9 Common Sources Of Finance (Capital) To Grow Your Start-Up Business
As an entrepreneur, setting up a business requires a certain amount of money which is kept aside as capital that has to be spent in starting up all the business activities. The business can later starts generating income through sales. Having your capital planed, help you in achieving success in business.
As a young entrepreneur, not setting up a good business capital for your business may be disadvantageous because during the first weeks or months of operations the sales revenue is low and can not cover for the expenditures of running the business and so, knowing your source of capital is important.
Setting aside little capital for a business can lead to liquidation of that business. A situation whereby the entrepreneur cannot pay salaries or supplies.
In the article, we will be looking at the 9 common sources of capital for an entrepreneur who want to start up a business. So please check it out below.
It is important for every entrepreneur to understand that every business has different stages in its life cycle and so enough capital is required to maintain the business until it has gotten to it exponential face where it can generate enough revenue.
What Are The Most Common Sources Of Startup Capital For An Entrepreneur?
Every business needs capital in order to succeed and it is the duty of every entrepreneur to prevent capital for his/her business. Some sources of capital for an entrepreneur starting business are;
1) Equity Financing
Equity financing is a source of capital for an entrepreneur starting up a business.
Money put into the business by the owner is called equity capital or owner's capital. This capital could be gotten by reinvesting profits made into business, personal savings, partnership, borrowing ventures.
A company can raise money by selling shares to it existing shareholders or to new investors.
An entrepreneur can also also get loans from family members and friends with little or no interest rate to pay.
2) Debit Financing
Another source of capital for an entrepreneur who want to start up a business is debit financing.
Borrowed funds consist of the amount raised by ways of taking loans or goods on credits. It could also be referred to as borrowed capital. The borrowed funds could be gotten from the following sources:
- Debentures: It is a type of debt that is unsecured by any collateral like a car, house, land etc. It is also called unsecured loan. It is an agreement between a lender and a borrower that is registered and this is given base on an individuals reputation and creditworthiness. It could be issued by both corporations and governments to raise capital.
- Bank Loans: These are secured loans and requires the borrower(debtor) to present a collateral security before funds are lent to him/her. Also, the bank gives you time to pay back the debt alongside with interest.
- Loans from specialized financing institutions that are specialized in lending out money to young entrepreneurs at a lower rate such as: credit unions, banks, micro financial institutions etc.
3) Commercial Banks
This is the main source of short-term loans to entrepreneurs starting up a business. Commercial Banks lends money to entrepreneurs and this money is to be paid within a time frame base on the agreement between the banker and customer, alongside the interest charged on the amount.
The entrepreneur guarantee the money he/she has borrowed by issuing personal assets or collaterals that are worth more than the money borrowed like: house, business assets, car, stocks or land.
Some entrepreneurs can decide to pay this money by depositing a fixed amount monthly to the bank until the debt is completely paid. While some will be prefer paying at once but this is not the best way since no one knows what might happen in the future. The banker also secures collaterals so that in case where the customer can't pay he debt, the banker sells them but only after informing the customer about that.
4) Trade Credit Financing
Trade credit financing is a situation whereby a customer purchases supplies on the basis of account that he will pay the supplies later within a certain period of time, ranging from 20-90 days.
Entrepreneurs producing goods and services may decide to offer these products to their customers on the account that they pay after selling. This helps them generate income and ensures continuity in business. This is mostly common with large scale business and amongst well-known and trusted customers.
5) Business Angels
Business angels are important sources of capital to every entrepreneur just starting a business.
These are individual who are experts in your line of business, have succeeded in dealings and are willing to invest their capital for the business start-up, usually in exchange for convertible debt or ownership equity.
Business angels could be wealthy friends and family members or other individuals. They see investment opportunities and then analyzed them to see if there are profitable before making investments.
They invest in fresh ventures and are commonly entrepreneurs who have liquidated their company and willing to invest their money or are retired executives of large companies.
