Ambition, passion, innovation, and drive are some of the most important things entrepreneurs can have when planning to start a business. These definitely help when planning the startup, but the thing that can bring the plan to life is funding or financing.
This is an essential part of a business plan as it outlines where the founders will get the capital to get the business started. It also covers feasibility and profitability to convince potential investors or lenders (SBA, n.d.)
Individuals who are interested in becoming a startup owner, but are yet to find out what their financing options are will greatly benefit from this article. Moreover, it gives information on why picking the right funding source is important.
6 Startup Financing Types
- Personal Investment
One of the most common funding sources is a personal investment. Entrepreneurs are the very first investor in their business, as they already spent time and effort in creating a business plan.
When the time comes that they have to spend money, funding through personal investment means that everything will come out of the entrepreneur’s pockets and bank accounts.
The thing about this option is it puts the entrepreneur’s assets at high risk because businesses impose opportunity costs and its success is not guaranteed. Moreover, not every visionary has the resources to make their dreams come true.
- Patient Capital
Owners who have limited assets to push through have other funding options. One of them is live patient capital, also called love money.
This type of financing entails that the seed capital is provided by someone close to the entrepreneur such as a spouse, family member, or friend. In short, the entrepreneur raises funds directly from their loved ones.
It is called love money because the source decided to capitalize on the venture because of their relationship with the entrepreneur. While it may seem like a gift, it is actually a loan. So, once the business gets going, the owner has a few options for repaying the loan.
- Bank Loans
Aside from borrowing money from loved ones, owners can also take a more traditional approach by applying for business loans from banks.
This is perhaps the most common option for many, especially as friends and family tend to have limited resources. On top of this, many experienced business owners advise newbies not to get into business with family.
Bank loans are the most straightforward way for micro, small, and medium enterprises because it gives them a chance to get a sizeable amount. They just need to successfully go through the application process.
An important thing to emphasize is they might need to put their assets as collateral in some cases. They also need to have a strong business plan.
- Grants and Subsidies
Grants and subsidies are often offered by government bodies to qualified businesses. These are financial awards given to a project deemed to have beneficial effects on the greater good.
The thing about government grants and subsidies is that competition may be fierce among applicants. The application process and criteria are also bound to be strict and difficult to fulfill.
Government bodies in charge of grants and subsidies typically look for several eligibilities such as the significance of the project to the greater good, the approach taken, innovation involved, the expertise of the team or individual, and a solid need for the grant.
- Accelerator and Incubator Programs
Accelerator and incubator programs offer a lot of benefits for entrepreneurs. They are some of the primary financing choices for startups because they prioritize innovation. However, the two program types have essential differences.
Incubators allow owners to improve and cultivate their business model and ideas from the very beginning. They allow companies to find their minimum viable product (MVP). Participating in incubators is a good choice for newbies because they provide a structured and guided approach.
Accelerators are often participated by projects that already have MVPs. They help companies by providing resources and mentorship to fast-track their growth.
The key to understanding their distinct offerings is by looking at the name. Incubators help entrepreneurs grow their companies from the ground up, while accelerators aim to speed up the progress of an already existing company.
They also have similarities. Both types of programs provide training, support, mentoring, and in many cases, funding.
Lastly, entrepreneurs can get funding from investors such as angels and venture capitalists. Angels are people who directly fund a startup, which they find interesting or profitable. Typically, these individuals are wealthy people, retired executives, and retired industry leaders. They usually enter during the early stages.
Venture capital investors are those that look for innovative and tech-driven businesses that have a high potential for profit and growth. They typically invest by taking stakes and assisting companies when pursuing a risky, but promising lead.
Funding rounds allow companies to obtain capital from investors. Some examples are Seed, Series A, B, and C rounds. Angel investors typically participate in seed rounds, while Series funding is participated by other types of investors.
Why the Type of Financing Matters
Newbies should be aware that their funding source will affect their business in the long run. For example, personal investment can be risky as it puts their assets on the line.
Meanwhile, bank loans require a long-term commitment until the loan is repaid. Loans entail interest. Moreover, any kind of setback can be detrimental to the loanee, as they could fail to may repayments. Love money, while less risky, can have negative impacts on relationships.
Investors, programs, grants, and subsidies offer the most amount of promise, as they take the business’ merit into account. The key to scoring one of these is to strengthen the business plan by incorporating research, creativity, innovation, and passion.
Entrepreneurs can obtain funding in many different ways. With knowledge of what their financing options are, they can start taking the next steps toward acquiring capital, so that they can watch their business plans come to life.
- Small Business Administration. (n.d.). Write your business plan. Retrieved from : https://www.sba.gov/business-guide/plan-your-business/write-your-business-plan