Starting a new business can be both a rewarding and daunting process. More is needed besides having a great business plan. You need to have enough capital to succeed. However, most founders don’t have enough money to cater to all of their operations. Therefore, they will need to look for external funding in exchange for their shares or sales.
There are several sources of financing available for new businesses. Continue reading the article for more information.
Several interactive social platforms make it easy for entrepreneurs to share their problems. One of these platforms is crowdfunding, where people pitch to potential investors that can support their cause. Therefore, an entrepreneur shares their business model and growth progression and wait for crowd funders to pledge to finance their business model.
The source of funding helps you to enjoy free marketing besides financing due to the public interest the platform creates. On the other hand, your idea may be rejected or overlooked if several people share the same business idea.
2. Venture Capitalists (VCs)
The VCs use professionals to manage their funds. These experts seek startups with great prospects instead of investing in equity. VCs pull out their investments during an acquisition or IPO and look for other businesses to fund. They may also provide expertise, connections and directions to the startups.
3. Partner Financing
There are strategic partner financiers in every industry that funds startups growth in exchange of distribution rights, products, staff and ultimate sale. The option is usually ignored, but it operates the same way as VCs. Both sources of funding are interested in equity sale or royalty sales instead of giving the business a loan.
4. Angel Investor
These are investors with large capital and are seeking edge business ideas to finance. The individual or group of investors will scrutinize your business proposal and offer financing as well as mentorship if the business model meets their requirements. These investors are flexible for they accept short-term losses as they anticipate huge returns on their investment in the long run.
5. Government Programs
These are excellent sources of funding for startups. Entrepreneurs are required to submit a business plan to the grant committee who access its viability. Funds are released after the scrutiny and approval. Further. Governments offer substantial funding that enables the entrepreneur to use extra cash in managing the business.
6. Incubators and Accelerators
They offer programs that nurture business (incubators) and fast-track growth (accelerators). The two groups link startups with investors that can provide mentorship and other connections that can fund their business. However, the entrepreneur has to remain committed throughout the program for any laxity can contribute to business failure.
7. Bank Loans
Financial institutions can fund a solid and well-structured business plan. The proposal should articulate the profit forecast, mode of operation and projected time of maturity. The banks will provide your startup with funding and working capital loan, which can fast-track the income generation process. On the other hand, bank loans require collateral which most startups don’t have. Further, the business will lose security the moment it’s not able to repay their debt.
8. A loan from Microfinance Institutions
These non-banking financial corporations (NBFCs) were set up to finance small-scale entrepreneurs that can’t access funding from banks. Their services are also accessible to individuals with poor credit ratings due to their flexible requirements.
9. Business Contests
An entrepreneur can get funding by engaging in entrepreneur competitions where they are required to showcase their business module against other competitors. These competitors are required to present a comprehensive business proposal to win funding from a panel of judges representing investors. One of the advantages of this source of financing is that you get media coverage which gives your business a lot of publicity
It also is known as self-funding, and it’s a process of using your savings to fund your business or borrowing money from family and friends. You can obtain funds from friends and family because they are flexible and can allow you to service the debt slowly than you can do with external sources. Further, this source of capital has little or no bureaucratic challenges as well as flexible interest rates.
11. Invoice Advances/Factoring
Factoring is a method where a service provider gives you money on invoices upfront and offers to wait for the customers to settle the bill. The method gives your business some cash flow to continue its operations. Closing the pay gap allows the startups to access new projects, thus grow their business and hire new workers.
12. Peer to Peer Lending (P2P)
There are online platforms that link borrowers with lenders. Businesses in the US can access funding from Prosper and Lending Club. Thus an entrepreneur creates their account on the P2P website and waits to be connected to a lender. The financing alternative is available for small businesses and is only available in a few states and countries.
13. Merchant Cash Advances
It’s a quick way of accessing funds, but it should be the last resort due to its high interest. A financial provider lends your business a considerable sum of money in exchange of part of the debit card or credit sales. Therefore, the merchant will deduct a small cut from every sale until his debt is paid back.
14. Convertible Debt
A collective agreement is crafted between the entrepreneur and the investor where the debt is converted into equity in the future. It’s one of the best methods of financing small business and startup; however, the entrepreneur should be ready to cede some control of the company.
15. Community Development Finance Institutions (CDFIs)
There are several CDFIs offering capital to microbusiness owners or small business at reasonable terms. These are mission-oriented lenders that support small businesses struggling to access funding from financial institutions. One example of CDFIs is Coastal Enterprises Inc (CEI).
You can outside funding for your startup from any of the 15 sources. These options help your business to take advantage of market opportunities. However, you need to know how much financial assistance you need before approaching any of these sources.
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