A lack of adequate funding turns out to be one of the common reasons over 47% of startups fail in their first two years of operation, and about 44% go belly up after five years, according to a recent study conducted by CB Insight.
This study lays credence to the fact that money is the bloodline of every business and that even established companies are not immune from liquidation if their funding source is seized.
Funding sources can determine whether a company will swim or sink. A reason why most entrepreneurs often ask themselves at every stage of their business - How do I finance my business? How and where do I acquire the necessary funds for my business?
However, in this article, we will look into different funding options available for incumbents and startups and how they can access these funding options.
Different Sources Of Funding For Businesses
Bootstrapping
This is also known as self-funding, and it involves using your personal money or savings to finance your business. This funding source is common among startups who don't want to go through the rigorous processes of loan procurement.
This method saves entrepreneurs the time and effort most people face when seeking funding from external sources. And another perk connected with this method is that the entrepreneur gets all the controlling interest of the business. They share with none.
Another method that can be classified under bootstrapping is borrowing from friends and family. Using your kith and kin as funding source comes with fewer formalities and flexible lending conditions.
However, bootstrapping is optimum if the business requires little capital to start. Some businesses are capital-intensive and require wooing big investors to get started.
Crowdfunding
This is an alternative funding method for startups. It requires the entrepreneur to share their business idea with prospective investors who may eventually invest in their business if they discover the business idea will sell.
The entrepreneur raises a certain amount to start the business by discussing or pitching business ideas.
Crowdfunding is just like loan procurement, where the brain behind the business will post their idea on a funding platform and investors who are convinced of the business plan to invest.
If an entrepreneur has a detailed description of what they want to do, posting it on websites like GoFundMe, Kickstarter, Onevest, DonorBox, and RocketHub can help them attract prospects who would like to make pre-orders for the product or pledge a certain amount for donation.
Angel Investors
Some people are keenly interested in investing in startups with surplus cash. These individuals are called angel investors. Their vision is to help upcoming entrepreneurs make their dream of owning a business a reality by providing them with capital loans.
They also work in groups to collectively look into the proposal and consider many possibilities before investing. They also provide guidelines or advice alongside capital finance.
Angel investors have helped to start up many significant establishments, including Yahoo, Google, and Alibaba. This option is optimum at the early stage of a company's growth, with investors expecting up to 30% equity.
Many investors prefer to take more risks in investing for higher returns. Using angel investment to start or sustain a business has its drawbacks too. Angel investors don't invest larger amounts than venture capitalists.
Also, keep in mind that crowdfunding is a competitive means to earn money unless the entrepreneur has a compelling business idea.
Venture Capitalists
These VC are professionally managed funds that invest in establishments with huge potential. Venture capitalists put their money into a business against equity and remove it when the business is bought over or there is an IPO.
Venture capitalists are business experts with a wider range of experience in business funding and profit making. With their experience, they can determine where a company is going by evaluating the business from a scalability and sustainability point of view.
This funding system is optimum for businesses that have outgrown the startup stage or phase and already have consistent revenues. Incumbent companies with growth capacity, like Uber, Flipkart, and others with an exit strategy, can generate huge amounts of money that can be used to invest, connect, and grow their company as fast as possible.
However, using this funding method has some downsides that every business owner must consider before starting. The first of its downsides is that it has a short leash system regarding company loyalty, and capitalists are always looking to withdraw their capital within a three- to a five-year business window.
That shows that venture capital is not an ideal plan for any business with products that take longer than that period to get to market.
Business Incubators And Accelerators
Business incubators and program accelerators may be the best option for businesses at their early stage. Scattered in major cities are many program accelerators entrepreneurs can leverage as a source of funds to kickstart their businesses.
Though these words can be used interchangeably, they convey different meanings. As the name implies, incubators are like parents who nurture and train a child from the fetus to the point of maturity.
This is the same work incubators do for businesses - they provide the necessary tools and network for a business from the start to when it can stand alone. But accelerators help to take giant steps.
Accelerator programs usually take four to eight months from start to completion, and they always require a time commitment from the entrepreneurs.
Bank Loans
Normally, banks are the first place of contact business owners go whenever they think of funding their business. Financial institutions provide two kinds of business funding - we have the working capital and the funding.
A working capital loan is simply needed to run a complete financial cycle of revenue- generating operations with a limit that is always determined by hypothecating debtors and stocks.
While funding, on the other hand, has to do with the normal process of discussing the business plan and the evaluation, with convincing project reports before the loan can be sanctioned.
Conclusion
In conclusion, funding is an integral part of the business that must be considered if a business will thrive. Funding can determine whether we scale from one phase to another or not. Incumbents and startups need a consistent flow of money for business operations, which is a recipe for liquidation.
