At the beginning of every business there is always a dream, a creative idea that an entrepreneur wants to bring to reality. But how is it possible to find the capital to make it happen? Are there several options? Yes, there are. The eight most common approaches are listed below.
A personal investment is the most common way to fund a business and is where the owner invests his/her personal finances in their own firm. This is very risky and requires that person to have an initial amount of funds to start the activity.
2. Loans and debt financing
A loan is a way of borrowing funds from a financial institution such as a bank. More specifically, a loan is the act of giving money, property or other material goods to another party in exchange for future repayment of the initial amount, along with interests. There is a slight difference between the concept of loan and the concept of debt, words that are usually considered as synonyms. What changes is the perspective: a debt is something owed to a lender and a loan is something borrowed from a lender. In regards to startups, credit institutions can be reluctant to lend money to start-ups.
Crowdfunding is a relatively new form of financing that could not exist without the support of internet and social media. Using online platforms, small businesses can gather small investments from a large number of investors instead of having to focus only on a single investment. The leading countries or regions for crowdfunding are the US, UK and Europe with countries such as Australia, New Zealand and Asia also following this trend. “The future of Finance. The Socialisation of Finance” outlines that crowdfunding is potentially the most disruptive of all the new models in finance. Being one of the most social categories of alternative financing, crowdfunding can create a viral growth for specific campaigns when investors share the campaign across the social media, producing a strong network effect.
4. Equity crowdfunding
Equity crowdfunding is where an investor receives equity in exchange for their investment, thereby becoming a shareholder in the company. This means that when the company becomes liquid (is bought by another company or floats on the stock exchange), there is a chance of a return on that investment, unlike traditional crowdfunding. There is also a chance that the company will pay shareholders dividends before it becomes liquid.
5. Rewards crowdfunding
With this type of crowdfunding, investors do not receive a share of the company they invest in, but an incentive or a tangible item in return for their participation. This model goes hand-to-hand with the idea of community. The secret is to create a community around your idea: if the backers can impact the creative process, they will feel emotionally invested in its outcome and they will engage the community talking about it. The returns on this kind of fundings have a more creative, experiential, sentimental value.
6. Government grants
In order to encourage innovation and to support businesses with new ideas, the Australian government provides some grants for start-ups, depending on the nature of the business. Some of these are the “Entrepreneur’s Programme”, the “Public Sector Innovation Fund”, the “Research and Development Tax Incentive” and the “Export Market Development Grant”.
7. Venture capital
A startup that needs a large amount of money to support an expected rapid initial growth, can aim to attract venture capitalists. A venture capitalist is an investor who provides capital to startup ventures or small companies that do not have access to “equity markets”. Why do they want to invest in this kind of high-risk companies? Because the return could be huge if the business becomes successful.
8. Angel investors
An Angel is an entrepreneur or professional who invests capital in promising ventures, acting in an indirect role as an advisor. They usually operate alone or in small groups and what makes them different from venture capitalists is that usually their main motivation is the pleasure of helping a new business, together with the profit they can make out of it.
Even if there are various ways to fund a startup, it is important to find the right financial partner and to understand which path suits a specific business better.