One of the points to consider in all business projects is financing and its sources. One of the most frequent questions we face is: should I exclusively use funds from the company’s partners, or should I use external financing to grow? That is, obtaining funds through loans, issuance of obligations, or any other helpful instrument to receive them.
Then, we will clarify the diverse types of financing from which you can choose. However, this will help us know when it is more convenient to go to one type. The seven types of business financing sources are the following:
FFF
“Friends, Family and Fools” is the first source of financing since it is used for the company’s constitution. It occurs when an entrepreneur starts his business thanks to his savings and the help of his family and friends. It is what we know as the closest capital and is used to shape the project and move from a simple idea to something tangible.
Seed or Startup Capital
Seed capital is a stock offering in which an investor acquires a part of a business or company, investing early in it. Business support is done in its creation phase until it generates its cash flow or is ready for new investment.
Seed capital implies a greater risk for the investor than traditional venture capital financing. The said investor cannot see any business reality already in operation to evaluate its financing.
Public Funds
They are used to generate business models and project development, which is more advanced than a simple idea.
Within this classification, we can subdivide it into two types: period background aids, which should not be returned and are usually intended to finance a specific item within the project, and public loans, which, like any bank loan, must be repaid, but with more advantageous conditions than those that could be chosen through private entities.
Business Angels
The companies that are already operating receive this type of contribution because, due to their high innovative content or potential development, they attract the support of these investors. Generally, “angel” investors are independent or associated with a club.
Banking Financing
Companies can resort to bank financing to maintain a flow in the daily operation of the business or finance the acquisition of assets necessary for the project’s operation. There are many financial instruments, but we could classify them into two large groups: financial instruments to finance the current currency of the project’s daily activity and financing of assets linked to the usual operations.
Capital-Risk
Also known as “Venture Capital,” it is used when a company is at a certain level of development, as it is managed by a fund that invests significant amounts.
It is a temporary contribution of third-party resources to a company’s assets to optimize its business opportunities and increase its value. In this way, a solution is given to the business projects, and the risk and returns are shared.
Private Equity
It is a fund for large companies that is used to expand the business or for internationalization. It provides capital in exchange for shares that the company grants. In addition to money, it contributes other resources, such as contacts, best practices, and administration.
Consider the Cost
Once the sources of financing and the states in which they are most appropriate are classified and defined, the next step is to determine the cost of each alternative or several of them and compare it with the performance that will be obtained from the new project.
The basic rule will be that the project’s performance is more significant than its financing cost, adding value to the company and benefiting all who integrate it.
Conclusion
In any business endeavor, understanding financing options and their sources is crucial. Careful consideration is critical, whether relying solely on partners’ funds or seeking external financing through loans or other instruments. There are seven primary sources of business financing, each with advantages and considerations, from personal savings and investments from friends and family to public funds, business angels, banking financing, venture capital, and private equity.
It’s essential to assess the suitability of each source based on the project’s stage and needs. Additionally, evaluating the cost of financing against the expected returns is vital to ensure the project’s profitability and overall value to the company. Ultimately, the goal is to choose financing options that enhance the project’s performance, create value for the company, and benefit all stakeholders.
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