Whether you want to grow or start a business, you will need some sort of funding to get the job done. Deciding which source of funding suits the specific needs of your business is trickier than you might think.
When looking for ways to finance your business, avoid putting all your eggs in one basket. Diversifying funding sources allows you to handle potential downturns and improve your chances of finding the appropriate financing option for your specific needs.
Here are seven sources of funds for business:
Source #1: Venture Capital
Venture capital is not ideal for all entrepreneurs, but it’s one of the most common sources of funds for business. Venture capitalists aim to invest in technology-driven businesses with high-growth potential in Canada AI, biotechnology, communications and information technology. They acquire an equity position in a business in exchange for funding for a promising but high-risk project.
This means giving up some equity or ownership of your company to an external party. A healthy return on investment is also expected. It is often realized once the business begins selling its shares to the public. Look for venture capitalists who bring relevant knowledge and experience to your business.
Source #2: Angel Investors
Angels is a term used to describe retired company executives or wealthy individuals willing to invest in firms owned by others. In most cases, they are leaders in their respective fields who bring onboard a network of contacts, experience, management and technical expertise.
Generally, angels finance the beginning stages of a business with investments in the range of $25,000 to $100,000. In exchange, they are allowed to supervise the management practices of the business. This often involves assurance of transparency and a seat on the table. Angels prefer to maintain a low profile. To contact them, you have to do it through specialized associations.
Source #3: Business Accelerators
Business accelerators, also known as incubators, are programs designed to offer start-ups investment in exchange for equity. They also offer network access, office space and mentorship, which empowers them to be self-sufficient and sustainable in the long run. Once entrepreneurs complete the accelerator program, they get to meet and talk to future investors.
A business accelerator is a great source of funding for businesses. However, it’s important to note that the failure rate for accelerator programs is exceptionally high. Most companies find it difficult to transition from the level of support the program offers to complete autonomy. The incubation phase generally lasts for two years.
Once a business is done developing the product, it is required to leave the incubator’s premises and enter the industrial production phase on its own. This kind of funding is often offered to businesses that operate within state-of-the-art sectors like industrial technology, multimedia, information technology or biotechnology.
Source #4: Government Grants and Subsidies
Financing options such as subsidies and grants are provided by government agencies and may be available for your business. Getting a grant can prove to be tough. The criteria for awards are often stringent, and there may be strong competition. Most grants demand that borrowers match the funds they receive. The amounts vary widely depending on the granter.
When applying, you will have to provide a detailed project description, a detailed work plan and the full costs. You also need to explain your project’s benefits, background on key managers, details of relevant experience, and a completed application form where appropriate. The assessment of your proposal is based on the need for the grant, approach, significance, innovation and expertise.
Some of the things that may disqualify you for a grant include ineligible geographic location, an unfocused research plan, and an unrealistic amount of work. Others include failing to clearly communicate the relevance of your business idea, not providing a strong rationale, and failure to match funds.
Source #5: Bank Loans
Bank loans are a common choice of funding for businesses. Before taking a loan, remember different banks offer different advantages, from customized repayment to personalized service. Shop around for a bank that best meets your needs. Generally, bankers are willing to fund businesses with excellent credit and a soundtrack record. Only having a good idea just won’t cut it. A solid business plan has to back it up.
Source #6: Love Money
“Love money” is a term used to describe money loaned by family, friends, parents or a spouse. Bankers and investors consider it “patient capital.” The money has to be repaid later as the business profits grow. Before borrowing love money, be aware that they may ask for equity in your venture, and a business relationship with friends and family should be taken seriously. It’s also important to note that friends and family rarely have much capital.
Source #7: Credit Unions
A significant number of entrepreneurs get the cold shoulder when trying to get a loan from the bank. This is because the latter only deals with cold, hard numbers. Banks don’t just invest in an idea. They want a business and a product. Alternatively, try credit unions. They actually outperform banks when it comes to meeting the needs of mid-size businesses.
To lenders, demonstrating that you have used or sought various financing alternatives proves you’re a proactive entrepreneur.
