What funding is available for entrepreneurs?
When starting or expanding a business, there can seem like a never-ending stream of tasks to be completed. One of the first things to consider is how your venture will be supported financially. While in time, you hope that the business will support itself, there is usually a delay between starting up and the money coming in. Before that happens, you may have equipment that needs purchasing, employees to pay and advertising to fund, to name just a few of the demands on your finances.
While many entrepreneurs have their own savings to invest in their businesses or have friends or family willing to invest, loan or give capital, many others will need at least some alternative forms of funding. Fortunately, there are a number of other routes you can try.
Getting a business or personal loan from a bank or credit union is an effective way to raise capital, with the caveat that it will have to be repaid with interest. There are a vast number of different options, and it is worth looking around for the best deal as some will have lower interest rates.
This can be ideal for small companies and will not require you to give up any equity in the business. However, there is a lot of paperwork involved, and you will need to demonstrate a good credit rating, prove that you will likely be able to repay the loan, and sometimes provide collateral.
Venture capitalism is a form of private equity, providing finance for small businesses and entrepreneurs that are considered to have good long-term potential, with the capital coming from investment banks, wealthy individuals, and other financial institutions.
While start-ups can use venture capitalist funding, it is more commonly used for the next phase: building the infrastructure that will allow the business to grow. Venture capitalism is a high-risk/high-return investment, with the venture capitalist often holding a minority stake in the business. Usually, the money is invested for a set period such as five years, at which point it can be floated on the stock market and the venture capitalist hopes to get their return.
With the risks high, venture capitalists often have strict criteria where they invest or focus on an area of expertise. Emerging tech or healthcare entrepreneurs, for example, may consider going to New Enterprise Associates (NEA) with its highly experienced managing general partner, Scott Sandell. NEA has invested nearly $24bn across five continents since it was founded in 1977. Scott Sandell’s daughter is a big inspiration behind his work, and he is keenly aware of the importance of effective funding for new entrepreneurs.
Angel investors are wealthy individuals who will invest money in return for a stake in the profits. They usually invest at the beginning and are a good option for start-ups. Unlike venture capitalists, who finance their investments from an investment fund, angel investors use their own net worth. This is obviously risky for them, and therefore the amounts invested tend to be smaller than venture capitalists. The advantage of an angel investor is that they are likely to have considerable expertise. However, this may also mean sacrificing some of the control to the investor. Often, the best way to find an angel investor is through networking.
Government grants can be issued directly by the federal government or distributed to state and local governments for distribution. Getting a grant is an attractive option as it does not need to be paid back. However, getting a grant can be a time-consuming process, both in the initial application and the time you spend waiting to see if you are successful.
Government grants usually have a purpose behind them. They might be for particular areas of industry, or they may be for a particular group such as women entrepreneurs. They may also specify certain features such as being environmentally sustainable or employing a certain number of people. Research the criteria carefully before applying to save yourself time. A government grant need not be the only source of funding, and while you wait to see if you can get a grant, it is also well worth pursuing alternative avenues of investment.
Securing the funding
Securing investment from any source will need careful preparation. Always act professionally, providing as much information as they require about your business. Be realistic in your predictions of profit and success. Money for investment tends to come from experienced sources who will see through any attempt to exaggerate potential profits. Ultimately, they will choose to invest in entrepreneurs who have a solid plan with a good chance of success.