Putting all your eggs in one basket will never be considered a good business strategy when it comes to financing your new business. Expanding your sources to finance your business will help your start-up better withstand potential downsides and improve your chances of getting the right financing tailored to your specific needs.
Never forget that bankers do not necessarily see each other as a single source of funding. Moreover, lenders will consider you as a proactive entrepreneur if you have sought or used various financing methods.
Whether you choose a bank loan, an angel investor, or a business incubator, each has specific advantages and disadvantages.
Here is an overview of seven typical sources of financing for start-ups:
Personal investment
When you start a business, you should be the main investor – whether investing your own money or putting up assets as collateral. You prove to investors and bankers that you are committed to your project in the long term and that you are willing to take risks.
Money of family or friends
This is money lent by the spouse, parents, other family members, or friends. Investors and bankers view this method of financing as patient capital, that is, money that will be repaid later, as your company’s profits increase.
If you are thinking of borrowing money from your loved ones, remember the following:
- Family and friends can rarely provide a lot of money.
- They may want to own a stake in your business.
- A business relationship with family members or friends should never be taken lightly.
Venture Capital
Venture capital is a form of early-stage investment run by companies with strong growth needs and significant capital requirements. It is provided by venture capital companies or institutional investors rather than individuals.
Venture capital is not for all entrepreneurs. Venture capitalists seek to invest in high-tech companies and highly promising companies in sectors such as information technology, communications, and biotechnology.
These investors also take a stake in the companies they finance to help them realize a promising project, but with greater risk. This means that the contractor must transfer part of his business to a third party. Venture capitalists also want a good return on investment, which usually happens when the company starts selling shares to the public.
Angel Investors
Angel investors are usually wealthy people or of retired business executives who invest directly in SMEs belonging to others. They are often leaders in their field. They provide the company with their experience and their network of contacts, but also their technical knowledge or their management know-how. Angel investors tend to finance businesses in the early stages of development, and the amount invested ranges from $ 25,000 to $ 100,000. Venture capital companies prefer to invest large amounts in the order of $ 1 million.
In return for the risk they run by investing their money, angel investors reserve the right to supervise the management of the company. This often means that they sit on the board of directors and require transparency assurance.
Business Incubators
Business incubators typically target high-tech start-ups at various stages of development. There are also local economic development incubators, which focus on job creation, revitalization, as well as service provision and sharing.
Incubators often invite nascent or emerging companies to share their premises and administrative, logistical, and technical resources. For example, an incubator can make its labs available to new businesses so that it can develop and test its products cheaply before starting production.
Bank loans
Bank loans are the primary way of financing SMEs. Banks offer different benefits, such as personalized service or flexible repayment terms. Compare to find the bank that can meet your specific needs.
Banks typically target companies that have a proven track record and excellent credit history. A good idea is not enough. It must be based on an effective business plan. In addition, start-up business loans normally require contractors to provide a personal guarantee.
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