Exploring various avenues to finance your entrepreneurial aspirations is key. Here, we'll delve into diverse sources of funding.
1. Savings: your personal capital
Many entrepreneurs kickstart their ventures using their own savings. It serves as the initial capital, showcasing your commitment to the business.
2. Friends and family: a supportive network
Informal financing from friends and family is common. It often involves flexible repayment terms, with repayments made as and when feasible. For structured lending, promissory notes and share sales can be employed.
3. Crowdfunding: power of the crowd
Crowdfunding harnesses the collective financial support of individuals, typically over the internet. It blends crowdsourcing and microfinance, drawing small contributions from a large pool of backers. The process involves creating a compelling pitch outlining the business, funding needs, and what contributors receive in return. Four crowdfunding types include charity-based, equity-based, lending-based, and reward-based.
4. Business angels: experienced investors
Business angels are private individuals, often former entrepreneurs, who invest in industries they know well. They seek lower returns on investment and are driven by their passion for the entrepreneurial journey.
5. Venture capitalists: strategic backers
Venture capitalists work for organizations that raise funds from institutional investors. They provide financial support and invaluable assistance, helping identify key team members, customers, and suppliers. They also aid with operations, strategy, and, notably, preparing companies for potential IPOs (Initial Public Offerings).
6. Corporations: strategic alliances
Established companies may invest in startups for access to their technology, intellectual property, and product development capabilities. Strategic alliances often bolster marketing and manufacturing capabilities.
7. Banks: traditional lending
Standard commercial loans are available, typically with interest, for entrepreneurs. A positive cash flow is often a prerequisite for loan eligibility.
8. Asset-based lenders: asset-backed financing
Some investors offer loans based on a percentage of asset value, using these assets as collateral for the loan.
9. Factors: account receivable financing
Entrepreneurs can sell accounts receivable at a discount (1-2%) to obtain immediate capital. This allows them to receive cash quickly while sacrificing a small portion of the receivables' value.
10. Government programs: supportive initiatives
Governments offer entrepreneurial programs like the Small Business Innovation Research Program. These programs facilitate the pursuit of opportunities through phases like feasibility studies, prototype development, and market entry.
Exploring these diverse financing sources empowers entrepreneurs to bring their business visions to life. Each option offers unique advantages and considerations.
Adapted from: Baron, R. and Shane, S., 2007. Entrepreneurship: A process perspective. Nelson Education.