Starting and running a business requires more than just having an idea. While getting it off the ground can be tough, scaling it up presents greater challenges. Among the various challenges small businesses face , especially in their early stages, funding is the most important aspect.
Thus, having a brilliant business idea without the means to fund it can turn into a nightmare. In this article, we will be looking at potential strategies for funding small businesses, along with their advantages and disadvantages.
1. ANGEL INVESTORS:
Over time, angel Investors have played a vital role in helping small businesses grow. Angel Investors are those wealthy private companies, which are focused on financing small businesses in exchange for equity.
Angel Investors fund business in many industries. According to the Center for Venture Research at the University of Hampshire, 2020 was the first time in several years that angel-funded businesses were in the seed and startup stage. The total investment during that year was $25.3 billion, a 60% increase since 2019.
It is crucial for small business owners to recognize that this means of acquiring funding, has its advantages and disadvantages.
An advantage of having such investors is that, you don’t have to repay the money as the business owner is essentially offering part of the business ownership to the investor. This is why this type of funding is primarily intended for established businesses still in need of capital to expand and grow.
On the downside, most angel investors typically seek 10% to 50% ownership of a business in exchange for funding. This means that the business owner could lose control of their business if an angel investor sees poor management by the owner is hindering the growth of the company. Therefore, it’s important to carefully consider the equity offered to investors to prevent overcommitting and risking the business in the long run.
Angel investors are can be found even on social media platforms like LinkedIn. There are online angel investor networks with over 279,000 investors. Business owners can create their profiles and promote their businesses and interested angel investors will invest if they find the business promising.
Crowd funding is one of the most popular ways or strategies to raise capital by especially startups or small businesses. Through crowd funding, fundraisers collect money from a large network of people to fund projects or businesses.
Leveraging on the power of crowdfunding can enable business owners to raise funds from many individuals who believe in their business concepts
Crowdfunding enables business owner to present their ideas to a wider audience, where they collect small financial contributions that, when pooled together, can form a substantial sum. This usually requires the business owner to create a persuasive campaign, clearly outlining the benefits of supporting their venture, and the impact it will bring. The business owner is expected to provide compelling rewards or incentives to potential backers.
The advantage of crowdfunding is that, it is a fast way for startups to grow when successfully done. It provides the business with an impressive startup capital, often easily attained by the crowd. Additionally, it serves as a powerful marketing tool for the business. However, its disadvantage lies in its time-consuming nature though with minimal risk, and there’s often no guarantee that it will be successful when launched.
3. BUSINESS GRANTS:
This is a business financial strategy that exempts the beneficiary from repaying any interest in the long run. Most business grants originate from governmental sources, though they can also come from private organizations.
Many startup businesses rely on this strategy, as it frees them from interest payments, allowing them to allocate funds towards other operational expenses.
However, the downside of this strategy is the fierce competition for such opportunities. Not every business is fortunate enough to be selected, especially if the presentation lacks professionalism. Therefore, to stand a chance of being selected, one’s business plan must be compelling and address a significant problem. Only then will it have the potential to benefit from grants.
4. BOOTSTRAPPING:
This is another interest-free financial strategy which occurs when someone starts a business with minimal external resources, including no business loans, equity financing or investors. This means the business owner funds their own business using personal resources such as savings and equipment.
According to the Federal Reserve’s 2023 Report on nonemployer firms, 80 percent of startups with employees use personal savings to fund their business ideas. Similarly, 76% of startups with no employees use personal savings.
The disadvantage of this strategy is that most often, the savings are seldom enough to keep the business running effectively and business owners are therefore obliged to turn to investors or funders for assistance. The advantage on the other hand is that, if one can effectively manage their resources, amd move at their own pace, they might not really need external influence, especially from interest-prone funders.
5. FAMILY, FRIENDS AND NGO’s
This strategy is not uncommon is it ? Many startups have effectively been running over the year, thanks to the financial contributions from their families and friends. Some aspiring entrepreneurs come from very supportive backgrounds but don’t know how to get their families and friends to support their business ventures.
By providing a well-designed and detailed business plan, and the capital expected to run it, small business owners stand a chance to have support coming from their loved ones.
Some Non-Governmental Organizations (NGO’s) have been encouraging entrepreneurship over the years through grants. These organizations scout startups that are already to running, and simply support them with some finances to continue running. To benefit from such opportunities, the business structures are expected to be running already, because the cost of starting them might be too costly.
