Business Funding 101: Different Types of Financing Options

Do you have a great business running but not sure where to turn when funding is needed? Having a good business idea is the seed of any business project. But for that seed to grow, it is essential that it has the necessary time and resources. For this, there are all kinds of financing channels. Continue reading to find out more.

Some small projects manage to take their first steps thanks to microcredit. Other companies have combined the smart capital of accelerators with the help of various public bodies. Whatever the chosen method of financing, the important thing is that it fits your needs as an entrepreneur.

If borrowing is your only option, in order to choose the most suitable alternative, it is essential to assess issues such as the amount desired, the repayment term and the acceptable risk (especially in loans that require the presentation of a guarantee). It is also important to decide whether to resort to debt or it is preferable to let new investors in.

If you opt for the capital route, you will have cash without the need to borrow, risks will be shared among the partners, who will participate in the future profits and will also provide knowledge and experience. Your percentage of the company may decrease and may lose control of it. On the other hand, it is essential to know the different financing methods listed below and the pros and cons of each of them:

Bootstrapping

This term, which literally means ‘to put on the boot’, involves starting a business without outside help, investing your own savings and minimizing expenses. In this case, you have to make controlled investments; the ideal is to get the first income through whatever tactics that are on offer.

Family and Friends

Resorting to this alternative, also known by its acronym FFF (family, fools and friends) allows you to obtain not insignificant amounts quickly and with much less demanding requirements than those imposed by a bank or a professional investor. In addition, the conditions are usually looser in terms of the return period and interest. The funds can be obtained even for free, through a donation or a zero-rate loan.

The most obvious risk is that if the business does not prosper (95% of businesses worldwide close in the first three years, according to statistics), a family schism is generated. To avoid this, it is essential to explain the risks well and present a serious business plan.

Bank Loan

Banks offer a wide range of products to finance new businesses: microcredits, loans to entrepreneurs, loans with special conditions (for example, when the company has a social purpose or is linked to research) and lines of mediation, thanks to the agreements with the ICO and the EIB. The loans are subject to interest, which currently ranges between 3.5% and 7.5% per annum. The advantage is that they allow you to maintain control of 100% of the capital.

At the time of requesting a loan, the entities value that the entrepreneur presents a viable business plan, with a hypothesis of well-reasoned expenses and income. They also appreciate that the plan is written by the entrepreneur and is not a mere copy of sectoral information.

Public Aid

Another option is to request aid from a public body, either in the form of subsidies or soft loans. Some government bodies offer various grants for newly created companies, especially for those that are scalable and of a technological nature or with a social or environmental component. The experts value this resource but recommend that it not be the only source of funding. That a prestigious investor contributes money to the project is worth more than five subsidies.

Incubators and Accelerators

Platforms that provide training, mentoring and contacts that can be very useful to the entrepreneur. They can also participate in the capital of the company. The most suitable one is the one that gives you the most value; you must have experienced professionals and people should speak well of it. If it is also sectorial, it is easier for contacts to be more focused.

Crowdfunding

This option allows obtaining funds through a number of small investors. Depending on the chosen platform and the project in question, they can invest in a disinterested way or in exchange for a reward or participation in the capital. They can also make a loan in exchange for interest. It is a fast and easily accessible means of financing for the entrepreneur.

Business Angels and Financing Round

Keen entrepreneurs can open a round of financing between professional investors or resort to business angels or venture capital funds. These investors not only provide money, but they are also specialists in the sector and can provide valuable knowledge and contacts. To seduce them, it is worth remembering that investors invest in lines and not in points, they do not attract sporadic and punctual data, they look for a continuous relationship in time.

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