FIVE FUNDING OPPORTUNITIES AVAILABLE FOR STARTUPS AND ONGOING BUSINESS

Types of Funding you can secure as a startup

There are now several means for businesses, especially startups, to access funds and scale up their operations, moving away from the traditional culture of getting capital. Business funding has become more abundant in recent years, but knowing where and how to access it is essential.

Usually, the money is for essential projects, business growth, buying equipment, renting space, or paying staff during slow times.

If you have been considering expanding your business, this article presents the perfect opportunity to learn about the options and make a significant turnaround for your company.

5 “common” types of funding available to businesses: 

You need to know that different businesses operate at varying levels and capacities, determining the accessibility and availability of funding opportunities. Understanding the advantages and disadvantages of each funding option is crucial to securing funding, especially as a startup. Let’s explore the five most prominent ones!

  1. Angel Investors
Angel investors are a great option for securing funds for your startup

Angel investors play a vital role when it comes to raising initial capital for startup businesses. They typically invest in exchange for a percentage of ownership in the company. This investment can be a one-time injection of funds to kickstart the business or an ongoing infusion of capital to support product development and market entry.

Angel investors are often more accessible to startups than grants and loans. They can be individuals running successful companies or professionals involved in various projects. They may also have a personal or familial connection with the entrepreneur.

Unlike traditional lenders, angel investors do not focus primarily on lending money. They invest in promising ideas and expect a return on their investment if and when the business becomes successful. Depending on their preferences, they may be hands-off or actively involved in the startup’s early stages.

Pros:

  • Funding is not a loan, so it does not require any repayment if the business fails. If the company succeeds, they will get a share, but if it falls flat, they will not require any repayment from you.
  • Startups backed by angel investors have a higher chance of long-term success and significant growth. A study conducted by Harvard Business School proves that startups supported by Angel Investors have a greater chance of longevity, maintain substantial increases, and experience a higher return.  1

Cons: 

  • Angel investors usually expect equity or a percentage of profits, reducing the founder’s control over the business.
  • If you have an investment from an angel investor, there is a high chance that you will not have full control over the business. 
  1. Grants

Grants are financial assistance provided by granting entities, which can be public organizations, charitable foundations, specialized institutions, or socially responsible businesses. These grants are given to individuals, non-profit organizations, businesses, or local government bodies.

Grants are a great option for businesses because the business owner does not have to worry about repayment, and some grants offer substantial amounts of money based on the company’s idea or investment objectives. 

Detailed information about grants, including conditions, deadlines, and application requirements, is freely accessible through official government sources and related websites.

Pros:

  • Grants provide businesses with a convenient source of funding that doesn’t require repayment. Moreover, certain grants offer substantial financial support, depending on the company’s concept or investment objectives.
  • Receiving a prestigious grant demonstrates recognition for your work, serves as a valuable promotion, and enhances credibility with organizations, investors, and potential clients.

Cons:

  • Numerous innovative businesses aspire to obtain grants for their promising ideas, leading to intense competition for one or another. Anticipate challenges and obstacles, but remain resolute in your pursuit.
  • When seeking a grant, it is crucial to precisely outline the intended allocation of funds. After being awarded the grant, adherence to the proposed plan is mandatory. Hence, there is really no room for creative diversification of grant funds.
  1. Bank Loans
Bank Loan - One way to secure funding for business.

Photo Credit: Upklyak on Freepik

Bank business loans are a stream of commercial financing available to qualified businesses. They include long-term loans, equipment loans, microloans, and lines of credit. These loans can help cover operating costs, purchase equipment, pay staff, or aid the business’s growth.

Lenders (banks) assess a borrower’s financial flow, credit score, and debt levels before deciding to offer a loan. Traditional banks charge interest rates based on the venture’s risk level. In recent years, online lenders have also started offering loans, which were once rare.

Conventional business loans differ from loans offered by the U.S. Small Business Administration (SBA). SBA loans can be gotten through banks or online lenders; they usually have longer reimbursement terms and lower interest rates. 

A loan, unlike a grant, must be paid back, even with an agreed-upon percentage interest rate.

Pros:

  • Attractive Interest rate: Banks usually give loans to businesses and would give larger amounts of money as loans than most online funding platforms. On average, small businesses pay 6 percent to 7 percent for loans from traditional banks, while the average borrower pays 13.5 percent interest for SBA loans.
  • Flexible Use: You can use the loan proceeds for any business-related expenditure in most instances. Even if your spending deviates slightly from what you indicated in the loan application, the lender won’t object if you make timely loan payments.

Cons:

  • Strict requirements, including good personal credit score and substantial business revenue, may limit approval.
  • Extensive documentation is typically required, and startups may face difficulty qualifying for loans. Banks do not readily offer loans to businesses or ventures that haven’t been operational for over two years and show a huge chance for profit.
  1. Venture Capital

According to Forbes Advisory, the definition of venture capital is this: 

Venture capital (VC) is a type of private equity that provides financial backing to startups and early-stage businesses with limited or no operating experience but substantial potential for success and expansion.

