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Before an entrepreneur makes a choice of how he/she intends to fund the business, there are a few key factors that need to be taken into consideration. Take a look at what they are as a starting guide and some of the funding options available for start-ups and growing enterprises
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Factors to Consider
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At what stage is your business right now? How risky is your business proposition?
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Prioritize your funding needs: Do you require short-term or long term financing?
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How much funds do you intend to raise?
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How would the funds be utilized? What is the money used for – Is it for operational needs or for capital outlay (for assets like machinery, equipment)?
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How long do you think the money can last? You need to work out some cash flow projections.
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Do you need the entire required amount at one go or can it be raised in stages or tranches over a period of time?
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What type of financing form would you be willing to consider –borrowing, which means you need to plan how and when you can pay itback) or selling a certain percentage of the business ownership to aninterested and willing investor?
Funding Options
Choosing the right financing is critical to a business. Sources of funding can be broadly categorized into two types:
Debt-financing –
Typically refers to borrowing or taking a loan from an external party (the lender). Bank loan is a common example. This means you borrow or owe the money and you will agree to pay it back over a period of time. Normally, debt-financing tends to be interest bearing loans. Whether or not you succeed in your business, you will still need to repay the amount.
Bank borrowings alone may not be suitable or sufficient for all companies. A mixture of both debt and equity are common practices.
Equity Financing –
This form of financing refers to selling a portion of your company to interested investors in exchange for cash capital. The investors will then have a stake or ownership of your company, and therefore becomes a shareholder. As investors, they are looking for capital returns over a period of time and as an entrepreneur, you would need to be able to succinctly convince investors of your growth and revenue potential.
The map overview of government financing schemes in the next section provides a summary of the various options and sources of finance available at different growth phases of a business.
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