What are The 5 Sources of Finance?

what are the 5 sources of finance

Did you know that it takes an average of 26 hours for a business to search for a loan? Out of the thousands of small businesses that open their doors every year, 82 percent of them fail due to cash flow problems. Usually, this happens because the owners of the businesses did not know where or how to get funding.

If you don't want to be in that category, you need to understand the best sources of financing for your business. Funding your business, whether you're just starting out or need money to hold you through, can be quite the challenge. What are the 5 sources of funding when you can get enough money to get your business off the ground?

In this post, we bring you a comprehensive guide on the 5 types of business funding, and we hope it'll help you make an informed decision.


1. Start With Family and Friends

Before you start considering professional investors and loan institutions for financing, raising some funds through your network of family and friends may be worth the while. These are the people closest to you in your social network, and you may just have a few that believe in you and your idea strongly enough to invest in it. Keep in mind that these are not investors and will not offer a professional assessment of your business plan.

One of the most significant advantages of this type of business funding is that it's not only quick but cheap as well in terms of collecting the cash. The best time to get this type of funding is when you're just starting your business, or when you need to bridge some gaps after the first seed of funding.

Of course, you should not expect large amounts of money with this type of funding. Investors may offer it as a loan with or without interest or may ask for a share or equity of the business. Of course, there's always a chance that family members or friends may not be capable or may refuse to help out, so if you're not lucky, jump into the next funding ideas below.


2. Angel Investing

Angel investors are usually experienced entrepreneurs that have existing investments and can spare funds for great business ideas. They invest in other companies to help them grow and succeed, and the investment money could run into millions. The amount you get will highly depend on your business idea, and what kind of angel investor you get.

You should look for angel investors if you need a large amount of money for seed funding, and your close circle can't raise enough. You can find individual angels or angel groups that co-invest together in the best businesses. One of the best things about angel investors is that they don't just offer money, but smart capital.

You see, with angels, you won't just get funds, but the knowledge and network that aligns with your business to get more information. If you can find angel investors that have experience in your line of work, even better because you'll get guidance as well.

You can check out this service location.


3. Crowdfunding

It's hard to imagine that crowdfunding did not exist a few years ago, and now it seems like it's the go-to type of funding for so many people. Crowdfunding is exactly what it sounds like because it's a crowd of people that donate funds for a cause. Crowdfunding takes place on online platforms like GoFundMe, and when you sign up and publish your ideas, people will donate to help you out.

Generally, there are several types of crowdfunding, so decide upon the best one depending on your business model. Some of these include domination-based funding, reward-based funding, equity funding, debt crowdfunding, and real estate crowdfunding. Crowdfunding is suitable for propositions that the general public understands, so take that into account if you choose this as your business funding option.


4. Venture Capital

Venture capital does not work for all kinds of businesses. Venture capitalists are always on the lookout for entrepreneurs with technology-driven ideas that have the potential for high growth.

Biotechnology and information technology are some of those fiends. Venture capitalists go for high risks projects, but you need to give them equity or some ownership of the company.

Beyond that, they also expect a healthy return from the venture, which is mostly generated when the business goes public and sells shares. Having business investors that bring in not just money, but knowledge and experience as well as can be invaluable to your company.

Venture capital is suitable for businesses that are past the seed stage and want to start growing their business. The best thing is they can offer multiple times to your business. This is something angel investors and other investors may not be able to do, which makes it a great option.


5. Government Subsidies and Grants

You can opt to get funding from the government through grants and subsidies. Getting grants can be challenging because the competition is stiff, and they have very stringent criteria for awards.

In general, most grants will require you to match the funds they are offering you, and the funds vary widely depending on the grant. For instance, if you are getting a grant for research, you may be required to match 40% of the total cost.

You'll need to provide a detailed description of your business, the benefits of your business, a business plan that includes all associated costs, and complete application forms. Now you no longer need to ask what are the 5 types of funding for your business.


What Are the 5 Sources of Funding?

So, what are the 5 sources of funding? In this post, we have covered family and friends, crowdfunding. Angel investors, government grants, and venture capital. There are several more ways you can fund your business. They include bootstrapping, bank loans, credit unions, factoring, and debt financing.

You can even opt for Initial Coin Offering (ICO) depending on your type of business. These are some of the top business funding ideas, though, and you should give them first priority before you dig deeper into others.

Bootstrap Business Blog Newest Posts From Mike Schiemer, Partners, & Blog Outreach Services