Article: Funding and Types of Financing

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Funding and Types of Financing

SO, you read our last article and have produced hundreds of different ideas within the last week? Congratulations! But now where do we go? Well, you have several options. Once you have done a brainstorming session to find loads of ideas, it is time to limit them into a single one you would like to focus on. If you’ve managed to do that already, great! If not, we will release an article on Design Thinking soon. So, with your one idea, your next step is actually finding a mentor or a pre-accelerator program (*wink* *wink* again…. ABLE Activator is right here!) – and you can learn all you need to develop your business. But after that or during, you may find yourself requiring serious financing to get that business of the ground. That is what this paper is all about. All the different types of financing out there available for you:

Grants!

Did you know that your country as well as the European Union WANT you to succeed? That’s right – your success helps them too. From tax to employees you hire, to any advancements your firm may achieve.

The amount of Grants available are far too many to count but I will briefly list the types:

  • Financial Grants
    1. Grants for SME’s (Small and Medium Enterprises).
    2. Grants from individual countries (Bulgaria in this instance).
    3. Grants from local governments (less likely, but they do exist).
    4. Feasibility-Study Grants (to test out your idea, before investing more).
    5. Market Penetration Grants (for industries where a barrier to entrance is a high start-up cost).
    6. Export Grants (The government may help you with tax reliefs or VAT reliefs if you export a certain percentage or value, bringing in more money into the local economy).
    7. High Potential Start-up Grants (HPSU – you think your business has the ability to become a unicorn or at least achieve a hockey-stick curve of growth? Then this is where you get the money to prove it).

There are others too, but these just go to show how many there really are out there.

Bootstrapping

A tough decision to make when starting a business, but one many people choose to go with when starting a business. Bootstrapping refers to the act of Self-Financing your own business. It means risking your very own hard-earned savings but there can be a number of reasons why you would choose this in front of the others. You may not have access to other types of financing, or you wish to take on the benefits from being self-funded such as:

  • Having accountability only to yourself
  • Retaining 100% ownership (and liability)
  • Retaining 100% of profits (or losses)

It is never recommended to put all your life savings into a business or idea, no matter how much you believe in it. Consult with an expert or a mentor before choosing such a risky option and be wary of the dangers lie ahead – plan for those unexpected, unfavourable factors from the PESTLE analysis (link to last week’s Business Theory Analysis is here), and do not take unnecessary risks – always have enough money to pay for food and rent at the very least!

Friends and Family

If you are not able to Bootstrap your business but would still like to keep the ownership with people you are close with and can rely on, then asking friends and family to become early investors may work. Note, it does highly depend on the family situation and be wary as you do not want to end up owing a lot of money to those closest to you as it may put a serious strain on your relationship and that is never worth it. Sometimes however, if you do find that communication with your family is extremely easy, then you find it fun to work alongside them and your business could transform into something brilliant.

As some quick advice to end this point, try not to turn all your conversations simply about business and money. Have rules or times dedicated for that and allow yourselves to relax and just be yourselves when among each other. Do not lose a relationship with someone simply because you’re now business partners too.

Crowdfunding

Who here hasn’t heard of KickStarter or IndieGoGo or the hundreds of other websites dedicated to this exact cause? Put in one sentence, it is a way of getting your potential future market to put forward money to support you, before you have even managed to launch your product.

You set a maximum number of days for Crowdfunding – 30 days tends to be the most successful one for a lot of companies – and then you set an amount which you are trying to attain, for example 50,000 euro. You can offer different packages or tiers for people to “pledge” their support to you with varying amount, say from 10 euro to 1,000 euro each. You then require an incredible Marketing Strategy to make sure you get in front of the right people with the right message at the right time and use it to get them to “pledge” their money to them. If you’re not familiar, with what “pledge” means – it states that ONLY if your company reaches its full goal of 50,000 euro (or above) will all that money get transferred to your business, after which in return you will be expected to deliver everything you have offered to provide for these customers at the different tiers of support which they have given you. Do note, that if you do not reach your monetary goal, all the pledges are returned promptly to the people.

This is a highly successful tool for an early type of market validation where you can see if there is genuine interest in your product before investing much more than an idea.

Bank Loans and Credit Institutions

Well, this is quite simply what it says on the tin. You go to a bank or financial institution with your business plan and ask for a loan in the size you require. You will need:

  • Credibility – some sort of proof you know what you are doing in the industry your business is going to be conducting its operations.
  • Excellent Financial Situation and Projection – A good credit rating so your interest rates are not too high, and to show an understanding of financial projections, again showing that you know what you’re talking about.
  • Collateral – In the case that you cannot return the money, the bank will require an asset or an assurance of some sort that will transfer into its ownership should you default on the loan.

This can be an expensive, but secure method of getting financing. This is also known as Debt-Financing.

Venture Capital

When it comes to Venture Capital (VC), the main target for such groups is High Potential Start-Ups (HPSUs). The companies which offer such financing typically set higher than usual interest rates due to the increased risk there is with HPSUs. They would sometimes like to help with managing the company or set guidelines for you when managing it, so that they minimize the risk for themselves, but it takes away a huge amount of your freedom as a business owner.

VC Funds can offer financing in multiple different ways and can tailor their financing to each different firm. This means it could be set as Debt-Financing or Equity-Financing too, or even both at times.

Investors and Angel Investors

Before you go out to create an Initial Public Offering (IPO) on the stock market, you can attract private investors to invest in your firm for a percentage of the shares of your company (equity).

Sometimes, you may require this type of financing because you need the financing quickly to continue growing and your business cannot survive without it. The benefit is that bringing in investors is also incredibly tailored to the situation every time.

Investors may refer to VC Funds too while Angel Investors are accredited investors which use their own money to invest into small businesses.

Seed, Series A, & Series B Funding Rounds

Seed Round refers to a series of related investments in which 15 or less investors “seed” a new company with anywhere from $50,000 to $2 million. This money is often used to support initial market research and early product development. Investors are typically rewarded with convertible notes, equity, or a preferred stock option in exchange for their investment (Investopedia, 2019).

Series A refers to a smaller number of angel investors or VCs who contribute an average of $2-10 million in exchange for equity. The fund is named after the type of equity investors hope to eventually receive – Series A Preferred shares. This implies, they will be the first group of investors to receive preferred shares.

For more information on the several types of shares, from Common/Ordinary Shares, to Preferred, to Company Bonds, you can find out at Investopedia.com.

Key Strategic Partners

When looking for an investor, you may want to bring them to your team, not only because of their capital input, but also because they could have incredible connections or expertise that would work great for you. These types of people are called Key Strategic Partners. Often, when people in huge corporations become so important to a company, they are offered the chance to become a Partner of the firm, meaning they can invest their own money for a stake in the company.

Written by Lenard Adanov

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