One major factor every entrepreneur considers before opening a business is its funding. Basically, the funding of any business plays an important role in its success and growth. This is because every business needs money to operate smoothly. Fortunately, there are different sources of funding for businesses available for you to choose from. This guideline will teach you all you need to know.
What are Sources of Funding?
As stated earlier, entrepreneurs always seek funding to either start or grow their businesses. Funding, also known as financing, indicates an act of donating resources to sponsor a program, need, or project. Basically, entrepreneurs can seek sources of funding for businesses for either short-term or long-term purposes.
What Should I Consider Before I Look For Funding For My Business?
Before you seek funding for your business or side hustle, you have to build a solid business plan. You should specify how much money you need for your business and how you will allocate these funds. Also, you have to clearly explain your business and its strategy for success.Â
Additionally, you need to understand the business timing of the funding. For instance, do you want all the funding now or prefer receiving it in different stages?
The amount of funding you need for your business will ultimately affect the type of funding you should go For. For instance, if you require N3,000,000 in funding, angel investors are more favorable than venture capitalists. However, if you need a lump sum of money, venture capitalists will be more applicable.
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Top 7 Sources of Funding for Businesses
Here’s a summary of the top 7 common sources of funding for businesses:
1. Personal investment
When starting a business, you should be your first investor. You can find your business either with your own money or you can use collateral on your assets. Basically, this shows investors that you are committed to your project and that you are a risk taker.
2. Love Money
Love money is any money your spouse, friends, parents, or family loans to you. You will have to repay this loan back as your business grows and profits increase. Here are some things you should be aware of when opting for live money:
- Family and friends hardly have much capital
- They may decide to have shares in your business
- Lastly, do not take a business relationship with family or friends lightly.
3. Venture capital
Venture capital is not necessary for all entrepreneurs. Basically, this is because venture capitalists prefer to fund technology-driven businesses and organizations that have high-growth potential. The growth potential can be in sectors like communications, information technology, and biotechnology.
Essentially, venture capitalists obtain shares in your company to help it execute a promising project with high risk. Hence, opting for this kind of funding involves foregoing some ownership or shares in your company to an external party.
Also, venture capitalists expect you to provide a healthy return on their investment, usually gotten from selling shares to the public. If you decide to go for this kind of funding, ensure that you find investors who have relevant experience and offer knowledge to your business.
4. Angel Investors
Angel investors are usually retired company executives or wealthy individuals who prefer to invest directly in small businesses owned by others. Usually, they are managers in their own field that contribute greatly to the field. Usually, they tend to fund the initial stages of the business with investments.
In exchange for financing your business, Angels reserve the right to oversee your company’s management practices. In actual terms, this involves giving them a seat on the board of directors in exchange for funding. Also, you need to assure them of transparency in all you do.
Angels are likely to keep a low profile. Hence, to meet them, you have to reach out to specialized associations or even search websites on angels.
5. Business incubators
Business incubators, also called accelerators, generally concentrate on the high-tech sector by giving help to new businesses in different stages of development. However, there are still local economic development incubators that share in areas such as job creation, revitalization, and hosting and sharing services.
Generally, incubators will invite prospective businesses and other fledgling organizations to share their logical, administrative, and technical resources. For instance, an incubator may share the use of its laboratories and allow a new business to develop and test its products cheaply before starting production.
6. Government grants and subsidies
Government agencies are bodies that provide financing like subsidies and grants that may be available to your business. Basically, there are various grants you can gain access to in Nigeria. While some are refundable, others are non-refundable.
What Are The Criteria For Getting a Grant For My Business?
Getting grants can be difficult. This is because of the strong competition and the criteria for receiving the grants are usually stringent. Usually, most grants will require you to match the money you are being given. Some of the documents you need to provide include:
- A detailed description of your project
- A clear explanation of the usefulness of your project
- Details of applicable experience and background on key managers
- A comprehensive work plan with full costs
- The completed application forms when applicable
Basically, most reviewers will evaluate your proposal based on these criteria:
- Significance
- Innovation
- Approach
- Need for the grant
- Assessment of expertise
Some of the difficult areas where prospects fail to get grants to include:
- The research/work is not relevant
- Applicants fail to communicate the applicability of their ideas
- Ineligible geographic location
- The business proposal does not give a strong rationale
- The research plan is unfocused
- Funds are not matched
- There is an unrealistic amount of work
7. Bank loans
Bank loans are one of the most popular sources of funding for businesses. You just have to find the most suitable bank for you by shopping around and comparing your options first. Also, you should know that different banks offer different advantages so it depends on what you are looking for.
Generally, you should know banks are looking for businesses with a good track record and are not in debt. You do not just need a good idea to obtain a bank loan but also a solid business plan.
Bottom Line
There are different sources of funding for businesses available for Nigerians. Hence, you do not need to worry so much about capital for your business. Above, you will get a comprehensive list of all the types of business funding that are available for you. Just ensure that you pick the most suitable one based on your needs.
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