Finance is the fuel of entrepreneurship. Enquire from any entrepreneur about the greatest challenge, most likely the answer will be capital. The most important question before an entrepreneur is, from where to get the money to start the business?

There are many options available for an entrepreneur to get the funds for the business. However, it requires some research to find out the various resources of business funding and the pros and cons associated with each type. Good research will help the entrepreneur to choose the right type of funding that suits the situation and the stage at the company is.

For the entrepreneur to grow fast, the business needs outside funding. If the entrepreneur remains without external funding for too long, he might miss opportunities to expand the business. These days, there are a plethora of lending options that might make it easier to infuse life into the business. 

Before we discuss the various sources of funding for an entrepreneur, let’s first see what funding means for an entrepreneur and why the funding is important. 

What is funding?

It is quite evident that the businesses would have expenses. Money is the backbone and priority for a company to grow. The fundamental of a business is that at some point in time, the entrepreneur will make more money than what he has spent.

Without adequate financing for the business, it is at the risk of going nowhere. To solve this problem, entrepreneurs normally look for financial help from the outside. In simple terms, funding is borrowing money from external sources to run the operations. Funding is a financial investment in a company for product development, manufacturing, expansion, sales and marketing, office spaces, and inventory.

Why is Funding required?

Funds mean money required to spend on establishing or expanding a business. Its importance in a business cannot be exaggerated. For the entrepreneur to get his business up and running, funding is crucial. On the other hand, the entrepreneur has to ensure that funds being generated by the business are not wasted on initiatives that promise poor returns. As the business grows it would call for more money.

The entrepreneur needs funding primarily for the following activities:

• Working capital

Working capital is a key aspect of running a business. Insufficient working capital can have a serious impact on the future of the business. It is the most common reason for entrepreneurs to seek funding. Many entrepreneurs use external funding to create enough working capital to enable them to meet their growth ambitions. 

• Asset purchase

Growth in the business often requires additional assets such as new machinery or vehicles. The business may need funding to cover the purchase of new assets to enable the business to expand. 

• Growth funding

When an entrepreneur looks forward to growing the business to take it to the next level, he will need funding to execute business plans. Funding may be used to increase sales, expand the range of products or services, move into new premises, hire more staff, or expand internationally.

• Debt restructuring

Sometimes an entrepreneur needs funds to restructure the company’s debt. This consolidates the borrowings and reduces costs.  It makes your finances more manageable for the business. 

• Funding for Market Research

Market research is a critical and integral part of entrepreneurship. Some businesses need a huge investment to carry out market research at the start. Funding at this stage is vital for strategizing plans.

• Money for Product & Business Development

Product is what the businesses provide. Money is required for the product to be created. To bring a product from an idea through market release and beyond requires money. After the product has been created the funds are needed for effective marketing. Both product and business development stages are preceded by money generation so funds are needed at the initial stages. 

Types of Funding

There are a lot of options with the entrepreneur to get the funding for the business at whatever stage the business might be. The following are the best options to get funding: 

• Begin With Bootstrapping

Self-funding is called bootstrapping. Bootstrapping is the best and most effective way of financing. It is important as the business is at the starting stage and there is no profit generated from the business.

First-time entrepreneurs often find it difficult to get funding. The lenders need a solid plan and a strategy for potential success. Investing from personal savings gives much confidence as the entrepreneur is not bothered by the lenders for the interest or the loan repayments. 

There is no cost of raising the funds as well. Bootstrapping should be considered as the first funding option due to its advantages. Some entrepreneurs continue to bootstrap until the business is profitable. However, the entrepreneur needs to look for funding when he looks to scale the business quickly. 

• Consider Family and Friends

Before approaching professional investors and lenders, it is worthwhile to try raising money from the network of family and friends. Family and friends are not professional investors so they normally do not do a professional assessment of the business. The advantage of this funding is that it is a quick and cheap way of collecting cash. 

• Crowdfunding

Crowdfunding is gaining a lot of popularity lately. This newer way of funding is taking loans, pre-order, contributions, or investments from more than one person at the same time. 

