you want your venture to become successful, you have to know when, how, and where you should get the funds that you need. If you don’t know where to get the money, you might not achieve the success you dream of.
In the world, there are more than 400 million entrepreneurs. If you want to enter this industry, you have to make sure you have what it takes to stand out. You cannot do this if you do not have the funding.
What to Prepare Before Looking for Sources for Business Finance
Before you foray into getting the funding that you need, you must first have a business plan. You will need this business plan to show prospective lenders and financiers that you know what you are doing and that you have a solid idea on running the business. It will also detail how much money you will need, the purpose of the money, and how you wish to pay or return funds to lenders and financiers.
You have to study the timing of your funding carefully. Will you need the money all of the money now or would it be better to receive in tranches, depending on your business plan.
You also have to know how much funding you need because this will tell you what type of investor you are searching for. For instance, you need $150,000 in funding. You may approach an angel investor for this. However, if you will need about $10 million in funding, it may be best to go for a venture capitalist.
When it comes to looking for funding, there are tons of sources. For the purpose of discussion, only the most common types will be included.
Most Common Sources of Business Finance
Getting your needed funds from your personal savings is the most common source of business finance. This funding is ideal for small businesses that have no experience in dealing with investors. This is easy because, you, as a business owner, is not answerable to anyone but yourself (and perhaps your family members). However, getting funds from your personal savings has issues. First, how much money do you have? Second, how much of this money are you willing to risk for your business? These issues often cause business owners and entrepreneurs to use other people’s money.
Also known as a business loan, debt financing causes the lender to provide you money, which you have to repay with interest. With debt financing, you must provide proof that you have the capability to pay them back. Sometimes, you have to provide collateral in exchange for the loan.
In debt financing, the lender or the bank will not care if your business is doing well. You don’t have to give up equity for them. Their main concern is that you pay them back the principal and interest on time.
Love money is also a good source of business finance. This money comes from loved ones – parents, spouse, family, and friends. Some bankers and investors term this as a patient capital or money that can have a later repayment should the business gains profits.
When considering borrowing love money, you have to take into consideration that family and friends may not have enough money to capitalise on your business. If they have, they would want to have business equity in exchange for the funding. Moreover, you should place high importance on your business relationship with family and friends. If anything goes wrong, you lose a business partner and a family member. So, you should think about it seriously.
Angel investors or seed investors or private investors are mostly high net worth individuals who offer financial support for entrepreneurs. In exchange for the funding, they will get ownership equity in the company. These investors are commonly found among your family and friends. In the US, there are close to 250,000 angel investors who fund at least 30,000 small businesses annually.
You will hardly find these individuals in angel groups. Most of them are existing business owners, executives, or successful individuals that have money to spend on helping other businesses flourish. Some of them choose the company they will support based on their business plan or based on their objectives. Others because they believe in the product or the service the business wants to offer. One way of finding these investors is by attending face-to-face networking.
Venture Capitalists (VC)
Venture capitalists are often the ideal source of business finance for enterprises that have gone beyond the startup period. They are also the funding of choice for businesses that require massive capitalisation for expansion. Note that venture capitalists often have direct involvement in business management. They also take an active role in setting significant milestones and targets. It is common for them to provide advice on how you would handle your business.
Most venture capitalists often provide money for businesses that they believe will go public and give them profitable gains in the future. If your company has the ability to be valued at $100 million or more within the next five years, then you are most likely going to get funding from VCs. Be sure to wait for several months since they often take a lengthy and expensive process to determine the business they want to fund.
Looking for sources of business finance will open your eyes to the different financing options available in the market today. While some process is pretty complicated, others are easy.
Remember that you have to carefully choose where, when, and how you are going to get your funding. It can make or break you. In some instances, you might have to give up control. As you go along and look for funding, think about the potential benefits of each one. You might want to combine different sources of financing, depending on your needs and your capacity to pay.