An entrepreneur should always think rationally before starting a business. By diversifying your financing sources, your start-up will not only be better prepared to downfall, but it will also increase its chances of obtaining the appropriate financing for its specific needs.
You should be aware that the bank isn’t your only fund source. Additionally, demonstrating that you’ve explored and utilized various funding options demonstrates your entrepreneurship skills to lenders.
The type of financing you opt for, such as a bank loan, an angel investor, a government grant, or an incubator, will determine how your business will be evaluated.
1. Self Investment
The first investor in your business should be you-either with cash or with assets as collateral. In this way, investors and bankers can see that you are committed to your project over the long term and that you are willing to take risks.
2. Friends and Relatives
Generally, people borrow money from their spouses, parents, families, or friends. Investors and bankers refer to this as “patient capital,” which refers to money that can be repaid after your business profit increases.
3. Angel Investors
Angel investors are typically retired executives or wealthy individuals who invest directly in small businesses owned by others. In addition to their experience and contacts, they provide technical as well as managerial expertise. Angel investors typically invest in the early stages of a business between $25,000 and $100,000.
As compensation for putting their money at risk, they reserve the right to supervise the management practice of the company. In practice, this usually means being accepted onto the board of directors and ensuring that the company is transparent.
Angels tend to operate under the radar. Those interested in meeting them should contact specialized organizations or seek out websites about angel investors.
4. Business Incubator
A business incubator generally focuses on supporting new businesses at different stages of their development in the high-tech sector. Furthermore, local economic development incubators are geared towards employment, revitalization, and hosting and sharing services.
The incubation period can generally last up to two years. When the product is ready, the incubator usually lets the business leave its premises to move into its industrial production phase on its own.
These companies often operate in high-tech fields like biotechnology, information technology, multimedia, and industrial technology.
5. Bank Loans
Bank loans are the most popular source of financing for small and medium-sized businesses. Every bank offers different advantages, whether it is a personalized service or a customized repayment plan.
The bank looks for companies with an excellent credit history and a track record of financial stability. A strong business plan must accompany good ideas. Entrepreneurs will generally need to provide a personal guarantee for start-up loans.
6. Government Loans & subsidies
You may be able to obtain financing from government agencies in the form of grants and subsidies.
The process of getting a grant can be challenging. There can be stiff competition, and the criteria for granting a grant can be quite strict. Generally, most grants require you to match the grant funds you, and this amount varies greatly, depending on the grant provider. For example, a research grant might require you to come up with only 40% of the total cost.