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Putting all your eggs in one basket is never a good business strategy. This is especially true when it comes to financing your new business. Not only will diversifying your sources of financing allow your start-up to better weather potential downturns, but it will also improve your chances of getting the appropriate financing to meet your specific needs.
Keep in mind that bankers don't see themselves as your sole source of funds. And showing that you've sought or used various financing alternatives demonstrates to lenders that you're a proactive entrepreneur.
Many of us are endowed with great business ideas. However, the rate of implementing those ideas is very low due to lack of capital. It is why many people die with ideas that, if they were implemented, would have transformed the world into a better place. As an entrepreneur, you need to try and push yourself to the limit to make your ideas reality.
Nowadays, banks have become so conservative with their cash. There are so many things taken into consideration before any business loan is approved. It means that entrepreneurs need to think outside the box and determine alternative and creative financing options for their businesses. With the Internet and technology, it is time to put them to use when it comes to raising capital, rather than relying only on the traditional sources that have been there forever.
Today, we would like to take you through different ways businesses or entrepreneurs can raise capital. Not every source of capital is applicable to every business idea, though. An entrepreneur should choose one which fully meets their demands. Here is a breakdown of traditional and creative sources of capital you may use to start up your company.
1 Friends and Family
If your business is well thought out and has a proper business plan, your family members together with your friends are the closest people to approach when it comes to raising capital for your business. Your communication skills should save you at this point. The good thing with cash from friends as well as family members is that it comes with very low-interest rates or none at all. It makes it cheap for you when running the business since you would not be required to pay interest rates on loans.
However, be careful when choosing the members since some of them might want a majority share of your company.
2 Venture capital
The first thing to keep in mind is that venture capital is not necessarily for all entrepreneurs. Right from the start, you should be aware that venture capitalists are looking for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications and biotechnology.
Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business.
BDC has a venture capital team that supports leading-edge companies strategically positioned in a promising market. Like most other venture capital companies, it gets involved in start-ups with high-growth potential, preferring to focus on major interventions when a company needs a large amount of financing to get established in its market.
3 Angel Investors
If you have a great business idea, it is good to look for an angel investor who will provide capital for you to kick-start your venture without any financial strains. However, you should note that angel investors will have a share of your business and will also be involved in decision making. Furthermore, they also expect a certain value of return on their investment. If indeed you have a proper and well laid out business plan, make your dream a reality by looking for an angel investor. Have proper language and convince them that your business idea is quite profitable.
Stress that all their investment shall come back with great returns.
4 Bank Loans
With a proper business plan, which has objectives and is commercially based, different financial institutions will be willing to give out small business loans to you. There are two types of business loans: the secured loans and the unsecured loans. The secured loans have collateral, meaning that if you fail in repaying them, your assets might be taken away by the bank. On the other hand, the unsecured loans have no security attached to them. What may limit you in both cases is if your personal FICO score is low.
5 Merchant Cash Advance
If you plan to use credit and debit cards for your business, one good source of capital could be a merchant cash advance. It is a loan given to businesses against their future credit and debit card sales. The advantage of merchant cash advance is that the lender collects a certain percentage of the credit and debit card sales, meaning that if the sales are low, he will take a low amount and if the sales are high, he will take a higher percentage. Also, it does not come with interest rates since it is not considered a form of loan.
6 Business incubators
Business incubators (or "accelerators") generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization and hosting and sharing services.
Commonly, incubators will invite future businesses and other fledgling companies to share their premises, as well as their administrative, logistical and technical resources. For example, an incubator might share the use of its laboratories so that a new business can develop and test its products more cheaply before beginning production.
Generally, the incubation phase can last up to two years. Once the product is ready, the business usually leaves the incubator's premises to enter its industrial production phase and is on its own.
Businesses that receive this kind of support often operate within state-of-the-art sectors such as biotechnology, information technology, multimedia, or industrial technology.
MaRS – an innovation hub in Toronto – has a selective list of business incubators in Canada, plus links to other resources on its website.
7 Peer to Peer Lending
The Internet has provided unlimited platforms for those who want to raise capital for their businesses. We have sites such as prosper and lending club who pair people who need loans with people who are willing to extend the loans to them at an interest rate. All you need is to register on those sites and specify the size of your business and the amount of loan you need. The intermediary will check your credit report and disclose the information to different lenders. The lenders will bid on your loan.
Lastly, the intermediary shall choose the lender with the lowest interest rate and help you find the loan you want to start up your business.
8 Internet-based Lending
As stated before, the Internet has completely taken over the world. Thus, many entrepreneurs should work hard and benefit from this since it is faster and cheaper. What you need is to submit your loan application online and then let the lenders review your application within a day. Most of the time, your credit history will be taken into consideration. Once the loan is approved, it will be electronically deposited into your bank account the next day. The loan shall be rapid via electronic deductions on your business daily transactions.
The interest rates charged on these loans, however, are not as high as those on traditional loans or lines of credit.
9 Government grants and subsidies
Government agencies provide financing such as grants and subsidies that may be available to your business. The Canada Business Network website provides a comprehensive listing of various government programs at the federal and provincial level.
Criteria
Getting grants can be tough. There may be strong competition and the criteria for awards are often stringent. Generally, most grants require you to match the funds you are being given and this amount varies greatly, depending on the granter. For example, a research grant may require you to find only 40% of the total cost.
Generally, you will need to provide:
- A detailed project description
- An explanation of the benefits of your project
- A detailed work plan with full costs
- Details of relevant experience and background on key managers
- Completed application forms when appropriate
Most reviewers will assess your proposal based on the following criteria:
- Significance
- Approach
- Innovation
- Assessment of expertise
- Need for the grant
Some of the problem areas where candidates fail to get grants include:
- The research/work is not relevant
- Ineligible geographic location
- Applicants fail to communicate the relevance of their ideas
- The proposal does not provide a strong rationale
- The research plan is unfocused
- There is an unrealistic amount of work
- Funds are not matched
In the world that we live in today, getting access to funding for your business requires you to look beyond the traditional sources people used to depend on in the past. It means that the level of your creativity needs to edge out the rest of the individuals. It is what differentiates successful and unsuccessful people in life. If you have business ideas that you think, when implemented, will take over the world, don't sit on it. Try and work hard by using the above creative financing options to generate enough money so you can establish a strong business empire.
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