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Money is the primary and most important resource for you to start a business and lead it further. Funding for your business idea is the primary riddle any aspiring entrepreneur needs to solve. People make many financial choices for this purpose, and in fact, there are more such options than what you think. In this article, we may discuss how to choose your business’s funding option and how your choice may affect your business’s structure and performance.
Know how much you need
Each business idea is unique, and the fund requirement for each may differ. There is no such financial solution that acts as a one size fit to all. Your current financial situation and business vision will further shape the financial future of a business. Once you have a clear idea about how much capital you need to jumpstart your business, next, you have to figure out how to get funds in hand to invest. Here are the options.
Bootstrapping or self-funding is the method of leveraging your resources to fund your business. Self-funding can be done in different forms like funding from friends or family, using your savings, tapping the 401k, etc. In the self-funding mode of operations, you will be able to retain your business’s whole control, but it means you are taking the risk too all by yourself. So, always be careful not to spend more than what you can afford and be careful while trying to fund your retirement account early. You may face some expensive penalty or fees or even damage your eligibility to retire on time if things go wrong. So, check it thoroughly with a plan administrator or financial advisor to make an informed move.
Many investors may give you funding to start a business in the venture capital model. Venture capital funds are normally offered in exchange for your business’s ownership share and an active role in the company’s operations. There are various venture capital funding models, which range from traditional business financing to advanced funding options. Some important aspects to note about venture capital are:
- These focus on high-growth potential businesses.
- The capital is invested in return of equity than debt.
- Has a higher risk in exchange for a potentially better return
- Having a longer investment horizon compared with traditional financing
There is no guaranteed mode of getting venture capital funds, but the process is broadly as below.
- Have your business plan well set to be presented to venture capitalists
- Look for investors; sometimes, these maybe angel investors or firms offering venture capital.
- Do thorough background research to learn about the investor and ensure reputation and experience.
- Submit your business plan and supporting documentation.
- Venture capitalists may thoroughly review your business plan to ensure that you meet their criteria to approve funding.
- Undergo the due diligence review and present your part well. Investors may look into your business plan, projections, management team, market research reports, governance docs, and financial statements.
Venture capital funds
If they find your business relevant to invest in, then the next step is to go through the terms and conditions and sign the memorandum of understanding to release the investment. Once you sign on the terms sheet, they release funds and become actively involved in your company operations. Venture capital funds usually come in different stages. As you meet different set milestones, further funding rounds are released with adjustment in prices based on the return on previous phases. Flosum can be your best partner in terms of finding technological solutions in finding business funds.
Crowdfunding is one of the latest social networking models to fund for your business from many people, who are otherwise called crowd funders. This is different from the venture capital model as the funders are not investors in the company. They do not get an ownership share in the business but may or may not expect a financial return on the investment they made.
In many cases, crowdfunding comes as a “gift” to you to actualize a bright business idea. Sometimes, these gifts are coming based on your plan to sell your product or services with some special perks offered. This approach makes crowdfunding a very popularly accepted option for those who want to actualize creative ideas like releasing a documentary or making a physical product to make life easier, like an assistive vehicle for the physically challenged, etc.
Crowdfunding is very popular as it holds only a lesser risk compared to other business funding models. The business owners not only retain complete control of your business but even if the business idea fails, the owner is not under any obligation to return the crowd funders’ money. There are plenty of online crowdfunding platforms, which are different from one another. So, ensure that you read all the terms and conditions related to these platforms to understand the legal and other obligations to identify which one will work the best for your needs.
Getting an SME loan
If you do not want to lose your business’s sole control but still want to find finds for it. Then it is a good option to consider small business loans. Many banks and other financial services offering small business loans to boost business enterprises of all kinds. To increase your chances of getting a small business loan, you need to have a solid business plan, financial projections, and expense sheets to be submitted with the applications.
You may contact the corresponding bank or credit unions for business loans by getting all the documentation ready. You may compare the offers and interest rates of different providers to identify your best possible loan terms.
If you find it difficult to get traditional business loans, you may think of the SBA-guaranteed business loans. While banks think offering loans for your small business is too risky, SBA may testify you to avail of loans under specific terms. With this, the banks may have a lesser risk on them and may be willing to offer you a loan.