business funding sources

An Examination of Business Funding Sources

By Aly Chiman

The primary goal of every business is to make a profit and earn the owner a decent amount of money. However, launching and sustaining a business requires a sufficient amount of capital if it has to stay afloat long enough to earn you a good income. The amount of capital required will largely depend on several factors such as the goals, needs, costs, and operations of your business.

Developing your own resources will be crucial in your efforts to access additional capital. Additional business funding will enable you to compete with other business entities running similar operations. Without additional funding, your business runs several risks including inability to meet operating costs, unmanageable debts, or even bankruptcy. There are a number of funding sources available in different financial sectors. However, you need to understand the pros and cons of each source in order to make a practically viable choice. Here are a few common sources of business funding.

Debt Funding From Financial Institutions

Most startups and small businesses rely on debt financing from financial institutions as a major source of funds to run their operations. These are actually loans provided by banks at an interest rate and a repayment schedule. The business will need to qualify for the loan after an evaluation of its cash flow, liquidity of assets, and the kind of collateral you provide. You will be required to provide a detailed business plan to provide the financial institution with a concise understanding of your business. It is advisable to establish a good working relationship with the banker before you make a request for a loan. This is because besides having a successful track record, the status of your account with the bank will also be considered in the lending decision.

Debt funding by financial institutions comes with some advantages and disadvantages. One of the pros of this kind of funding is the fact that you will not be required to give up equity to get the loan. Secondly, loans are always available even for companies that can not access equity funding. Disadvantages of loans include payment of interest, limitations in your business network, and the requirement for collateral such as your home or other property.

Self Funding or “Bootstrapping”

Bootstrapping is one of the most common types of business funding practices today. It basically refers a business that is solely funded by the owner. Such businesses do not depend on other sources for any financial support. An entrepreneur who chooses to self-fund his or her business will initially evaluate his or her assets which might include personal savings, real estate equity, properties such as vehicles or a commercial property in London, and recreational equipments to determine the amount of capital he or she can afford to invest in the business. These possessions can even be used as collateral for a loan if need arises.

A major advantage of self funding is that the higher you personally invest in your own business, the higher your chances of getting additional funding from other sources. You will also gain full control of the company as the sole financier. However, this source of business funding has a few disadvantages. You will need to be a rich investor to avoid financial constraints after investing your personal finances in the venture. A business may take a long time to break even or start paying back your investment. A self funding entrepreneur is likely to start a business without a detailed business plan which will in the long run affect the company’s performance.

Grants

There are many organizations that provide grants for small businesses or large companies specializing in specific areas of business such as in developing technology products. These are state, regional, or minority based grant organizations that seek to promote businesses dealing with products or services relevant to their activities. They provide a great opportunity to tap into billions of free money to boost your business when you are not prepared to put up your classic Mercedes for sale. One of the main advantages of sourcing for grants to fund your business is the leverage such grants provide. However, this is a highly competitive source of funding with stringent qualification procedures. You will also have to abide to the donors requirements which may include the way you use the funds and your company’s carbon trading schemes if the donor is an environmental conservation group, for example.

Equity Financing

There are many companies financed by either private investors or institutions in exchange for a specific amount or percentage of equity ownership. Such investors who can include close associates, and other large financial institutions can be of great assistance when the required capital exceeds the available funds or resources. They help you finance the business and get a share of the business in exchange. The advantage in this type of financing is that you do not need to pay back interest or monthly payments as you would do with a bank loan. The business relationship is on a more personal level. It is also a convenient way of accessing funds quickly without too much formalities attached to the relationship. On the downside, this kind of funding involves giving up part of your ownership of the business as investors will want to have a say in your business.

Angel Investors

These are personal investors or organizations that use their wealth to invest in lucrative businesses. The funding they provide can either be a loan or in the form of equity. They are known as angel investors because they usually come to the rescue of an entrepreneur with financial difficulties. However, despite being heaven sent they will always aid you out with expectations of a higher rate of return especially for a start-up business. The advantage in this source of business funding is these investors naturally want to earn back their money so they will not only invest money in your business but skills and new opportunities too. However, they are always difficult to find and it can be difficult to meet the demands and divergent views of different groups of angel investors.

For a small or start up business, finding the best funding opportunities can be a difficult task if you are not well prepared. Involving your business with risky venture investors can easily end up in a take-over when the company becomes successful. Getting loans that you can not practically make payments for is also equally risky as you might end up losing your business or putting up sell my house adverts to process your debts. However, doing your homework properly and seeking for the right amount from the right sources is the best way to source for funds.

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Aly Chiman
Aly Chiman is a freelance blogger on AlyChi Designs. He enjoys frequent golf and kayaking. He writes about marketing, innovation, and entrepreneurship on his blog here.

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