One of the most common startup concerns is funding the business. No business will run without money or funding. Many great business ideas have gone to waste just because no capital can be raised to back it. However, there are also many ways to fund a business. A great and innovative business idea will always get a backing, one just needs the patience and confidence in finding the right investors for it.
Here are some of the common ways to fund a business, including its relative advantages and disadvantages to help you choose the best one that will fit your business needs;
This is the most straightforward way of funding a business – no complicated paperwork, no interest costs, no delays. Since you will be using your own money, you will also have total control of the business. However, it is not easy for one to save up enough cash to start a business. You will also shoulder the entire monetary risks in case the business fails. Using your own money means you’re entirely on your own, this could mean missing out on the valuable mentorship and guidance available in other forms of funding like venture capital and angel investors.
Friends and Family
This is referred to as the ‘love money’ or funding you can get from your inner circle of family and friends. Love money is easy to acquire with minimal to no paperwork involved and repayments can be arranged to your advantage. Often acquired due to their trust and support, the money can be loaned with minimal interest or in exchange for equity in the business. On its downside, this option might sour personal relationships if business understandings aren’t established early. You might also share control of the company in exchange for the funding.
Angel investors are private individuals who have the cash to spare and are looking for investment opportunities. These are either retired business executives or wealthy individuals who choose the inactive way of growing their money. Aside from the money, angel investors also come with business expertise like financial, technical, and management know-how which they will bring into the table together with their extensive network. However, angel investors provide funding for equity and partial control of the company. This might involve transparent reporting and/or a board directorship.
Crowdfunding is collecting small amounts of money from a vast multitude of individuals and is commonly done via the internet. This type of business funding has only recently become a trend, thanks to the power of the internet and social media platforms. In exchange for their contribution, the company might offer stock ownership or a certain product to be delivered in the future. While the process is easy enough, funding is not guaranteed. it might take time to accumulate the necessary funding or the campaign might fail altogether.
Venture capitalists are huge companies looking to invest in high-growth companies most especially in the tech, biotech, and communications industries. This is a win-win funding option for the owners. In exchange for equity, the venture capitalist will bring in ample funding, relevant expertise, and business guidance. They will not only bring in the money, but they will also guide your company for growth. The goal of venture capitalists is to invest in startups, help it grow, and then sell it for huge profits. The only challenge in getting a venture capitalist backing is the exhaustive screening process. Your business has to be innovative and have growth potential.
After personal savings, bank loans are the most common form of funding for small businesses. It is accessible to most startups and loans can be flexible in payment terms, amounts, and interest rates. Low to medium loans may only require personal guarantee and processing could be as quick as just a few days. This type of funding will keep the total control company in your hands. For its downsides, one has to take extra diligence before signing a bank loan. Educating oneself on the technical terms and implications of the loans and shopping around for the best package are requisites. The loan process can be complex, will require a significant amount of paperwork, and the release of funds can take some time. The loan application is not guaranteed, and if the business fails, the total loaned amount will still have to be paid.