It is the dream of many people to start and own a business. Last week, this blog shared a number of business ideas one can start a business from for little capital. Many potential entrepreneurs do not know where to raise capital when to start or expand businesses. There are different avenues from which you can source capital. However, it is not all sources of capital that are suitable due to the nature of the business one would want to operate. Thus, entrepreneurs should identify the source of capital that best fits their business capital structure.
This structure implies the way business is funded for instance on credit (loans) or equity financing. In the business world, financial backing is very necessary due to speculative needs of the operations. They include investor funding, loans and grants.
Methods of financing businesses
There are different ways in which one can acquire capital to start up a business. These depend on the urgency of the cash and the expected turnover of the business to operate. It is important though for anyone to be aware of any risks involved in acquiring funds to start any enterprise given that businesses are themselves risks. Some sources of capital include:-
- Personal Investment
This should be the first source of capital when starting a business. It includes own cash and assets. Someone who commits his resources to start up a business is seen to have a strong commitment to the project and readiness to take risks. Other investors and banks can therefore very easily offer loans to boost your business when faced with financial constraints.
- Government Grants
It is a practice of many governments to offer grants to entrepreneurs more so those with research related businesses. These offers are an important incentive for many people who yearn to start a business. The most encouraging part about government grants is the fact that it is free and not repayable.
- Love Money
This is the funds one can obtain from a spouse, friends or parents. This is referred to as patient capital since it is usually repaid as the business returns increase. While borrowing love money, you ought to be aware that family or friends may not have much capital. They also want to have equity in your entity. Not many entrepreneurs will be comfortable with that. Thus, you should weigh more opportunities before making the final decision.
- Angel Investors
Angel investors are individuals or a group of people who offer their personal property or assets to assist you to start a business. They usually look for startups that are viable and have the potential for good earnings. Majority of these people are investors and thus require you to produce a favourable portfolio for the type of business you need to raise capital for.
- Venture Capitalists (VCs)
Unlike angel investors, VCs establish an organization(s) through which they provide capital to individuals. In most cases, VCs like to fund already started companies who are in pursuit of establishing themselves. They also sponsor potential entrepreneurs who show significant determination to grow. Venture capitalists expect high returns from their investments (your business) while others want to be involved in your decision making after they sponsor you. In fact, they initially wanted to be part of or be the decision-makers for the businesses they support. Nevertheless, this has changed over time and they have now taken a mentor role to business people where they assist you with good business decisions and financial guidance.
6. Business Plan Competitions
A business plan is a very important element for getting business capital. Entrepreneurs present their business plans to some of the aforementioned sponsors such as angels, VCs, banks or even friends and families. Business plans competition offers entrepreneurs an opportunity to earn fame and capital to start a business. It involves firms or individuals who trade similar products, substitutes and other consumer options. Business plans are presented to potential funders to accept or reject. To win capital from a potential sponsor, then it has to be very unique and outstanding to beat the rest. If your plan impresses the funders, then you are picked to be sponsored to implement and actualize the plan.
7. Small Business Loans
Small business loans are usually offered by the Small Business Administration (SBA). SBAs are established to assist business people financially. It is important noting that SBA business loans are competitive but guaranteed and have relatively lower rates than the ordinary loans you are used to.
This type of capital targets small businesses and potential entrepreneurs who wish to start up business operations. These types of loans have boosted many in achieving their dreams due to their low interests rates and hence very attractive to young entrepreneurs.
In the modern world, the majority of small and medium-sized business use banks as their source of capital to start a business. Due to competition for clients, different banks offer different services as far as loans are concerned. They encourage and create awareness to their clients on a variety of the services they offer and advice them accordingly to take a loan that suit their business needs. In some cases, the banks may need to only work with companies who are well established and with good ideas which should be accompanied by a good business plan.
This source of capital is more practical to those who need equipment as assets to operate their businesses. Leasing involves a finance company acquiring the equipment for you and renting it to you for a monthly payment. This happens until you fully cover the cost of the equipment after which it becomes yours.
Finding enough funds to start a business is like a hard game that needs endurance. As a risk-taker (entrepreneur), you must work hard to beat all odds and overcome any chances of rejection for your business to succeed.
Photo credit: Kuzabiashara