To avail of crowdfunding, the entrepreneur put up a detailed description of the business on a crowdfunding platform. The goals of the business, the plans for making a profit, the amount of funding needed, and reasons for the funding are mentioned. The investor puts the money if the ideas are good.

Crowdfunding is a competitive way of earning funding. However, to get the funds, the business idea has to be rock solid to gain the attention and the confidence of the investors.

• Look to Angels for Tech Start-up funding

Individuals with surplus cash who are interested to invest in startups are called angel investors. Sometimes, angel investors work in a group of networks. They collectively study and screen the proposals before deciding to invest. Angel investors also offer mentoring besides investing in the company. They offer network opportunities and knowledge within specific fields. 

Angel investors have helped to start up big companies including Google, Yahoo, and Alibaba. Angel investing generally occurs at the early stages of growth. Investors take higher risks for higher returns.

• Venture capital, private equity

Venture capitalists (VCs) invest in companies that have huge potential. They are professionally managed funds and invest in a business against equity and exit when there is an IPO or an acquisition. 

Venture capitalists normally look for big returns (3-10 times) within the next 5-7 years. Before investing, they need an in-depth and strong business plan. The benefit is that they can give big amounts of money. 

Venture capitalists also provide mentorship and expertise. They can be a good option of funding for the businesses that have passed the startup phase and are already generating revenues. 

Therefore, Venture capitalist funding is helpful for the faster growth and expansion of the company like a company wants to reach out to different international locations. Venture capitalists have another advantage in that they can fund a company multiple times. They also have good knowledge of the sector they put their money in. 

• Debt financing: the bank

Usually, banks are the first place where an entrepreneur goes for funding. Bank financing is the most traditional method of funding a business. Banks have different methods of funding businesses. They can provide the working capital loan and fund the business operations as well. The funding involves the process of sharing business plans, project reports, and valuation details.

The bank provides funds of a specific amount. The loan has to be repaid by the entrepreneur with interest over a predetermined time. Failure to pay can result in the seizure of the assets that have been put as collateral. 

The main advantages of the funding provided by the banks are:

• Lower interest rates.
• Terms of the loan are determined at the outset.
• Predictable loan payments.
• Factoring

Factoring is a method of financing working capital by lowering the size of accounts receivable. It is the process in which the entrepreneur “sells” the invoice to the factoring company at a lower price than the invoice price. The factoring company provides the funds so that the entrepreneur does not wait for the money as per the payment terms of the buyer. The factoring company takes the risk and the responsibility of collecting the payment from the buyer. 

• Leasing

Leasing is a way of spreading the payment of assets over a longer time.  Instead of paying at the time of purchase, the entrepreneur can pay for the assets at later stages. This method is useful when a company wants to purchase costly assets. 

• Funding from the Suppliers

When a business relies heavily on the supply chain, an entrepreneur can negotiate favorable payment terms with suppliers. The entrepreneur can negotiate with the suppliers for longer terms of payments. 

• Initial public offering

Initial public funding (IPO) funding is the procedure when a company gets capital by offering shares to the public. Any individual or institutional investor can purchase the shares and invest in the company. 

However, for the IPO to be successful, the company should have demonstrated strong growth and transparency for some years. The company should also demonstrate confidence that it has strong fundamentals to record good growth in the coming years as well. 

• Quick Ways to Raise Money

There are few more ways for an entrepreneur to raise funds. However, these might not be feasible for some businesses.

Product Pre-sale: An entrepreneur can sell products before their launching. It is often overlooked. It is highly effective in raising money. Sometimes companies like Apple & Samsung start pre-orders of their products well ahead of the official launch. It improves cash flow and creates higher consumer demand.

Selling Assets: Selling assets is not easy however some non-performing assets can be sold to meet short-term fund requirements.

 Credit Cards: They are the most readily available ways to finance the business. Credit cards get the entrepreneur quick money. 

For the entrepreneur, getting funds for the business can sometimes be the hardest part; however, it is also the most rewarding. Once the funding is arranged, along with the funds, the entrepreneur can invest his energy and time as well to streamline and expand the business. Keeping afloat the business and making it generate revenues make all the difference.