Early on in your journey as an entrepreneur, you’ll confront one of your biggest challenges: finding the money to open the business that you’ve been dreaming about. You will be unable to purchase inventory, pay employees, or cover any of the other costs associated with establishing a business’ operations if you lack financial resources. So, what are the primary sources of funding for entrepreneurs?
6 Primary Funding Sources For Entrepreneurs
Below is a list of eight common sources of finance for small businesses. Some are for early-stage businesses, while others are for older enterprises experiencing rapid growth.
1. Personal Funding
Do you have any savings? Did you get a nice bonus? Why not put it to work for you?
The majority of entrepreneurs support their businesses with personal funds. Most entrepreneurs start a business after saving some money in their bank accounts. But personal resources don’t always cover 100% of an entrepreneur’s expenses. So, typically other funding sources are also employed.
2. Family And Friends
To begin with, try to raise money from your network of family and friends before approaching professional investors. People who are close to you may make investments in your business because they believe in your idea or your abilities as an entrepreneur.
This type of funding is typically sought to cover initial costs or bridge the gap between rounds of pre-seed capital. Quick and low-cost collection of funds is a benefit of this type of funding. But you shouldn’t expect a professional evaluation of your company’s strategy from an investor who isn’t a professional.
It’s not uncommon for this type of investment to be repaid as a loan (with or without interest) or to be invested in exchange for a minor stock stake in the company.
3. Angel Investors
If you’re searching for seed capital in the aforementioned price range, consider working with an angel investor. Angel investors generally provide “smart capital,” which includes not just monetary support but also access to their extensive networks and industry-specific expertise. For this reason, it is beneficial to look for an angel who has experience in your industry.
4. Crowdfunding
When a large number of people each invest small amounts through an internet platform, it is known as crowdfunding.
Crowdfunding comes in three different types: loans, pre-orders/donations, and convertible loans. Do you need a loan, but the bank refuses to give it to you because of your high-risk profile? Try loan crowdsourcing. Want to evaluate product/market fit but can’t afford to produce/deliver the first batch of actual products? Then pre-orders/donations are the way to go.
Because investors on crowdfunding platforms are not always experienced investors, crowdfunding is best suited for simple, non-technical ideas that are easily comprehended by the general population.
5. Entrepreneurship Subsidies
Do not underestimate the value of this source of funding. From startup to corporate, from freelancer to publicly-traded company, subsidies are relevant at practically every level.
Many subsidies are geographically or sectorally restricted. So, it’s critical to choose a grant that is applicable to your area and works for your business. Remember that administrative and reporting requirements typically apply to subsidy and grant applications.
6. Venture Capital
Venture capital is a term in use to describe professional investment firms that invest in non-public firms. Investments in early-stage companies are the focus of venture capital, a subcategory of private equity.
A long-term investment in a larger company is frequently called private equity. Venture capital is the investment in expanding businesses. Venture capitalists invest a set amount of money in a range of risky startups in order to distribute the risk throughout the portfolio. After a few years, the shares will be sold for a profit. The “seed stage” is ideally suited for this type of funding.
In general, VC firms spend between $500,000 to $20,000,000. For them to invest, a business must demonstrate proof of product/market fit and long-term revenue growth. However, it is possible to obtain startup funding for businesses that do not yet fit the aforementioned criteria for a fee. Unlike angels or other initial investors, venture capitalists can fund multiple rounds for the same company. They also often have a network and sector specialization.
Summary
Entrepreneurs can obtain primary sources of funding in a variety of ways. After reading this blog, you’ll be better equipped to choose the funding avenue that is most suitable for your situation and stage of business, therefore giving yourself a better chance of securing funding!
