Hardly is there a business venture without the need for funding. Whether it’s for procuring equipment, hiring talent, purchasing stock or pitching ideas, start-ups require funds, no matter how little, to take off, grow and sustain momentum. Fortunately, there exist a myriad of sources of funding for start-ups. However, securing such funds can be tasking, and knowing the type of funding required would depend on the specific needs, stage and projections of the start-up.
Many a founder is familiar with this source; investing their savings into their solution-driven, start-up ideas. It is regarded as the best and one of the quickest ways to access funds to get the business up and running. Personal financing is also a good route for first-time entrepreneurs. Founders who plough their money into their visions send a clear message to future investors – we believe in this enough to back it up with our money.
Family & friends
A founder’s family and friends are next in line for great sources of funding for start-ups. Unlike strangers (angel investors/venture capitalists/bankers), these individuals are well acquainted with the founder, trust her/him and would be easier to convince about investing in the business idea. On their part, founders must consider that this form of funds could lead to damaged relationships in the event of loss of funds.
Business loans from banks
Loans from banks are one of many external funding options available to start-ups, and they come in different forms – traditional business loans, working capital loans, personal loans, etc. They fall under the category of strangers to founders. Banks need proof from founders that they (the founders) meet any requirements (collateral perhaps) and can repay the loans when due. Founders who access this source of funding must contend with interest rates and repayment tenure.
Business loans from microfinance institutions (MFIs)
Compared to traditional banks, microfinance institutions can be considered little league. While both offer the same type of services, the size of MFIs’ loans is considerably smaller, and their conditions and collateral constraints are less stringent. Founders seeking this path to funding will be evaluated, as the traditional banks, by the lending MFIs for their ability and willingness to repay the loans.
Angel investors are mainly rich people or bodies who invest in start-ups in exchange for a certain percentage return or shares. They could be successful individuals, executives, and/or business owners with surplus cash to invest in ventures that interest them. Though they invest for higher returns of profit, they present a good funding option for start-ups and can be found through networking. Entrepreneurs with angel investors would discover that they not only come with the required funds but can also offer strategic experiences that could benefit the start-ups they have invested in.
These are professional investors, individuals or firms, who are more involved with business management. They play a significant role in setting targets, milestones, and proffering advice on ensuring better success. Venture capitalists invest in businesses they believe will be sold for huge future profits or possibly go public.
This type of funding is usually suitable for start-ups that have gone beyond the beginning phases of business and those in need of venture capital for growth and an increased market share. It targets specific industries and has a short return on investment window – between three to five years. Founders going this funding route should be prepared for a lengthy process that can take several months.