The idea is excellent, the time is right, and the opportunity shines bright. Even 99 things go in a business’s favor, but it doesn’t have the necessary financial muscle. Everything goes in vain. One crucial element for business success is ensuring a handsome fund to start and sustain emerging businesses.
A substantial amount of money is necessary for corporate expansion, long-term profitability, and consistent operations. The corporate finance technique is an essential part of the overall business plan. Unique entrepreneurial talents are required to provide low-cost funding options and business loans.
According to Score Org, a whopping 82% of businesses fail due to financing problems. Financing has always been the most significant concern of companies over time. At the same time, the contemporary influx of innovation has clouded the domain of finance as well.
Fortunately, now there are more business financing options than ever before. However, not every option is friendly for every business model. It takes strategic decision-making to analyze and choose from the best choices.
The traditional way of financing through borrowing from friends and family is going out of fashion. The intricacies of business require a more systematic and potentially sufficient source for funding. Moreover, the financial markets have primarily revolutionized as well. They have a lot to offer now.
If you have been looking to finance your emerging business but are confused about choices, this article is for you. It discusses four exceptional business financing options for emerging businesses.
1. Crowdfunding
As the word suggests, it is a funding from the crowd of funders. It refers to the process of accumulating funds from different funders. It usually takes place through online crowdfunding portals. However, it would help if you were careful about the financial and accounting aspects of crowdfunding.
People often struggle with finance vs accounting terms. At times, it can get tricky. Therefore, it requires a specialized finance team to avoid the conflicts of finance and accounting in your financial documents. It is mainly because of the transactional complexity involved in this process.
According to Smallbizgenius, entrepreneurs pledged approximately $7.2 billion in crowdfunding projects during 2014-2020. A surprising 78% of crowdfunding campaigns exceed their expectation and accumulate more funds than targeted.
You can set up a crowdfunding campaign on any one of the popular crowdfunding websites. You describe your company there, and then people can donate to your campaign primarily for rewards like discounts, profit sharing, or maybe equity in the business. The most significant advantage is that reward-oriented crowdfunding campaigns are not subject to interest or principal repayments.
2. Angel Financing
Angel financing is a mechanism where angel investors invest in the initial stages of the startup. They invest mainly in exchange for equity ownership. Uber, Facebook, and WhatsApp are a few instances of companies started by angel investors. The investments resulted in outsized returns. Therefore, angel investment has been gaining more popularity over the last decade or so.
Angel investors mainly look for the founder’s commitment, passion, and motivation for the business. If an entrepreneur persuades an angel investor on his business idea, he can expect a healthy investment. On average, typical angel investments in startups range from $25,000 to $100,000.
However, angel investors like Jeff Clavier have invested as high as $6 million in a single startup. So it entirely depends on how well a business portrays its purpose and positive prospects. You can search for an angel investor through networking with other entrepreneurs, angel investor networks, and even crowdfunding platforms like Kickstarter and Indiegogo.
3. Venture Capitalism
Venture Capitalists (VC) provides capital to emerging businesses with high growth potential. It is a private equity investor that invests in exchange for equity in the company. They provide capital for companies that have already shown some promising traction in the market. It might include a working product prototype or the acquisition of the very early customer base. However, once you show traction, VCs can provide good amounts of investments for the business.
According to MJ Hudson, startups received a surprising $4.3 billion in first-time VC financing. The amount is enormous for emerging businesses. It aided their operating machinery, allowing them to expand their reach in less time than anticipated. The majority of venture capitalists invest in three types of firms. They invest in specific industries, developmental stages, or geographical areas. However, the focus of appeal for VCs is corporate growth, which makes it a bit more complicated.
4. Loans for Small Businesses
According to Fundera, over 70% of small businesses have taken loans to meet capital needs. There are innumerable sources of conventional and contemporary loan options for emerging businesses. Options include but are not limited to:
- Line of Credit
- Account Receivable Financing
- Working Capital Loans
- SME Term Loans
- Equipment Loans
- Direct Online Lenders
- Conventional Commercial Banks
- Hard Money Lenders
And so on. There could be a lot of options for small business loans. However, the best is the one that complements the overall business model. Interest rate, amortization, and collateral requirements all influence the decision. All of these elements, both directly and indirectly, have an impact on business profitability. As a result, while picking the proper funding, an entrepreneur must exercise considerable prudence.
Final Thought
Once a child starts walking, his nutritional needs increase. Similarly, once your business gains initial traction, you must nourish it with more financial input. Mostly, startups are not financially self-sufficient. Therefore, the financing options discussed above can serve as a great help for your emerging business. It would help if you were smart enough to choose the right option.