Types and Major Sources of Financing for Startup Businesses
Every entrepreneur needs finance for his or her business and it is important that entrepreneurs and to-be-entrepreneurs know the several sources from which they can get financial support know and have knowledge of it. Therefore, I will be discussing about the various sources of finance for entrepreneurs and business owners in this post.
GUIDE: COMPARING CASH TO PROFIT
Even though you might be able to fund your business from the beginning but trust me, your business will get to a point where you will need financial support from people and that is why people end up having business partners or looking for investors at late hours.
To start a business and make it profitable, financing is vital. You can choose from a wide range of long and short term sources of finance for your new business. The first thing to do is to calculate the amount of money you need and when you will need them. This will help you choose wisely from the various sources of financing business.
From different project on sources of business finance, the financial needs of a business venture is different from the other due to variations in the size and type of the business. Let us take the processing business as an example, it is capital intensive while, a retailing business requires less amount of money or capital.
It is better to know right from when you start your business those that can help you and start soliciting for their help, your business does not have to be in debt before you realise that you will need financial help from others.
Most times, entrepreneurs rely on banks and microfinance for help but what they do not understand is that these institutions also need finance to run their own business. You should always have it at the back of your mind that each finance source has its own specific demands.
There are many financing sources available for entrepreneurs and business owners, it is when you know how to tap into this opportunity or source that you get the finance you need.
The different sources from which you can get finance for your business as an entrepreneur are listed below:
The two major sources of financing are equity and debt. Government grants may also be another source of finance.
Small Business Financing Sources: Different Sources of Business Finance
It does not matter if your business is old, small, new or large, nothing can take the place that major sources of finance for that business. It helps your company to expand, grow, and make use of new organization strategies. “Business finance” is all about money for your business. It is an essential foundation for businesses to survive and flourish. For an entrepreneur, it is vital to know the different sources of deficit financing so you can choose the best for your business.
Commercial Bank Loans
Getting a business loan from a commercial bank is a very good way of financing your business. Youfist apply for the loan by composing a loan proposal, if you company is approved, the bank will determine the details of the loan. It is best to get a fixed interest rate, so as not to pay more than you have bargained for.
Corporate Credit Cards
A corporate credit card is also a source of financing. As a business expands, and its expenses grow, a corporate credit card is sure to provide you with more money. You should note that for larger businesses, credit cards may not be enough. Also, the interest rate is as high as 20%, so it is not advisable unless you want to pay the debt off within a short period of time.
Making use of your personal funds is one of reliable sources of finance for a new small scale business. You can make this possible when you use your savings for business expenses, use retirement funds, or borrow money from family and friends. It is true that most new businesses are financed personally. The merit is that you have control over the options for repayment. Paying a relative back is flexible, and can be negotiated, whereas when you get loans from financial institutions, it cannot be negotiated again, but you must stick to its repayment terms.
This is a financing source that is quite popular for providing support to new businesses in the different stages of development. We also have local economic development incubators under this that focus on areas such as job creation, hosting, revitalization and sharing services.
What incubators do mostly is to invite fledgling companies and future businesses to share premises, administrative, technical and logistical resources with them. An instance is an incubator sharing its laboratories with a new business so that the new business can develop and test its products which will be cheaper for the new business.
Incubators usually support businesses that operate within sectors such as information technology, biotechnology, multimedia and industrial technology. Businesses like this usually have a better success rate due to the support provided by incubators.
Grants and Subsidies
Technically speaking, a grant is a sum of money given to you conditionally for your business which you do not have to pay back but getting it can be very tough. It is tough to get grants because the requirements and criteria surrounding it are always stringent and the competition for it is always strong.
If you are lucky to get a grant for your business, then it must be used according to the terms under which it was given or else you will have to repay it. Getting grants from the government is not limited, that is, you can continue to receive grants from the government once you meet the requirements of the program.
Usually, this type of funding is used to cover expenses like salaries, equipment, development, research, productivity and marketing.
Friends and Families
Friends and families can also be a source of finance for your business. Money collected from this group of people is referred to as ‘love money’. This is called love money because it is money given to you out of love, nobody will give you money for your business unless the person loves you and wants you to succeed.
This type of money is referred to as ‘patient capital’ by bankers because it is the money that will be repaid when your business profits increase.
There are some things you should be careful of when borrowing money from friends and families and they are:
(1) Family and friends don’t usually have much capital so you have to make do with whatever you get from them.
(2) Business relationship with family and friends is not to be taken lightly to avoid quarrels.
(3) Also, they might be interested in having equity in your business which is not to be allowed.
As an entrepreneur, this is another source from which you can get financial support once you meet its requirements. Although, this finance source is not for all entrepreneurs but for technology driven businesses and companies with high growth potential in sectors like communications, biotechnology and information technology.
Venture capitalists take equity position in the company or business to help it carry put a higher risk and promising project than other businesses. Therefore, entrepreneurs that want this type of source to help them should be ready to give up some ownership or equity to them as external party. They also expect a good and healthy return on their investment which is usually generated when the business starts to sell shares to the public.
You can also be a source of finance to your business through investing some of your money via cash or assets collateral. This will also indicate to people and other finance sources that you are committed to your business forever or for a long time.
It is of general knowledge that to get help from any of the finance source listed above, you have to do the following:
- Provide a detailed description of your project including the location.
- Provide a work plan that is detailed with full cost.
- Explain the benefits of the project.
- Complete application forms where necessary.
If you are an entrepreneur needing finance for your business, you can sieve any of the opportunities listed above to secure fund for your business and grow.