On a daily basis, I encounter entrepreneurs and aspiring business owners that are in need of start-up capital. There are many ways that you can fund your idea and you need to be clear on which type of funding would actually work for you. Let’s have a quick look at 5 most common types of funding that could help you in bringing your idea to reality.
- Equity– Equity funding refers to the process whereby you accept money from someone, normally an investor, in exchange for stocks in your business. The power of equity funding can be utilized and administered in a variety of ways. For instance, you can give up from 1% of your business to 100% depending on the amount of money raised. It is very difficult to negotiate on the equity at an early stage of the idea. It becomes easier to negotiate if you have a working product, a good business plan, and a good team.
- Simple Loan– To develop your business idea and start executing, you can apply for a loan from one of the financial institutions such as bank or credit union in your area. After obtaining the funds, you will have to make monthly payments of interest and/or principle or whatever was agreed upon during the loan’s negotiation. Using simple loans as a means of financing your business venture is one of the easiest ways to raise funds for your business. Loans are normally given based on your personal guarantee. What it really means that you will have to pay the loan, even if your business was not successful. You can also use your invoices, which are not paid by your customers, as a collateral.
- Convertible Loan– A convertible loan is a short term debt/loan that can be later converted to equity. It generally converts at the next level of investment. Therefore, you can receive your seed capital in the form of a convertible loan and when you are ready to raise money agains equity, you can convert the loan into equity. Generally, a convertible loan is an uncommonly used investment method; however, it is a great option for raising funds when you are at the idea stage. It takes away all the debate on the value of your idea and company.
- Grants/Awards– Grants and awards are great ways to get funding for your business. The biggest advantage of receiving money through grants and awards is that no reimbursement is necessary and equity in your business would not have to be offered to access them. Different organizations that support entrepreneurship offer various grants and awards, so you need to actively seek them, starting with your local chamber of commerce.
- Advance Payments– Advance payments are great to fund your idea. Advance payment, like a payday loan, refers to an upfront disbursement that is given for a future product, service, venture, or project. It is the best type of funding you can receive for your idea. You need to think about the potential buyers of your end product. If you know any of your potential customers for a long time, it is worth talking to them. Please make sure that you have a clear business model in mind and an offer for them, before you start the conversation.
In conclusion, the above are 5 of the most common types of funding options available to start-ups. With that said, based on your situation, it is not necessary to solely focus on these since other methods of funding may exist. I will continue elaborating each funding type further in a series of five blogs.
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