Things to consider before looking for money for your company
Before choosing the way you are going to finance your new business, you need to come up with a financial plan that shows you how much money you need. What are you going to invest the money for? How soon will you start generating profits? What will be the profitability of the business? … In short, you must be clear all the financial and economic aspects.
Once you have done this you will know which is the source of financing that is best for you, for this you must consider 3 key aspects:
- The cost of capital
- The repayment or payment scheme (term, form, etc.)
- The amount of money you can get from a particular source.
Well, now let’s get to know the different sources of money you can find. Make a list of those you can access and then choose the most convenient.
Main sources of financing for a business project
- Capital and own resources
Start by looking at your pocket. The financing with own resources is the form of financing most used by the majority of the small entrepreneurs (according to the magazine Entrepreneur).
It is possible that the money you have is insufficient, however, it is very helpful to make the most of how many resources you have. Any table, computer or space you can use will serve to reduce the initial investment.
Also remember that entrepreneurs like Steve Jobs started out in the garage of their home or in a bedroom, and were able to sell their most precious belongings, such as cars, in order to complete the resources needed to start their company.
- The 3 “F” (Family, Friends, and Fools)
The next place to look for money is your closest circle: “family, friends, and fools”.
The big problem with this source of funding is that it can usually cause conflicts with those who agree to provide you with capital, however, it is very easy (relatively) to access it and you can reach good agreements with them.
If you have clear all the resources you need and are well organized, this option can be a great help to start a small business.
- Corporate loans and bank loans
The two options above are perhaps the easiest to access and may be the best for a small venture, but if your project requires higher investments, you will inevitably have to turn to the financial markets.
Financial institutions are a great option, as long as you are willing to know some basic concepts about finance. It is very important to know about interest rates, ROI and other indicators that will serve as a benchmark to evaluate the options offered by banks.
Remember not to go to a single bank, look at the cost of capital and the benefits offered by several entities and compare. Oh and always read the loan document very well and if possible consult with a financial expert because the fine print and technical terms are often confusing.
- Government support programs
Each government has its own programs to support business culture, offering training and financial resources for the economic development of the region. These tasks are carried out through institutions responsible for evaluating business and productive projects, to select those that meet the necessary requirements to access the aid.
Most of these programs do not even charge interest on the capital, or simply do not charge the money if the project meets certain requirements related to the offer of employment in the locality or contribution to the development of the region.
The big disadvantage of this option is that because it is public entities, it can take you quite some time to get your support. Also, the paperwork is excessive.
- Entrepreneurship competitions
There are entities, both public and private, that organize different events and competitions looking for innovative ideas and projects with the potential to support them.
Here in this blog we share periodically lists with contests and opportunities to finance your project, these bulletins can be found in the section “Competitions for entrepreneurs “.
To access this source of funding it is very important to develop a business plan.
- Business Angels and Risk Investors
So far we have seen options where the source of investment does not seek direct participation in the business, but we come to one of the best options when you have a large project whose initial investment is relatively large.
Angels Investors are individuals possessing a large capital and are looking for investment opportunities to put to give their money.
Convincing an investor to trust your project is not an easy task, however, when you achieve it you get not only to invest your money, but also to put your experience to successfully develop your project.
A Business Angel will want shareholding in the business, but remember to structure the capital of your new company very well; otherwise, you could fall into the mistake of giving too much power to third parties losing control of your own business.
Another drawback is that, usually, an investor does not have the same passion as you for the business, he is only interested in seeing his money multiple and could put great pressure on you by demanding results.
I recommend reading the Keys to sell your project to an investor in 15 minutes, there you will find good advice to prepare your presentation before a potential investor.
- Get a sponsor
Starting a project through a sponsor means that the entrepreneur is financed through a third party related to the activity.
There are companies with Social Responsibility programs oriented to the business development of the region where they operate, for example, Carrefour supports small producers through the purchase and marketing of their products. In this case, the entrepreneur has a client before starting up his company.
Having the backing of a large company is an invaluable help when starting a business, it is only a matter of presenting a good project to a brand, showing you the advantages that would support your business. For this option the conditions of the relationship must be established very clearly, otherwise, dependence on the sponsor can be lethal.
- Financing with suppliers
This form of financing does not work for any company, it is more effective in businesses engaged in marketing activities.
Suppose you are going to start a clothing marketing business. You make a list of suppliers and negotiate with them to give you a period of 90 days for the payment of the merchandise. These 90 days are the term you have to sell and pay the suppliers the debt.
If you can establish a good business model you will be able to work with the capital of your suppliers, and you will have no problem to maintain the adequate inventory level to satisfy the demand of the business.
If you choose this source of funding you will be very useful to know and implement Just In Time to lower your costs and make the most of the suppliers.
- Issuance of shares
The stock market is a great source of money to start big business projects.
Each country (or the majority) has its own stock exchange, there they meet entrepreneurs in search of money to start businesses and investors with capital to finance projects.
To access this capital you must comply with some legal requirements, for example, not any type of commercial company has the ability to issue shares, so it is advisable to consult the trade legislation of your country. I also recommend you check out this About Action Concepts Guide.
- Start without capital
Did you know that you can start a company without capital? That’s right, it’s a business model that works for companies with 3 characteristics:
A minimum investment is required in fixed assets and in inventory of goods
With few operational losses (or are reduced to a minimum)
The accounts receivable are as short as possible and the accounts payable are as long as possible.
Some businesses of this type are for example Internet based, service companies whose main asset is the know how commercial companies … What business do you think of?
If you want to know more about this topic see the article How to create a company without capital.
10 Good source to finance a new business or small business