Every business aims to go higher, grow bigger, and cover a larger share of their target market. So how does an Entrepreneur or Business Manager go about growing his/her business? What is the most essential ingredient required for success? In case you haven’t guessed it till now, it is finance, finance is extremely critical for any business more so if you are in your growth phase. There are multiple sources which can be tapped into while financing your business, the most commonly used ones are:
1) Bootstrapping
This is the most common method of funding, bootstrapping or self-funding is essentially about lending your own money to your business. One benefit of it is that your business would have tax benefits when the loan is later returned to you. Self-funding also ensures that your control over your company is not diluted since you do not depend upon external funds. However, the obvious problem with bootstrapping is having the necessary funds to begin with. Secondly, using only self-funding may not always lead to success.
2) Friends and Family
Entrepreneurs, like everyone else can also depend upon their friends and family. If you are known and liked by many people, then why not turn it into an advantage? A form of crowdfunding, it basically involves people close to you investing some amount in your company (sometimes in exchange for equity). Having friends and family as investors gives you the same benefits as bootstrapping, but with less direct outflow of funds.
3) Small grants
Governments in most countries allocate a fixed amount for funding startups. If your business is in specific sector, which is being promoted by the government such as education, environment, or any other then there is a bright chance that you might get some governmental grant. However, these grants cover only partial expenses for a business, which implies that you still need an additional source for the remaining capital requirement.
4) Loans and Credit Cards
If you are a young business in need of capital, bank loans look like a lucrative option. The benefit here is that you do not need to convince anyone why your product deserves to be funded. Alternatively, you could use your credit card, which a quick and convenient option but it is quite expensive. These sources however are only available to those who have a great credit history. This is a faster way to get funds compared to bank loans, but also far riskier. Defaulting on repayment can severely hamper your business as the interest rates on credit cards are very high.
5) Staff Equity
From one perspective, it is like killing two birds with one stone. You get to have talented employees for your business, and you make them a part of your venture by giving them equity (sometimes as a substitute for salary). This is hugely popular especially among new and young businesses which are low on funds but can give equity. The only downside of this approach is that it tends to dilute your control over your own business.
6) Incubators
The most sought-after funding option by young businesses are channeled via incubators. An incubator is more than a provider of funds; they offer a place where a startup can get all the resources required to grow from scratch. This usually includes office space, equipment, business expertise, and finance. Another similar option is accelerators, which are similar to incubators but focus on helping business take the big and vital decisions pertaining to their core operations.
7) Angel investors and venture capitalists
Angel investors are individuals or organizations that are willing to invest in a business in exchange for equity. They are a preferred because they provide capital and business expertise. Angel investors tend to believe in the high risk, high reward approach to investments.
Venture capitalists, on the other hand are pure professionals who invest in your business in return of equity and subsequent revenues. They provide you with resources as well as capital, and the funds are generally much higher than what angel investors could give. On the downside, VCs take no risk with their ROI. They look for businesses that are both sustainable and scalable and they usually seek returns within a five-year window.
8) Partnerships
Limited partnerships are an age-old method to raise capital. It is similar to staff equity, except that here both the funds and equity are significant. Limited partners are basically of two types: Active partners, who invest and form a part of the decision-making process, and passive partners, who simply invest and keep an eye on the company from far. Limited partners have limited liability, so their only risk is the capital invested by them.
Raising funds for a young business could be a daunting task, but smart entrepreneurs know how to play their cards well. You need is to ensure complete understanding of your business and analyze which funding method works best for you. The rest will be a story worth telling, best of luck.
