Starting and growing a business requires a lot of things, and one main ingredient here is funding. As an entrepreneur, it’s important to know how to fund your business to help it grow and sustain itself over the long term.
To bring your business idea to fruition, you must understand the sort of capital investment that would go into it. And this is where business funding comes into the picture.
And how can you fund your business?
Thankfully, there are numerous options out there that you can employ to fund and grow your business.
However, all of these require one thing in common — a solid business plan. This is the plan that will help you understand how much money you need and for what. It’ll help you employ your capital well.
That said, let’s take a look at how you can fund your business.
How to Fund Your Business in 7 Ways
There are numerous ways through which you can fund your business and drive its growth. Let’s take a look at them.
1. Self Funding
The most obvious and easiest way of funding your business is by self-funding, or bootstrapping it. In this method, the entrepreneurs themselves fund their business by using their personal savings.
Typically, this method is used by those who prefer to avoid loans or may not qualify for them.
While this method saves you from falling into debt right at the start of your business, you may require a lot of funds to get started. This could be pretty challenging for most budding entrepreneurs.
Additionally, you’re risking your hard-earned money here too.
Crowdfunding is a great way to start your business with minimal financial risk. This method involves raising funds from prospective customers who might be interested in the product or service the entrepreneur plans to offer.
The entrepreneur puts up a detailed business plan on a crowdfunding platform and elaborates on their goals and products. They also mention how they intend to use the money they collect from crowdfunding.
Based on these, the customers decide to invest in the business.
What makes this mode of funding your business favorable is that you don’t risk your capital and don’t even have to raise debt. Additionally, it helps market your business even before it’s launched.
3. Relatives and Friends
Numerous entrepreneurs use this mode to fund their businesses as well. As the name suggests, they essentially approach their friends and family members for funding their business.
For this, too, you might have to create a thorough business plan that can convince your close ones to invest in your business venture.
The best part about this funding method is that you don’t necessarily have to pay back the money with interest like you’d have to with bank loans.
However, involving friends and family in such financial matters can also lead to friction in case the business idea goes downhill. So, it’s important to weigh the pros and cons carefully before going down this path.
Getting loans from banks and non-banking financial institutions is yet another obvious way to fund your business. In this approach, you’ve to apply for a loan with a financial institution by presenting your business plan and future financial projections.
However, a lot depends on your creditworthiness and business background. Additionally, you may need to have some sort of collateral to present to the bank as well.
That said, getting a loan from banks isn’t guaranteed. Even if you’ve got everything in order, the final decision for the loan rests with the bank.
Additionally, banks would charge interest on the loan and this interest could be pretty heavy, especially if you’re starting the business and aren’t profitable yet. This makes loan repayment challenging.
5. Angel Investment
If you’re starting a corporation, your best bet to fund your business is angel investment. These angel investors are individuals who have surplus cash that they’d be willing to invest in new business ventures. Along with the capital, they can also provide mentoring support to you.
But why specifically corporations?
The reason is that corporations are best suited for raising capital via angel investors. It’s easier to allot shares to them for their investment. This isn’t very simple in other forms of business structures.
The only drawback here is that you might have to cede some control over your company to them.
This is because they’d get some stake in return for their investment. You must thus be careful enough to ensure that you continue retaining majority ownership of your business.
6. Venture Capitalists
While angel investors are individuals, venture capitalists are professionally managed funds that actively look to invest in attractive businesses.
The biggest advantage of finding venture capitalists to fund your business is that they can help you raise a huge amount — even more than angel investors. Additionally, you get access to their pool of experienced professionals who can mentor you and help in growing your business.
However, just like angel investors, venture capitalists will also acquire a stake in your company. Additionally, they might try to recover their investment in a short period. So, you must grow your business quickly to achieve those goals.
It’s also possible to get funding for your business through incubators or business accelerators. These organizations have sprung up all over the globe and help budding entrepreneurs set up and grow their business.
Apart from funding, these organizations give you access to a thriving community of entrepreneurs too. This can help further boost your growth.
However, most incubators are only meant for tech companies. If yours isn’t one, it might not be the best one for you.
Finding the right way to fund your business is important as it can make or break its growth potential. If you’re not able to raise sufficient capital, it’s likely that your business may flounder at a certain point.
Some of the ways through which you can fund your business include bootstrapping, family and friends, venture capitalists, and angel investors.
You could also go for crowdfunding, incubators, and get loans from banks.
Do you have any questions about how you can fund your business in the right way?
About the Author:
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.