6) Personal Funds, Funds from Friends and Family members
The most reliable source of capital for every entrepreneur is his/her personal savings(funds) such as money, life insurance, cars, land etc. Your personal savings as an entrepreneurs tells an investor how serious and prepare you are and attracts investment.
If you invest your money in a business, it will you work harder to see that you earn profit but if some one invest money in a business and that business is manage by another individual, there is a high chance for that business to collapse.
Friends and family members are another conventional source of fund that is limited and their expectation of getting back a good return is set in an informal way.
7) Well-Wishers and Non-Governmental Organizations(NGOs)
Well-wishers are individuals who desire happiness and success for another. NGOs and well-wishers may provide capital for who want to start a business as a means of encouragement and will usually not demand that the money give as support should be repaid or asked for interest.
The government also provides financial support to young entrepreneur who present a good and well structure business plan.
8) Selling of Shares
Selling of shares can be a stepping stone to the expansion of a business and also a source of capital to the business.
An entrepreneur who wants to grow his business might decide to sell shares in his business to individuals who want to become shareholders in his business. This helps in raising capital for the business, leading to business expansion and a high profit margin attained.
9) Account Receivable Financing/Invoice Financing
This is an agreement that involves capital principal in relation to a company's accounts receivables. Account receivables are assets equal to the outstanding balances invoices billed to the customers but not yet paid. Accounts receivables are reported on a company's balance sheet as an asset, usually a current asset with invoices payment required within one year.
It allows an entrepreneur to leverage your company's unpaid invoices to get the small business funding you need. This cash is provided in the form of a loan or credit line, with invoices serving as security.
What Are The Primary Source of Funding For Entrepreneurs?
The primary sources of funding for entrepreneurs are:
Personal savings: Many entrepreneurs use their own personal savings to fund their businesses. This is the most common source of funding for early-stage businesses, and it can be a good option if you have the financial resources to support yourself and your business during the startup phase.
Loans: Loans from banks and other financial institutions are another common source of funding for entrepreneurs. Loans can be used to finance a variety of business expenses, such as startup costs, inventory, and equipment. However, it is important to note that loans must be repaid, so you should carefully consider your ability to repay the loan before you borrow money.
Grants: Grants are a type of funding that does not need to be repaid. Grants are often offered by government agencies, non-profit organizations, and foundations to support businesses that are working on innovative or socially beneficial projects.
Investors: Investors provide funding for businesses in exchange for equity, or ownership, in the company. Investors can be individuals, angel investors, venture capital firms, and other types of investment groups. Investors are typically looking to invest in businesses with high growth potential, so it is important to have a well-developed business plan and pitch deck before you approach investors.
In addition to these primary sources of funding, there are a number of other sources of funding available to entrepreneurs, such as crowdfunding, crowdfunding, and business incubators. The best source of funding for your business will depend on your individual circumstances and the needs of your business.
Here are some tips for choosing the right source of funding for your business:
- Consider your stage of growth: Different sources of funding are appropriate for different stages of business growth. For example, personal savings and loans are often used to fund early-stage businesses, while investors are typically more interested in investing in later-stage businesses.
- Consider the needs of your business: What types of expenses do you need to cover? How much money do you need? How quickly do you need the money? Once you have a good understanding of your needs, you can start to evaluate different funding options.
- Do your research: Learn about the different sources of funding available to you and the pros and cons of each option. You should also research different lenders and investors to find the best fit for your business.
- Get professional help: If you are unsure which source of funding is right for your business, you should consult with a financial advisor or business consultant. They can help you assess your needs and find the best funding solution for your business.
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Thanks for visiting. Hope you have learned something new?.
Conclusion On Sources Of Entrepreneurial Capital
Deciding on what source of capital to take as an entrepreneur is a very vital decision which should be made based on evaluating various alternatives in terms of funding environment and current markets.
Base on this article, personal savings are the base forms of investment, reason being that you are not paying interest but it serves as a motivation to work and grow your business.