Entrepreneurs looking for funding for their start-ups have numerous options open to them, however some of these funding opportunities pose more risks than benefits if the business turns out to be unsuccessful. Whilst defaulting on bank loans could cost you your business, if you borrow money off friends or family then you jeopardize much more and could cause a rift between you and your loved ones. Therefore, entrepreneurs when looking for funding, need to be sure what they are getting themselves in for, and also be sure that they know what the risks are.
Borrowing money from friends and family to start a business can be a great way to get a business off the ground as typically friends and family require less return on their investment and in certain circumstances will invest in a person for no return other than the pleasure of seeing that person succeed. This type of funding is sometimes called FFF funding, which stands for Friends, Family and Fools! However, this form of funding is obviously not open to everyone as not everybody can find friends or family willing to invest their money into a new business.
The natural inclination for many entrepreneurs is to first turn to friends and family to help fund their new ventures. While this is the ideal situation - with low-to-none interest rates and deadlines - loved ones have also felt the same economic pinch and don’t have the savings they once did.
When looking for business funding it can also be tempting to fund your business on your credit card or via a loan, with the belief that your business will be so successful that you will be able to pay off this loan very quickly. Whilst there are hundreds if not thousands of stories of how entrepreneurs have had great business success this way, the stories of the many more people who fail and rack up huge debts aren’t so readily heard. The main thing to remember with credit cards is that the interest repayment rates are typically very high, so it is never recommended to fund your business on a credit card.
Bootstrapping is a phrase that is used to describe funding a startup business from scratch with your own money and personal savings, and without using outside investment. For many entrepreneurs this is the dream but, in many cases, it is an impractical goal since it can be difficult to launch any business without adequate financials in place. One of the key factors for any business is having enough cash flow, and many self funding business owners quickly come to the realization that they do not have enough cash flow to expand the business past launch. That is why startup funding is a popular option for many. This is also why some people opt to launch with a co-founder or partner.
Perhaps a more modern version of this type of small business financing is by using crowdfunding. This type of funding can work well for some small business types, such as if you're looking to raise some money for product development, but it doesn't suit everyone. There are also limits to how much you can likely raise using this method, and many crowdfunding campaigns are unsuccessful. Not because the business idea isn't viable, but because crowdfunding tends to suit ideas that are targeted to either a specialist, or younger audience. Generally, you will find that crowdfunding is less useful for business development or expansion. One benefit of crowdfunding is that you typically retain your intellectual property and equity in your business. However, some companies do choose to use a form of equity crowdfunding to finance their business, although this is less common.
Entrepreneurs looking for capital investment from the banking sector and other traditional financial institutions can end up being disappointed when the bank turns them down for the loan after the application process. Whilst you need to have a watertight business plan to present to the bank if you want a small business loan from them, typically banks only want to invest in businesses that are already established - and in many cases this means lending money to entrepreneurs who have a successful track record, which is of no help to the new budding entrepreneur who requires financial support. This means for most brand new businesses, traditional lenders are off the table for investment.
Grants from the government may also be available to the entrepreneur, but there are usually ‘strings’ attached to this form of financing program. Government grants tend to focus on businesses that tie in with various policies that the government are currently focusing on, such as Eco incentives, charity (and non-profit organizations), or community business projects. If an entrepreneur is looking to operate in these kinds of sectors, then these funding programs and business grants may be the solution they are looking for. Eligibility criteria for small business grants can be very strict, so likely this form of funding opportunity is only really viable for a few types of businesses. It is worth checking out if there are any business accelerators or incubators in your location or business area, as sometimes these are available, and can be useful for finding additional support with your business launch.
In many cases entrepreneurs look towards outside investment from private investors, venture capital funds or angel investors who can help support a new business by providing business capital for that business.
Angel investors are typically silent business partners who look at a business in terms of the money that they can make out of it. As with banks, entrepreneurs need a strong business plan, however in many cases angel investors are much more likely to take a measured risk, can offer different levels of funding and are typically more flexible than some of the other traditional financial providers.
One of the benefits that some angel investors bring to the relationship is that they often act as mentors as well as offering seed funding and investment. Not all potential investors offer mentorship, but many angel investors do. So, if this is something that you might be interested in this is something that you could discuss with any potential investor.
Venture capital investment tends to occur in companies that are already established but needs a financial injection to take them to the next level. Occasionally venture capital firms will get involved in rounds of funding for a 'unicorn' business (startup companies with a billion plus valuation) but as the name suggests, these investments and businesses are very rare.
They will take a valuation of your company and business model to ascertain growth potentials, and then they will invest accordingly. In some cases, venture capital firms may get involved to help take a company towards an IPO. In terms of investment, venture capitalists tend to deal with large numbers in terms of finance.
The amount of capital needed to start the average business these days isn’t as massive as what entrepreneurs were seeking several years ago.
Part of the reason for this streamlining of capital is that businesses have replaced manpower and extravagant marketing campaigns with technology and a more hands-on operational approach. Another is due to the financial crunch banks have imposed in lieu of the global recession. Entrepreneurs are no longer padding their start-up costs, making it easier to secure smaller loans and investments.
Instead, more entrepreneurs are being rescued by angel investors, private investors who offer small amounts of money with lower return rates than venture capitalists, banks, or shareholders. Angel investors usually expect the company to have a 5-to-10-year exit strategy. Entrepreneurs can develop a partnership with these business angels based on each other’s needs - some angels take a more managerial role, while others can sit back coolly and ride the investment to term.
Entrepreneurs and business owners who join the Angel Investment Network can connect with angel investors who are looking to invest in new businesses. For investors who are looking at ways to invest their money, either in established or early stage start-up companies the Angel Investment Network hosts a wide range of opportunities to suit your requirements.
You can find investment opportunities across a wide range of market sectors, from tech companies and fintech to digital media and real estate.
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