Small Business Sources Of Finance – Are you a (startup) founder looking for funding? You have come to the right place! Below you will find an overview of the thirteen most common sources of funding for entrepreneurs. Some are suitable for early-stage startups, while others are more relevant to fast-growing mature companies. Still, all the options should give you enough inspiration for your next round of funding!
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Small Business Sources Of Finance
Explanation: Do you have your savings? Did you just get a nice bonus? Why not invest in your own business! However, you don’t have to invest in cash. If a co-founder or partner puts hours into starting your business while doing their job, that’s also an investment. Or how about a founder offering an office, machine or technology license? These are all sources of investment. It is also an option not to pay yourself a salary temporarily.
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When to choose this funding source: Founders can of course invest in their company at any time. However, this usually happens when the company is just starting out. When starting a business, in many cases there is no income or external financing, but some of the initial costs must be covered.
You can do whatever you want with regard to the size of the investment (as much as your bank account allows). What is the benefit of this type of investment? An external financier may find it positive that the founder also has “skin in the game”. Why should someone else take the risk of investing in your business if you are not willing to take the risk yourself?
Explanation: Before you start approaching professional investors, it might be worth trying to raise funds from a network of family, friends and geeks. Often these are people in your family or social network who are close to you and invest mainly because they believe in your idea or you as a person/entrepreneur. Since they are usually not professional investors, such an investor should not be expected to provide a professional assessment of your company’s strategy.
When to choose this source of financing: This type of financing is often requested to cover the start-up costs of a new business or to cover the first round of (pre)startup financing. The advantage of this type of fund is that it is a quick and cheap way to raise cash, especially if you consider the risk of 3Fs (who are not always self-aware: hence “stupid”).
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Usually the amount involved in this type of investment is not large and is usually paid back as a loan (with or without interest) or invested in exchange for a small equity stake in the company. When the amount of investment, percentage of share and professionalism increase, we talk about angel investment.
Explanation: Angel or informal investors are experienced entrepreneurs who receive some funding (often from previously abandoned companies) and invest in new companies to help other entrepreneurs succeed in their business. Angel investments start at around $50,000 per euro and can be up to a million dollars per euro (or more), as angels sometimes invest together in groups.
When to choose this funding source: If you are looking for seed funding in the above area, choose an angel. Angels usually provide “smart capital”: not just money, but also networking opportunities and expertise in specific fields. Try to find an angel that matches your company in terms of experience and industry knowledge. Angels find new investment opportunities through their network, but also through platforms such as (eg) AngelList, Crunchbase and f6s.
Explanation: Today it is hard to imagine that crowdfunding never existed. With crowdfunding, the “crowd” finances the financial needs of the company. Generally, crowdfunding takes place through an online platform, where entrepreneurs offer investment opportunities on one side of the platform, and on the other side of the platform, a large crowd invests small amounts to meet the entrepreneur’s investment needs.
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When to choose this funding source: In general, there are three types of crowdfunding: loans, pre-orders/donations, and convertible bonds. You are looking for one
, but having trouble opening a bank account because your risk profile is too high? try then
. Do you have a prototype available and want to test the product/market fit, but can’t finance the production/delivery of the first batch of the actual product? Then let’s go
. Well-known examples of platforms that offer this type of crowdfunding are Kickstarter and Indiegogo. l They are mostly suitable for products, projects or gadgets aimed at the consumer market and have a strong design element.
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It has the following advantages: 1) no shares are issued, 2) valuation discussions are delayed until the value of the company is better established, and 3) it is a simpler, faster and cheaper process than actually transferring shares.
Since the people who invest through crowdfunding platforms are not always professional investors, crowdfunding is more suitable for proposals that are not too complex or technical and easily understood by the general public (hence “crowdfunding”). Consider, for example, consumer products.
There are also crowdfunding platforms with a specific focus, so take that into account when making your choices. For example, the Dutch crowdfunding platform Oneplanetcrowd focuses exclusively on sustainable projects with a positive impact.
Explanation: There are a number of tax/financial schemes and subsidies. The purpose of subsidies/programs is usually to promote entrepreneurship, innovation/R&D or economic growth in a specific geographic area. That’s why every region, every country, and even, for example, the entire European Union has its own subsidies.
Sources Of Finance For Small Businesses
When to choose this source of financing: Always, and we can tell you about it very briefly. Subsidies are important at almost all levels of business, from startups to companies, from freelancers to publicly traded companies.
As mentioned earlier, many grants are targeted only to a specific geographic area and often also have a specific sectoral focus. That’s why it’s important to find the right support for your business.
Note that administrative and reporting requirements often apply to support and grant applications. You must be able to justify the costs for which you are applying for support, and sometimes a verification of this justification is required.
Explanation: Private equity is a collective term for professional investment firms that invest in companies that are not publicly listed. Venture capital (VC) is a form of capital investment that focuses specifically (from the investor’s point of view) on risky investments in early-stage companies.
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People often talk about private equity when investing in larger companies that have been around for a while. On the other hand, venture capital is invested in the growth capital of young companies. Typically, VCs have funds of a certain size (eg 100 million USD/euro) that can invest in several companies with different risk profiles over a period of time (eg 10 years) for diversification. Whole portfolio risk. The goal is to sell the shares after a few years at a certain return/profit.
When to choose this funding source: Private equity is best suited for companies that have already passed the “seed stage” and are looking for Series A or B financing. The purpose of such financing is therefore to support growth faster than the growth of the organization, for example if the company wants to go international.
Venture capital companies typically invest around $500,000 to $20 million/euro. Getting venture capital funding requires that the company’s product/market has already been proven and that steadily growing revenue streams must exist for several years. However, there are venture capitalists with seed funds (starting at around $200,000/euro) who provide seed capital to companies that do not yet meet the above criteria.
Venture capital firms have the advantage of being able to provide multiple rounds of financing for the same company, whereas an angel or other seed investor cannot always do so. Private equity investors often have a specific industry and good knowledge/network in these areas.
Sources Of Finance
Explanation: Although there are banks that start venture capital funds, they are riskier than angels, seeds and typical VCs. This does not mean that banks do not finance entrepreneurs – quite the opposite!
However, they are more likely to invest in SMEs, companies with a lower risk profile (such as startups) and when companies can provide collateral. For early-stage startups that don’t fit the focus of venture capital funding, getting bank financing can be difficult.
When to choose this funding source: As mentioned, banks tend to take less risk than VCs and angels. But if you can give
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