1.7 How to fund your business
Once you’ve decided on a business plan, you’re going to need capital to kickstart your business. Typically, most start out by using a sum of their own money but as you expand your business, you will need to source externally too. There are several ways to do so for your business, but the main two are…
- Raising equity
- Taking a loan
Equity Financing: The process of raising capital by selling shares to grow the business.
Loan: Money borrowed that is expected to be paid back with interest.
Under this method, there are several methods:
Seek partners – Getting partners involves sharing ownership of the company. Based on the agreement you have made with them, the partners may or may not be actively involved in the business.
Angel investors – Angel investors are people who are interested in funding other business in exchange for a share of the company. Other than financial help, they also provide advice and guidance as well.
Venture capitalist – Venture capitalists are similar to angel investors but their main focus is in the financial gains of the business. They would typically fund the business in the early stages for a bigger share of the company. They would also want returns if the company gets acquired or becomes publicly listed.
Crowd/cloud funding – Crowdfunding refers to sourcing from many individuals, usually done online in exchange for a minor share of the company or a reward. There are many platforms online that support crowdfunding, do some research on which one is most suitable for your business.
Pros & Cons of Equity Financing
- More control over fund management, you can choose how to spend the money
- Angel investors and Venture capitalist would offer guidance or mentorship to help you grow your business
- Flexible/negotiable business terms
- Creating a fund pool would be a slow process
- You may have to give up a large share of the company as you keep raising funds
Small Business Administration (SBA) loan – These are loans given by governing bodies to grow a certain industry.
Bank loan – Loans given by commercial banks.
Pros & Cons of taking a loan
- A quick funding process once approved
- No shares are given up, only interest-based payments
- Various funding options
- The payments are fixed
- You have to fulfil the requirements to be applicable for certain loans
- Requires heavy documentations with strict guidelines to follow
- Risk bankruptcy if you cannot meet the payments.
After the initial funding, companies aiming to do large expansions or prepare for an initial public offering (IPO) will go through series funding. Each round of series funding will increase according to the valuation of the company. It can take several years for a company to prepare for one round of series funding.
The series is typically labelled after the alphabets, the first round will be called series A, this is the stage where the company should have indications profitability and a long-term business plan. Series A funding usually aims to seek between $2 million dollars to $15 million dollars. The value of funds will increase with every round subsequent.