Putting all your eggs in one basket is never a good business strategy. This is especially true when it comes to financing your new business. Not only will diversifying your sources of financing allow your start-up to better weather potential downturns, but it will also improve your chances of getting the appropriate financing to meet your specific needs.
Keep in mind that bankers don’t see themselves as your sole source of funds. And showing that you’ve sought or used various financing alternatives demonstrates to lenders that you’re a proactive entrepreneur.
Whether you opt for a bank loan, an angel investor, a government grant or a business incubator, each of these sources of financing has specific advantages and disadvantages as well as criteria they will use to evaluate your business.
Here’s an overview of seven typical sources of financing for start-ups:
#1. Personal investment
When starting a business, your first investor should be yourself—either with your own cash or with collateral on your assets. This proves to investors and bankers that you have a long-term commitment to your project and that you are ready to take risks.
#2. Love money
This is money loaned by a spouse, parents, family or friends. Investors and bankers consider this as “patient capital”, which is money that will be repaid later as your business profits increase.
#3. Venture capital
The first thing to keep in mind is that venture capital is not necessarily for all entrepreneurs. Right from the start, you should be aware that venture capitalists are looking for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications and biotechnology. Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project.
Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge.
#5. Business incubators
Business incubators generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization and hosting and sharing services. Commonly, incubators will invite future businesses and other fledgling companies to share their premises, as well as their administrative, logistical and technical resources.
#6. Government grants and subsidies
Government agencies provide financing such as grants and subsidies that may be available to your business. You should check that out in your country or state. Getting grants can be tough. There may be strong competition and the criteria for awards are often stringent. Generally, most grants require you to match the funds you are being given and this amount varies greatly, depending on the granter.
#7. Bank loans
Bank loans are the most commonly used source of funding for small and medium-sized businesses. Consider the fact that all banks offer different advantages, whether it’s personalized service or customized repayment. It’s a good idea to shop around and find the bank that meets your specific needs. In general, you should know bankers are looking for companies with a sound track record and that have excellent credit. A good idea is not enough; it has to be backed up with a solid business plan. Start-up loans will also typically require a personal guarantee from the entrepreneurs.