What is capital funding?
Entrepreneurs need a certain amount of capital before starting a business – no matter the size of the company. However, not all can fund the operating capital of a business in its early years. This is why capital funding is the money that investors and lenders provide for a business in exchange of earning a return on their investment either in the form of stock appreciation, interest, or dividends.
Why seek funds for your business?
Every entrepreneur understands clearly that, in order for a particular business to operate, there should be an operating capital on hand. Many start-up businesses seek funds from lenders or equity holders and use it for the benefit of their business. Here are a few reasons entrepreneurs need funds:
1. They don’t have the out-of-pocket capital to launch a business.
To launch a business, entrepreneurs would need the funds to pay for all resources a start-up needs. This is why new ventures require large sums of money that many start-up entrepreneurs do not have. Good thing there are fund sources they can tap into with a little work and a sound business plan.
2. They need funds for research.
Research funding is used by entrepreneurs who have multiple projects for their business. It can vary from creating a research regarding the demographics of a certain area to creating a new marketing campaign that will help the business gain more customers. Funding a research is highly important as it can help sustain the projects of a business.
3. They use it for growth funding.
Each entrepreneur wants to grow their business and they need funds to be able to execute their business plans. Whether they need to expand their products or services, hire new staff, or move to a new location, having growth funds to cover all of these can really help.
How do I choose the right funding option?
Now you know very well the importance of having capital funds, the next thing you need to do is to find the right fund source for your business. Choosing a funding option is not as easy as you think it is as not all of them may be suitable for all types of business. Here is a list of funding options that you can choose from:
1. Angel Investor
An angel investor is also known as a private investor who provides funds for your business in exchange for a large portion of your company. Meaning, if you are making money out of your business, then they too will earn through their investment. Angel investors are one of the most popular options that start-up entrepreneurs choose as they are more accessible and are more than willing to accept high-risk ventures. However, they are best used by small to medium-sized businesses.
Crowdfunding is also a popular option for many entrepreneurs that allow them to fund a particular project by raising small amounts of money from a number of people. Entrepreneurs usually take advantage of the internet to find people who are willing to fund their project. They usually provide detailed information of a particular project, mention how much money the company needs to raise, and provide information regarding a particular project’s goal.
3. Venture Capital
Venture capital is a managed fund that is usually invested in companies who have huge potential in the market. This type of capital can be used by start-up entrepreneurs who already have fast growing companies.
However, there is a downside to choosing a venture capital as a funding option for your business. A venture capital usually recovers their share or investment from your company within the time frame of 3-5 years. This means, if you have a product or service that takes longer than 3-5 years to gain a return on investment, then investors under this option may not see you as a perfect fit for such an investment.
4. Small Business Administration Loans
Small Business Administration loans can help fund your business, most especially if it is a start-up. It usually involves getting funds from a particular government administration that are willing to help small businesses succeed. Entrepreneurs who choose this type of funding option are guaranteed by the agency, which allows them to pay at low-interest rates.
5. Personal Savings
The most common type of funding option for start-up entrepreneurs is by using their own personal savings. This is an appealing source of funding because you get to use your own savings and don’t owe anyone anything. Plus, you have full control of your money and use it to source any type of project you have.
Using personal savings to fund a business venture, however, comes with risks. (1) If your business fails, all your hard earned money will be put to waste. (2) You will miss the opportunity to gain a mentor from your investors.
There is always a point in every entrepreneur’s life when they need to choose between acquiring funds for their business or file for bankruptcy. Most of them are not aware of the impact that capital funds can give to their business. Which is why having a mentor is ideal for every entrepreneur who is starting their first business.
Brian Gaister is an investment analyst and a private wealth adviser who is passionate about helping entrepreneurs succeed. He is an effective mentor who teaches important things in business that cannot be found in books. He is part of an investment committee for prominent companies like Saas Ventures and Pennington Partners & Co. Having Brian Gaister as a mentor will allow you to execute your business plan and help it grow.