Among the first boxes that need to be ticked when you plan to start a small business is the funding. Without infusing funds, your small business may not really get off the starting block. You may have the most brilliant concept for a product or service, but without the oil of money your idea will remain just that – an idea. There are multiple avenues for raising funds, and a founder needs to be ready for a tradeoff, an arbitrage of sorts when choosing the options – diluting stake and maximizing returns. Take a look at the options available for an entrepreneur looking to bolster finances for a small business.
Financing for businesses is either by way of equity stake or loans. The available options are profiled through seven different categories, given below.
Investments by angel investors typically support businesses in the initial stages. The tradeoff here is that the investors look for stake in the company. Founders who are willing to forego a significant portion of their future earnings can look at this type of funding. The advantage of this funding is that angel investors are generally successful businessmen who can spot the brilliance of an idea and are confident that the concept will do well. Angel investors do not only put their money where their mouths are, but actually put their mouth where they feel there is a chance of making money. And angel investors bring their business acumen to the table guiding founders through the motions for making the most out of a business.
On the face of it VC funding may look similar to angel investing, but both are entirely different. VC funding is extended by institutions, and founders need to relinquish partial ownership to the institutions. And in some cases, depending on the circumstances, a founder may need to cede management control when the stake of VCs exceed 50 per cent. Another difference between angel funding and VC funding is that angel investors come early on in the lifecycle of the business, whereas VCs enter a little later. Here again, the funding from the institution will only be extended to ideas or businesses that have a fighting chance to succeed. Founders whose only vision and mission is to see the business grow, can look at the VC route to raise funds, if they have a viable business idea.
This could actually be oxymoronic – the most easy and difficult at the same time. Finding the sources among friends and relatives can be the easiest, but persuading or convincing this group can be the most difficult. However, if you manage to pull off funding from friends and relatives, you can consider yourself free from the strings of institutional finance, VC or angel investor demands for stakes in your business. If you manage your business properly, you can flexibly manage the repayments and there is precedent to show that this funding can be a very effective and simple one. The only catch will remain in your ability to prove that you have an idea that will work. Remember familiarity breeds contempt, and your known circle may find it difficult to believe that you have winnable idea.
As a funding avenue, this is catching up with different subsets. Your business can be funded by a rewards based system or a loan based concept. Many businesses have opted for this route and have met with considerable success. However, as far as the contours of crowdfunding goes, there are two possible drawbacks that a founder needs to contend with. One is the need to protect intellectual rights from being infringed, and the second is to reach the target, failing which the raised funds need to be returned. You need to share your concept or idea on a digital platform which will be seen or shared by individuals. Your description of the idea should be convincing enough to get the readers to believe in it and make an investment. If you do not have protection of your idea legally, you could be in a spot here. Explain the concept fully and your stands the risk of being copied. Do not explain the idea fully and you run the risk of not being understood or not sound convincing enough. And if you have a targeted figure on the site, you need to raise the targeted amount or return the raised amount. The positive side of crowdfunding is that you have a group of people who will be your emissaries, promoting your product or your service, because they have invested in it.
Are typically small amounts, and cannot be regarded as an avenue to get your business going. If you consider yourself lucky enough to be in one of the categories eligible for a grant, the amount you receive can help to a certain extent but will not be adequate enough to replace any of the other fund raising options. And grants are typically a combination of many eligibility criteria that funnels and filters down to a handful of eligible businesses.
Though not in the category of exclusive funding avenues, business incubators and accelerators are sources of limited funding alongwith other services during various stages of a business. True to their names, incubators and accelerators help a business to grow or expand, and founders who need technical, professional assistance with limited funding options can choose either of the two. However, getting onto any of the programs are not very easy and will be demanding.
This is sometimes the ‘go to’ option for a large number of founders who have been unsuccessful in efforts to raise funds elsewhere. However, this comes with equal if not more eligibility criteria. The advantage of this option is that the founder will remain in control, with no dilution in stake, provided the repayment goes as per schedule. Loans come with different interest rates (that are actually subject to negotiation), and need to be repaid within the stipulated and greed period, failing which recovery options will be exercised through attachment or sale of assets. This means that a founder needs to provide security for the loan in the form of physical assets or intellectual property/revenue inflows. This can be a tough ask for businesses that are just starting up, though the process is evolving with alternative funding options offering founders various avenues to raise loans.
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Regardless of the options chosen by a founder, ever single avenue comes with its own set of challenges and advantages. Founders need to consider the tradeoffs that they will need to agree with and compromise in their search for funding. Various considerations, such as high rate of debt servicing/interest, dilution of stake in business, ceding management control, need for urgent funding, the need for technical assistance and marketing need to be considered carefully before deciding on the option. For instance, a crowdfunding system comes with the advantage of free marketing, angel investors come with the benefit of business expertise, VC funding comes with an assurance that your idea has more chances of winning, funding from family comes with lesser strings, grants come with the advantage of lower interest and finally loans come with the advantage of letting you remain the master. Choose the options based on specific circumstances and the need to get your business going, before you zero in on the most suitable one.
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