A venture capital firm is an investment body that takes care of venture capital funds and makes the funds available to startups. Venture capital organizations invest in a variety of sectors, although the majority of the investments made by venture capitalists are focused on the technology industry. Many of the most well-known venture capital organizations are headquartered in Silicon Valley, though they can be found across the United States of America. Prominent venture Capitals include companies like Andreeson Horowitz, Sequoia Capital, and Y-Combinator.

Stages of Venture Capital Investment:

Seed round funding

Seed round funding marks the initial stage of venture capital investment, where investors offer a modest amount of capital to support a newly established company in formulating its business plan and developing a minimum viable product (MVP). The purpose of this funding is to help the startup validate its concept and progress towards attracting further investment in the future.

Early-stage Funding

Early-stage funding, sometimes called series A, series B, and series C rounds, assists startups in their initial stages of growth. As startup owners scale their enterprises, the funding amounts are higher than in the seed phase.

Late-stage Funding

Series D, E, and F rounds are late-stage venture capital funding. Startup companies should be producing income and growing rapidly at this stage. While the company is not yet profitable, the future seems bright.

Pros:

  • Venture capital provides substantial funding for scalability and growth.
  • Venture capital firms offer expertise, mentorship, and guidance to startups.

Cons:

  • Venture capital investments often come with a loss of control as investors demand equity in the company.
  • Founders face high expectations and pressure to achieve specific targets quickly. This results in a situation where the founder cannot make a long-term plan for the business.
  1. Crowdfunding

Crowdfunding is collecting small investments from many people to launch a new business venture. It uses the enormous reach of social media and specialised crowdfunding platforms to link investors and entrepreneurs, thereby increasing entrepreneurship’s chances. Crowdfunding expands the financing possibilities for new businesses by reaching a wider range of potential investors beyond the conventional circle of owners, family members, and venture capitalists. 

With crowdfunding, entrepreneurs can secure significant funding, ranging from thousands to millions of dollars, from individuals willing to invest. It allows anyone with a compelling idea to present it to enthusiastic investors without needing a physical presence. 

The two prominent types of crowdfunding are reward-based, where backers receive non-financial incentives, and equity-based, where investors gain a share of the company.

Hundreds of individuals aspiring to develop or endorse the next groundbreaking innovation are drawn to crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe. Platforms like Patreon and Substack have expanded the scope of crowdfunding by providing a means for creators such as artists, writers, musicians, and podcasters to support their creative endeavours through consistent financial support.

GoFundMe was regarded to be the largest and most notable crowdfunding platform in the year 2023. 

‘Notable crowdfunding feats’

  • Palmer Luckey started a Kickstarter effort in 2012 to raise funds to produce virtual reality headsets made especially for video game developers. The campaign exceeded its initial objective and raised $2.4 million, ten times its $250,000 goal.
  • M3D, a company established by two friends specializing in the production of compact 3D printers, serves as yet another compelling illustration of a business that achieved remarkable success through Kickstarter campaigns. Back in 2014, David Jones and Michael Armani managed to secure an impressive $3.4 million in funding on Kickstarter for their revolutionary Micro 3D printer.

Below are the Pros and cons of raising a business fund through crowdfunding: 

Pros 

  • The main benefit of equity, reward, and donation-based crowdfunding is the potential exemption from repaying the funds. However, in exchange for crowdfunding contributions, you might be required to give up a portion of your company’s ownership. Some businesses prefer crowdfunding over loans to avoid concerns about loan default. Nevertheless, if you decide on debt-based crowdfunding, you must reimburse the backers.
  • Credit checks are usually not necessary. In most cases, crowdfunding platforms do not conduct credit checks, meaning your personal or business credit score will not be affected. However, if you opt for debt crowdfunding, which involves obtaining a loan from multiple investors, there is a higher chance that a credit check will be required.

Cons

  • Business loans can be expensive due to fees and interest. Crowdfunding can help you avoid interest payments, but fees are still involved. For example, Kickstarter charges a 5 percent fee on all donated funds, along with payment processing fees ranging from 3 to 5 percent. However, these fees are only applicable to successful campaigns. Alternatively, platforms like GoFundMe do not charge a fee for donations, but there is a payment processing fee of 2.9 percent.
  • Your business concept might be stolen. Establishing a crowdfunding platform also involves promoting your business during its initial phases. If your idea has not been copyrighted or patented, someone could steal it. If a competitor converts that idea to a product or service before you, your business could face negative consequences.

Conclusion

Businesses can make educated decisions about the most effective means of securing the necessary funds to support their growth and development if they first investigate and understand the five potential funding sources listed here.

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1 Comment

  1. nice article,keep writting such blogs for us.

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