10 Sources of Funding: a guide for Small and Medium-Sized BusinessGo to the news page
Most up-and-coming entrepreneurs have great ideas but often lack sufficient capital to start a business. Bank loans for small start-ups are not easy to get, especially without collateral.
This is why we’ve put together this guide on the different ways to raise money at every stage of a business’s development. Some entrepreneurs can raise money from people close to them while others apply to investment funds or use personal savings. To help you find the best way, we take a look at ten different funding sources and provide you with useful insights and tips for setting up and developing your business.
1. PERSONAL INVESTMENT
It is one of the best ways to fund the establishment of a business. It is not necessary to fund the total amount of business needs. However, it is worth trying to put up between 25 and 50 percent of the required capital. This will show potential investors and lenders that you are prepared to assume some of the risks and are convinced of the business’s viability.
2. BORROWING FROM FRIENDS OR FAMILY
One of the most common ways to fund start-ups; however, when relatives become your creditors, both funds and relationships can be put at risk.
To avoid any misunderstandings, you should draw up a financial agreement and a written contract for a loan. These should indicate when your relatives will get their money back. Reduce the risk of any disagreements developing as well as showing your relatives that your approach to the loan is serious.
3. BUSINESS ANGELS
These angels can be private individuals, for example, who invest at an early stage in exchange for ownership of some of the company’s equity.
Unlike traditional investors, business angels usually differ in that they invest smaller amounts, make rapid investment decisions, and rarely insist upon taking a controlling stake. Therefore, this funding option is very convenient for start-ups, which do not need large amounts of investment and want to maintain greater business control.
4. VENTURE CAPITAL
Venture capital is money put into new companies that have the potential to achieve rapid growth, but that also comes with substantial risk. Venture capital can be obtained at any stage of business development.
Unlike other forms of funding, when an entrepreneur is required to repay the capital and any interest, venture capital investments are provided in exchange for a shareholding in a company. So the venture capital fund obtains powers over corporate governance.
In exchange for venture capital, entrepreneurs expect a high return on their investment. This means that the relationship between the two parties can be long term. At the end of the deal, entrepreneurs who have lent the money will sell the shares to the owners or through a public auction, expecting a return much higher than their original investment.
Fast loans are granted for three to 18 months and are usually designed to help a business overcome unforeseen problems. Such loans are generally for amounts that are much smaller than traditional ones. However, their annual interest rates can be around 14 percent or more.
Traditional loans are intended for more stable companies and businesses which are already established. The loan amounts are higher but are not so easy to obtain. While there are more commitments, the interest rate is usually lower. These loans are granted for one to five years, and although they are not issued as quickly as a fast loan, you can expect to receive funding in fewer than ten days.
Leasing is a way of acquiring the supplies a company needs by making partial payments for assets that can be used immediately. A business only needs to make a down payment and then pay fixed monthly amounts.
Leasing is divided into two types: financial leasing (during the term of financial leasing, the client must pay the full acquisition price of an asset, interest, VAT and, when the term of the lease expires, the client owns the asset), and operating lease (during this lease, the leasing company acquires assets needed by the client and transfers them to the client to use until the due date. During the contract period, the client makes payments, and at the end of the contract, he or she can choose to return the asset to the leasing company, enter into a contract for new assets or extend the lease.)
Factoring is offered by Factris and is an asset-based funding system for small businesses.
How does it work?
We fund outstanding corporate accounts, which later become security for the funding. A company receives financing (up to 90 percent) for goods or services sold, paying us an interest fee, and the buyer returns the money to the financiers in the amount stated in the account.
This solves some of the common problems encountered by a young business, particularly late payments by customers, which can result in a destabilizing shortage of working capital and, potentially, missed payments to suppliers and other creditors.
With the factoring service, an enterprise can obtain money for outstanding accounts right away without risking growth and development processes. In other words, a steady flow of working capital and the integrity of a company’s operations are ensured.
8. CREDIT LINE / OVERDRAFT
A business gets access to funds that can be used whenever they are needed. Interest is charged only for the money withdrawn and used.
This is a very convenient way to fund small seasonal businesses that need to hold some capital in reserve for emergencies.
The weaknesses and risks associated with credit lines are that penalties for late payments are much higher than those for loans. Furthermore, if a business is considered an unfortunate debtor, then it will face much higher interest rates.
9. TRADE FINANCE
The trade finance service is aimed at managing trade payments with greater ease and lower risk. It includes three types of funding: Letter of credit, documentary collection, and guarantee.
10. BOND PLACEMENT
Bonds are an acceptable alternative to bank credits. They are more advantageous than loans, as they allow a company to obtain funds on acceptable terms which are drawn up, taking into account market demand and include the currency, term, interest rate, payment structure.
They are a more expensive source of funding than bank credits, and this is particularly true with bonds issued by companies that are not yet well known or have yet to acquire a good reputation in the market.
One more difficulty related to bonds is that there is no guarantee that they will be successful just because they have been placed. Failure may be due to any factor which results in a lack of demand for a particular company’s bonds such as limited market size or a general lack of knowledge about the issuer. Moreover, every time a bond placement fails, the image of the company can suffer.
Find out more about various financing sources by downloading our e-book.
Global 100 Awards CEO of the year 2020 - Brian Reaves
Each award program comprises a unique, proprietary selection process and ranking method. Only the most worthy winners are chosen, based on their domestic and international work, according to a comprehensive set of criteria. Factris is proud to be recognised.
SME Working Capital Provider of the Year 2020
The Netherlands Prestige Awards celebrates small and medium-sized enterprises consisting of localised businesses and sole traders that have thrived in their highly competitive community and have proven their success.
How to make the most of the unique 2020 Holiday season
Unless you've been living in a cave in the Himalayas, you have already had to adapt in countless ways due to the COVID-19 pandemic. Changes such as quarantines and restrictions have impacted not only business but our entire way of life.