How to Decide What Type of Financing Suits You to Start Your Business
In most cases, business projects start with a business idea. That first moment in which 'the light bulb goes on' is followed by a more or less plausible development of how one is going to turn that idea idea into a reality. And in that process, one of the first steps is to analyze how much money you need and how you are going to get it.
This is, of course, one of the tasks that will take you more time as an entrepreneur because it requires a very detailed study of the type of company you are going to create , the technical and human team you will need, the turnaround time to put everything in motion and your own ability to take risks and debt. Based on these main concepts you can make an estimate and launch yourself in search of the ideal financing for you and your business.
Public or private financing? Crowdfunding or professional investors?
To find the financing that best suits your needs, you should first ask yourself a series of key questions, on whose answers your options will depend. Some of the most important ones are:
- How much capital do you need to start? This is straightforward as it includes the amount you need as startup capital. However, it also implies that if you do not currently have a job, you should also include in the estimate the amount of money needed as your living costs during the first months of the project. That is until it starts generating enough return on investment.
- What is your ability to take risks or get into debt? This is another key question, because it determines to a large extent, your access to the financing you need. If you have savings or an investment that can support you in case the business doesn’t go according to plan, you will have many more options at your fingertips than if you do not have guarantees to offer in the face of, for example, the return of a loan.
- How much time do you have? Depending upon the urgency with which you want or need to create your company, certain lines of financing could be closed.
- To which sector does your business belong? It is another of the most important variables in any business project. Any actor, public or private, looks carefully at not only the business plan but also in which sector it will be developed. To cite an example, entrepreneurship in Information and Communication Technologies may have more institutional support or private investors than entrepreneurship in culture.
Of course, depending on each business project the questions can be more or less but these are the general ones. It is up to you to make a definitive list of questions, answer it and have very well defined plan of action for exactly what you need. From there:
Bank loans
We begin with the form of business financing more widespread among budding businesspersons. Bank loans involve a series of important advantages that must be assessed before an alternative is looked at:
- Availability of options: there are many banks in the market and each of them has a wide range of loans, with different interest rates and conditions that vary depending on the project, the applicant, and so on. There is a lot to choose from, so if you have the ability to borrow or guarantee payment, it is one of the most interesting options.
- Speed: of all the financing options, the bank loan is one of the fastest. The times depend on the project and it also varies between banks, but it is normal for the grant of money to be closed in two or three weeks in most countries.
- Level of personalized financing: another characteristic of bank loans is that you can choose a personalized financing, which is based on the study of your needs. It is unlike other ways of obtaining capital, in which you cannot choose how much money you will receive or how you will return it.
- Study of the project: one of the major advantages if this option is that every loan request goes through a study of the business model. The concession or denial of the loan will be subject to business viability criteria that you, as entrepreneurs, are interested in knowing. In a certain sense, to pass or not pass this screening can give you an idea of how solid your project is or if you need to make improvements in it.
- Access to a multitude of services: finally, getting a bank loan will link you for a certain number of years with a bank, which very possibly offers you another series of services at a lower cost because you are already their customers.
Subsidies
The world of public subsidies is complex. There are local, provincial, regional, national and even bloc-level subsidies. In addition, there are specific support programs for entrepreneurs that finance businesses in certain sectors or productive areas.
Previously we mentioned ICT as one of those areas that are receiving the most institutional support, but it is not the only one. Tourism and hospitality, health, agriculture are other areas that receive it the world over. Depending on the region of the world in which you reside or want to start your business in, you will have access to different grants.
In addition, different public organizations that ensure equality between men and women offer specific financing for female entrepreneurs who decide to start a business.
On the other hand, there are both non-refundable subsidies - in which one does not have to repay the capital - and subsidies in which the return of part or all of the money transferred is requested.
Grants and subsidies have the great advantage that, for the most part, they are free or do not involve interest payments, but in return, they bring some disadvantages:
- They are difficult to achieve: in general, a series of very specific requirements must be met, in addition to providing a continuous report on the progress of the business. Furthermore, given the high number of applications that are usually received by the aid packages, which have a fixed budget, a good part of the entrepreneurs can remain without accessing them, even if they fulfill all the requirements.
- They are slow: the process of obtaining a public subsidy usually lasts several months; In addition, once the financing has been obtained, it may take some time to arrive, so the subsidies are not the best option for those who are in a hurry or need to set up their company quickly.
- Limited capital: in grants there is usually a cap on funding, so in some cases it will not be enough to cover your needs.
Crowdfunding and its variants
The collaborative economy has become in recent years a very interesting option for a certain type of entrepreneurs: those who have a very novel or niche product. Just walk around one of the most popular platforms like Kickstarter, to see that even the craziest projects have their market. And if they are well focused, the market responds.
Because that is the key. On crowdfunding platforms you have access to ‘investors’ or ‘patrons' from around the world, so your project can become global and reach audiences you could never have imagined.
In addition, the way to return the capital is usually in kind, so once we have launched your product, you can offer your sponsors different benefits: discounts, access to exclusive versions of the product, express shipping, and so on.
To these advantages we must add that a crowdfunding campaign is relatively fast. Usually they are active for a period of a month or two months on the platform chosen, time in which either the funding objective is achieved, or it is not reached and you must consider other alternatives.
Of course, it is worth mentioning that launching a crowdfunding campaign involves an important task: on the one hand, you must prepare well as to how you are going to sell it and make sure to offer the product that you can really develop; On the other, during the campaign duration, you need to be very active on social networks to give the maximum possible dissemination to your funding campaign as well as responding to comments from investors or potential investors.
Finally, remember that most crowdfunding campaigns do not achieve their funding objective. This type of platform is a very busy place and your project will compete with thousands of other proposals. Also, if your business is a service, crowdfunding is not the most appropriate way to go.
Angels and other private investors
As a result of the rapid rise in entrepreneurship that has occurred in recent years, with hundreds of thousands of startups emerging throughout the world, the presence of private investors has been reinforced in turn. Venture capital companies and angel investors are two of the most important players in the private investment scene.
This type of financing is very recurrent in the technological sector and almost non-existent for traditional businesses. That's why a very concrete profile of entrepreneur and company is required in order to entice an angel investor. However, if you achieve it, you can access important advantages.
Among the most important ones, is the advice and help that angel investors offer to the entrepreneurs they support. This translates into a constant conversation between entrepreneur and sponsor to improve the product or service to offer. And with the breadth of experience that these investors have, such an interaction can be very beneficial for budding entrepreneurs.
However, getting this type of financing requires giving up a part of your company and with it the ability to make decisions. As expert investors, venture capitalist and angel investors seek the return of their investment plus a few benefits, and that may involve doing things in a different way than you had originally proposed.
A final tip: stay open to all possibility
Searching for funding always takes time, but it is one of the most important steps in the creation of your company. Explore all the possibilities and do not close doors. A justified 'no' is always more valuable than an unasked question.