Part two of our series 'Business Funding' is dedicated to the different sources of capital. Why is that? It will help you understand your options as an entrepreneur.
Starting and growing a business requires capital. But what if your business is not big enough to attract investors yet? In the previous article, we talked about the basics of raising capital. This part focuses on the different sources that successful entrepreneurs can have access to when fundraising for their companies.
1. Self-Funding – In the early days of a startup, entrepreneurs get initial funding for their business by tapping into their savings, credit cards, and any other personal assets. It’s crucial to have your own money in your company. This shows investors that you believe in your vision and you have a skin in the game.
2. Bootstrapping – A very common term you will hear in the startup scene. When bootstrapping, your business funds itself through internal cashflow and watching expenses carefully. Depending on your business model, your company might be able to generate enough cashflow to push future growth. If you’re able to sustain the growth of your company through internal cashflow, then you won’t need to sell part of your company to investors.
3. Friends & Family – Your family and close friends are more likely than anyone to believe in your vision and your ability to turn that vision into a successful and profitable company. Friends and family investments are usually structured as convertible notes or a form of debt with more flexible payments. Taking money from friends and family is a touchy subject and can risk you personal relations with them. Make sure that the risks are clear from the beginning, and only borrow enough to launch your company. In other words, don’t be greedy and don’t treat them as fools.
4. Crowdfunding – Crowdfunding has helped a many companies secure the capital they need to fuel their growth. There are many crowdfunding portals out there such as Kickstarter and Indiegogo. Reward based crowdfunding has been the popular option over the years, however we’re witnessing the rise of equity crowdfunding. If your idea appeals to potential investors, you might be able to secure the capital you need to push your growth forward.
5. Small Business Loans – Whether through banks or alternative lenders, small business loans will often require a business to be generating revenue with healthy margins. Banks for instance require your business to be profitable. You will need to show a track record, and if your business has no hard assets (i.e. collateral), you will be required to sign personal guarantees.
6. Government Grants – Many entrepreneurs leave free money on the table. As Canadians, we’re lucky to have access to a number of government grants and subsidy programs that will allow you to benefit from some type of initial funding. Grant programs can be provincial or federal. Our friends at Fundica could help you find the different options you can benefit from.
7. Angel Investors – These are usually wealthy individuals who might believe in you and your business and are willing to take the risk by investing early on. We’re seeing many successful entrepreneurs become angels themselves. We’ve also seen many lawyers, doctors, and dentists participate in angel investments. Make sure you find the right financial partner for the long run.
8. Venture Capital (VCs) – As the most popular and expensive source of funding for startups, VCs could be willing to invest in promising companies at different stages. Some VCs tend to focus on specific industries, so do your homework before contacting them. Cold calling VCs is not effective, so use your network to get intros and referrals. VCs could help you grow your business through support, access to resources, and follow up investments when needed.
There are plenty of ways to fund your company. So find the the best way that works for you and make that vision a reality.
We hope the first two parts of this guide conveyed a sense of understanding of what business funding actually is, the available options and how it works in its very basics. Stay tuned for more. The next part will deal with pitching your company to investors.