There are two ways to externally fund your business, debt and equity. When using debt, you receive funding which you commit to paying an agreed interest rate and the principal amount after an agreed period of time. The benefit of debt is that you retain control and ownership of your business. On equity, you turn over a portion of your company to an investor in return for funding. This obviously entails losing some control of your company to the investor. The idea is to reduce the cost of funds and ensure that a funding option suits your business model. We look at 6 sources of funding for your business whether through debt or equity.
You may find that you can grow your business without any external assistance. The business may be generating enough resources to fund its own growth. This is called bootstrapping. Bootstrapping is considered to be one of the cheapest and most affordable way to fund your small business. Firstly, you are not taking anyone’s money. Secondly, you are not giving away some of your ownership and control to an external investor. You remain fully in charge of your business. When using this form of funding, you need to manage your cash flow effectively. When things go wrong, there is no one else to blame but yourself.
Friends and family
If you are lucky, your friends and family may be willing to buy into your business idea. Without having to pledge your house or your most prized assets, this group of investors are the most flexible. However, there is a downside to getting funding from friends and relatives. If things in the business do not go according to plan or you are unable to meet your end of the bargain for some reason, this may adversely affect your personal relationships. As such, your relatives and friends need to know what they are getting into upfront. Whether they offer you debt or equity funding, you need to ensure that some paperwork accompanies your transaction. That way, there is always some contractual agreement which avoids shifting of goal posts in future. So, before you go looking for other sources of funding, you may want to knock on your brother’s door.
Traditional bank loan
Going for a bank loan avoids the hassle of going door to door to find someone wiling to fund your business. It is important to note that you need a longstanding relationship with your bank in order to qualify for loans. Banks want some kind of assurance that you will be able to repay them, a track record. In Zimbabwe, Empowerbank is one such bank which was formed to assist small businesses with funding. There are many more. However, banks need to see something of value in order for them to give you a loan. They need collateral mainly in the form of title deeds to a property. This is a deterrent for many small businesses who do not already own anything of value. Bank loans tend to also carry prohibitive interest rates making the money expensive. You therefore need to be on the lookout for the bank that offers you the best interest rates. One distinct advantage of bank loans, however is that they are flexible. You can choose to pay off the loan and terminate the agreement at any time. Venture capitalists are not as amenable.
These investors can offer you funding in exchange for equity. They are mostly respected industry executives who are willing to give your business credibility with other investors. Angel investors are not as heavy handed as venture capitalists and they tend to invest from personal resources. In addition, they are more interested in the growth of your business more than anything else.
Often, venture capitalists are investors looking to provide early stage funding to your business in exchange for a significant share of your company, mostly a controlling stake. Unlike angel investors, venture capitalists normally provide large sums of money. This is the direction to look when in need of massive capital injection.
Crowdfunding is increasingly becoming popular with increased internet penetration around the world. Crowdfunding is all about appealing for funding from the public or a certain community. You pitch your idea on the internet and anyone interested pledges to fund your business. Investments can be debt, equity or rewards based. There are many crowdfunding platforms on the internet and you need to explore these in detail before making a choice. The advantage of crowdfunding is that you may get are appealing to many potential investors at once and your chances of success are increased. However, having a business with too many investors may become cumbersome. Too many cooks spoil the pot.
Zimbabwe still lags behind in terms of funding options although there has been a notable improvement of late. You need to ensure that you take up the option that best suits your business idea. Most importantly, you need to believe in your own idea before you can convince someone else to invest in it.