If you’re an entrepreneur who has a good idea for a new business or are already running a start-up business which is ready to grow, one of the critical aspects that you will need to deal with is funding your business.
If you’re an entrepreneur looking to expand your start-up company further, there are several ways to secure business funding. This guide provides an overview on the different types of funding options that are available to new businesses. So, if you're looking to launch a business and need some additional funding sources, then you can learn how to go about raising capital here.
For some lucky entrepreneurs they may be in the position to launch their business idea self-funded using their personal savings. If you have set aside cash in the bank and do not mind spending your own money, then self-funding is one of the easiest ways to kick off a new business project. This kind of way of launching and funding a company is often called bootstrapping.
It's a commonly known trope that some business start-ups launch after being funded on a credit card. However, very few businesses manage to succeed when launched in this way. The main reasons to avoid building your own business on your credit card are the high interest rates and credit card fees, along with the fact most credit card providers will only give you so much credit, and this is often not enough to launch a business with.
You might also consider taking a personal loan from the bank. Sometimes these can be unsecured loans, but often you will need to secure your loan against an asset. This is not an ideal way to launch a business since if you fail you will end up with loan repayments against your personal finances which could lead you into financial trouble.
A final option is to borrow the money from your friends and family members. This line of credit isn't necessarily a bad idea, but everyone needs to come into the arrangement with their eyes wide open. As many businesses fail, there is a chance that the investment money will be lost. So even if you do borrow money from someone close to you, both of you need to be very clear what the arrangement will entail and how and when you will pay the loan back regardless of the success of the enterprise in question.
Grants are the cheapest way to finance a start-up company, so on the surface seem one of the better ways to generate finance for your business. For some businesses this can work well, but for others it is not an option that is viable.
The reason for this is that there are several downsides to small business grants. For example, they involve a very paperwork-heavy process to apply for them, which can often be headache inducing.
Another disadvantage is that very few government grants are awarded, and for those that are, the funding usually must go toward a specific purpose such as IT infrastructure or hiring staff.
One hurdle that businesses often face when they apply for a grant, and are approved, is that they can find that the whole process can take a really long time and, in some cases, it can take more than a year for the funds to even be released to the business. Often, this delay can cause significant operational issues, and many entrepreneurs simply cannot wait this long for financial investment.
Yet another problem with grant programs is that they are often designed are for businesses that operate in a very specific industry, or location. For example, you might find that grants are only available for non-profits, or healthcare initiatives. Grants tend to be setup for economic development purposes, to attract new businesses to a certain field or location. So not all new businesses will meet the eligibility criteria for the grant.
To find out more about grants, entrepreneurs should research what is available in both from the national / federal government, but also locally, since many grant schemes are launched to help facilitate business growth in a certain location.
A second option for business financing is loans, but often brand-new entrepreneurs and those without significant collateral run into some problems acquiring any finance at all. You might think that you have a good credit score with the bank, but unfortunately, they will not be interested in giving you a line of credit based on this!
Generally, bank loans are usually granted to well-established businesses that can provide security to borrow against and can prove a prior history of credit, stability, and financial growth.
These criteria make it hard for a start-up business to qualify for a small business loan from traditional lenders, even if it’s only for a small amount. Add to that bank and credit companies’ reluctance to lend money in today’s struggling economy full-stop, and approval for high-risk loans is becoming more improbable. In fact many early-stage start-up companies struggle to even get a business credit card when they start out!
Another option for raising funding for small business owners is using a crowdfunding service. On the surface using crowdfunding sites can seem like a good option as this kind of kickstarter campaign is a very fast way to generate funding for your business. However, there are some downsides associated with crowdfunding.
Firstly, one of the main disadvantages of using crowdfunding for start-up financing is that if you don't reach your target funding the money pledged by others is normally returned to them, so you do not get any funding at all.
Another disadvantage is that your project can get lost on the platforms, against the thousands of other crowdfunding ideas that are listed alongside yours. So, this means you would have to think about marketing your idea early on, to give it some exposure and generate interest. Finally, investors tend to invest smaller amounts, rather than one large investment like you might get from a more traditional start-up investor. With crowdfunding you will be receiving microloans for your new company, which can mean that you may have to deal with a lot more people, and in turn more small business administration. This is not always preferable for a start-up.
Once the business is off the ground and proves high-earning potential, then entrepreneurs can seek venture capital, another form of equity in which a group of investors usually pool a large amount of money into a company, and in return they tend to take a stake in the company’s operations.
It's not always the case, but it is most common for venture capital firms to invest money in businesses that are already established but are looking to grow and expand. For example, an existing business may have been trading for a while and has begun to look at launching a new area of the business or expand into the overseas market and requires a large injection of investment to facilitate these expansion goals.
You can find venture capital firms willing to back start-ups and brand new business ideas, but often these businesses will be launched from individuals with an established track record, and who already have run and built-up a successful business and are looking to do it again. In these instances, venture capitalists are really investing in the individual primarily, but the business idea also needs to be a sound one in terms of viability. For entrepreneurs without an established track record, then the business concept really will need to be something special to temp traditional VC investment.
A final source of business funding is equity. Business angels, or private investors, can provide start-up equity, called seed capital. For young companies, private equity investors are a great source for securing initial financing. Business angels usually provide seed capital to launch a business, and they actively look for high growth potential, so that they can get a good return on their investment. It is common for an angel investor to make a slightly riskier investment than traditional lenders, since, although the risk is high, so is the potential return.
One of the other benefits of teaming up with an angel investor, or an angel investor group is that in many cases business angels offer their business expertise, mentoring, and contacts to help their investments grow.
This can be of vital benefit to the entrepreneur who may not have strong industry contacts established, or the experience to grow a business from scratch. It's a well-known fact that many start-up businesses fail in the first year or two of launching, and often there are a few reasons for this.
One of the reasons a new business fails (even those that seem like they should be successful) is because of a lack of cash flow or capital to make the business work, and the other is a general lack of business experience. Every business needs a certain amount of working capital to operate, and if the money isn't there, expenses cannot be paid, and it doesn't take long for commercialization to begin to fail.
Partnering with an angel investor can help reduce the odds of your business idea failing. In fact, since angel investors are looking for wise investments that have a good chance for return, the fact that a business angel is willing to invest in your business in the first place, means that you might be onto a good thing.
Of course, angel investors won't just give you money just because you have a good idea. If you want startup funding you will have to present your potential investors with a comprehensive business plan to show that you have sat down and done the math to ensure that your business has a chance of success.
These partnerships can work well for start-ups and for smaller companies looking to raise funds to grow.
If you're an entrepreneur that is looking to start a brand-new business, then the Angel Investment Network can help. Sign-up to our business angel network to post details of your business idea, to then attract business investors from both close to home and overseas.
One of the main advantages of our angel network is that we are a global enterprise, meaning that we have both entrepreneurs and investors located globally. This means you can find an investor locally, but also, from further afield. This can be a benefit especially if you are looking to target a specific territory or market and need some local insight into the marketplace.
Simply sign-up, post details of your project and wait for angel investors to reach out to you.