Diversification is the key word when it comes to sources of business financing, especially for startups. Having different sources will improve your prospects and help you survive setbacks. Popular business financing options include business incubators, grants, bank loans, angel investors and, of course, personal investments.
Our list of potential sources starts with angels, who are wealthy individuals or groups of individuals that make direct investments in startups. Angel investors tend to finance a business in its early stages. The investments they make are typically relatively small, e.g. up to $100,000.
What do they expect in exchange for their support? Usually, they gain the right to sit on the board of directors and have a say in how the company is run and operated.
When starting your business, you are often your first and biggest investor. You use assets as collateral or cash savings. Using this type of financing makes a good impression because it shows other potential investors you are committed to your venture and willing to take risks.
Venture capital is a popular financing option, but it’s not right for everyone. Most venture capitalists will only consider businesses in high-potential sectors such as IT, biotechnology, and communications. If your company is not in any of these dynamic industries, your prospects are not ideal.
Another factor to consider is that a venture capitalist will ask for equity or some ownership in your company. They expect high returns on their investment, which usually involves selling the company or listing it on an exchange at some point. On the plus side, these investors can offer a wealth of knowledge and experience.
Also known as business incubators, these sources of funds are typically focused on the tech sector. Moreover, some incubators are focused on areas such as hosting, job creation and sharing services. Accelerators invite startups to share their premises and their technical, administrative, and logistical resources.
The accelerator stage can last up to two years. The startup usually leaves the accelerator premises to become autonomous once its product is ready.
This source of funds is one of the most common, especially in the SME sector. Different banks offer different advantages, such as a tailored repayment plan or personalized services. When considering a bank loan, it always pays off to shop around for the best deal. Talk to loan officers and see what product they offer to meet your specific business needs.
Banks are always looking for businesses with a proven track record and a good credit history. In addition, it’s usually not sufficient to have a solid business idea – you also need a sound business plan to back it up. Typically, startup loans will require the entrepreneur’s personal guarantee.
This is an excellent funding option because you don’t need to pay grants back. On the downside, they are very difficult to get – competition for grants is fierce and there are stringent awarding criteria to meet. Usually, a grant provider will demand you match the funds allocated to you. This amount can vary to a high extent, and your sector is a key consideration for the grant provider. In addition, a grant in an area such as research and development might require you to fund less than half of the total.
To qualify for a grant, you will need to provide a detailed business plan with full expenses, a detailed company description, and an explanation of its benefits. Reviewers will evaluate your application based on your approach and expertise, as well as your venture’s potential for innovation and financing need.