You’ll need funds to start your firm once you’ve decided on a business plan. Most people begin by investing a small amount of their own money, but as their firm grows, they will need to seek funding from outside sources as well. There are various options for doing so for your company, but the two most common are…
1. Raising equity
2. Taking a loan
Equity financing is the process of raising funds by selling stock in order to expand a company.
A loan is a money that is borrowed and is anticipated to be repaid with interest.
Equity Financing
There are various approaches that fall under this category:
Look for collaborators – Obtaining partners entails sharing ownership of the business. The partners may or may not be actively participating in the firm, depending on the agreement you’ve established with them.
Angel investors are individuals who are interested in investing in other businesses in exchange for a piece of the company’s ownership. They provide not just financial assistance, but also advice and direction.
Venture capitalists are comparable to angel investors in that they are primarily interested in the financial rewards of the company. In exchange for a larger portion of the company, they would often fund it in its early phases. They’d also like to receive paid if the company is bought out or goes public.
Crowd/cloud funding – Crowdfunding is the process of obtaining funds from a large number of people, usually over the internet, in exchange for a small stake of the company or a reward. There are various crowdfunding platforms available online; do some research to see which one is best for your company.
The Benefits and Drawbacks of Equity Financing
Pros
– You have more control over fund management and can decide how to spend the money. – Angel investors and venture capitalists can provide coaching or mentorship to help you expand your firm. Business agreements that are flexible and negotiable
Cons
– Establishing a capital pool would be a lengthy procedure; – As you continue to raise funds, you may have to give up a significant portion of the company.
Loans
Small Business Administration (SBA) loan — These are government-backed loans used to expand a certain industry.
Commercial bank loans are known as bank loans.
The Benefits and Drawbacks of Taking a Loan
Pros
– Once accepted, the funding process is rapid. – No shares are given up; only interest-based payments are made.
– A range of funding alternatives
Cons
– Payments are fixed – You must meet certain criteria to be eligible for certain loans – Requires extensive documentation and rigors adherence to stringent restrictions – You risk bankruptcy if you cannot make the payments.
Series Funding
Companies seeking major growth or preparing for an initial public offering (IPO) will go through series funding after receiving initial capital. Each round of series funding will increase in accordance with the company’s valuation. A company’s preparation for one round of series finance can take several years.
The series is usually named after the letters of the alphabet; for example, series A is the first round; at this point, the company should demonstrate signs of profitability and a long-term business plan. Typically, Series A fundraising tries to raise between $2 million and $15 million. With each subsequent round, the value of the funds will rise.