Banks are not the only place to get money. Today, I will discuss 12 sources of funding. I will start with those that are of interest to small businesses and finish with those that are of interest to larger businesses.
In another post, I will explain how banks decide how much money to lend to you. I will also show you how to do your own calculations to find out how much money you can borrow. I also have a post to help you prepare for a loan application interview at a bank.
When business owners tell me they are looking for funding, most of the time they want to get a loan from a bank or a grant from an international development agency.
What I notice is that many business owners think there is no way to start or grow their business without getting a loan or grant.
This is not true. There are 3 key strategies that small and medium businesses can use to generate higher profits that you can reinvest in the business.
But many entrepreneurs believe only banks and investors can help them. So, they put all their effort and energy into getting a loan rather than developing the business. As a result, the business struggles or even fails, even if they manage to get the funding.
Before we start, there are some things you need to know about funders, particularly banks:
- Funders do not like to give money to a business that is not yet making good profits
- Unless you have set up other successful businesses in the past, funders will consider you to be high risk. This is because you have no track record in the business or the market.
- If your business fails and you cannot repay the loan, banks will blacklist you and it will be even more difficult for you to get funding in the future.
So let us look at sources of funding. Are you familiar with the following?
Bootstrapping means that you grow your business with your own money. This is how most entrepreneurs start their business. It means that you start in the smallest possible way (see my advice about how to start a business at minimum cost) and whatever profit you make, you invest it back into the business.
The main benefit is that your business faces less risks. You will learn to master doing business by developing your skills in a less complicated environment. Most importantly, it will give you the opportunity to find out if customers are actually willing to pay for your products (see my advice about how to find out if there is a market for your products and services).
But bootstrapping is hard. Sometimes you don’t have the money to start or your business is not generating money to grow. This may mean that you need to start another cash-generating business on the side to get additional money to be able to start or grow the other business.
2. Family, friends and business partners
Your family and friends have interest in the success of your business. I leave it to you to decide if their interest will help your business or damage it! But the fact is, these people will be more willing to support you as compared to banks or development agencies.
But many business owners do not approach bringing family into the business in a professional way. The result is a lack of clarity and people having different expectations about the benefit they will get. This can lead to confusion and even falling out among family and friends.
You can avoid this if you have clear agreements in place about what they are putting into the business, what they will get from it and when. You should also have a clear agreement about what will happen if the business does not succeed and what influence you will allow them to have in the business.
Your suppliers and your customers may also be willing to help you start the business, but it will depend on the level of trust that they have in you. If your suppliers have confidence in you and you promise to keep buying from them as your business grows, they may be willing to give you credit for just a few things so you can start. There is no need for me to tell you that if you can not fulfil your promise, you can forget about working with them in the future.
The same applies to your customers. If you have done your research to find out what people want and what they are willing to pay for, there may be some customers who are willing to pay you (part of the money) in advance so you can use that money to start the business.
3. Mobile loans
Do you live in a country where they have mobile loans?
If yes, try to find out under what conditions they will allow you to take out a loan. The amount may not be much, but it may be enough for you to be able to start your business with 1 or 2 products. I recommend you follow the alternative strategy to start your business that I wrote about recently.
4. Credit unions
Many countries have credit unions that give loans to their members. Depending on the level of professionalism of the credit union, these loans can be very big.
Each credit union has their own rules and regulations so you will need to do research to find out which one is suitable for you. The interest they charge is usually less than what a bank will charge.
However, the credit union will also require collateral or a guarantor. They may also require you to have been a member for a certain amount of time before you can get a loan. It could be a good idea to combine this with a cash-generating business that does not require a lot of money to start.
5. Grants and awards
Despite what many people think, it is not easy to get a grant. You usually get grants from international development partners or corporate programmes.
In the case of development partners, their grants and awards have strict conditions. They may need to be in a certain industry or sector, be innovative or achieve certain social impacts. They will also require you to submit a business plan.
Corporate programmes are run by businesses, so the conditions they set may be even higher.
It means that you need to:
- read the terms and conditions very carefully
- determine if your business can meet the criteria and
- spend time and effort to write a good business plan to cover all the areas the funder wants to see.
The fact is that it takes a lot of effort to get on the shortlist for a grant or award. Also, funders will usually give higher marks to businesses that are already doing well. You need to decide for yourself if you are better off putting the effort into this competition or into your business.
6. Micro loans
If a micro loan is given by a bank, the application process is similar to getting a loan from a credit union. But only if you are asking for a small amount. If you need a larger amount, the process is similar to that of a commercial bank (see point 9).
For smaller loans, the bank will want to know whether your business is making a profit, if you have collateral or a guarantor, and they will want to see your business. For larger loans, the bank will do more in-depth research into your business. They will also require you to submit a business plan and profit and loss statements.
7. Government-run economic development programmes
Many times these programmes are co-funded by international development partners. This means that they will add their own conditions to those set by government.
Again, you will need to put in a lot of time and effort to fully understand the criteria and the objectives, and then determine if your business aligns.
Another thing is that you may face challenges getting funding from these programmes even if you have a great business plan. Because some government officials may decide to only give funding to people they know.
However, a programme that is well-run can provide a lot of support to entrepreneurs. You will need to consider how much time and effort you are able to put into this and compare it to how well that same time and effort might benefit your business if you focus on developing the business.
Crowdfunding is – in a very simple definition – when you put your project on the internet and raise money from people all over the world. There are 4 main types of crowdfunding:
- Donations-based crowdfunding
People donate money to your project and do not expect anything from you
- Rewards-based crowdfunding
Funders donate money to your project and get rewards. For example, you could offer a t-shirt to anybody donating USD 25 – USD 74, and offer a piece of African art to anybody donating USD 75 – USD 125.
- Lending-based crowdfunding
This is similar to bank loans. People give money based on how much interest you will pay.
- Equity-based crowdfunding
This is similar to normal investing. People give money in exchange for owning part of your business.
Donation-based crowdfunding and rewards-based crowdfunding have fewer conditions, but it is hard to get the money you need unless people know you and trust you.
Lending-based and equity-based crowdfunding require a professional business proposition. The organisation hosting the crowdfunding will evaluate your business plan and financial information. They will also carry out other due diligence on you and your business before they decide whether to allow you to raise money on their website.
All 4 types of crowdfunding will not be successful unless the project can reach many people, for example through social media. Meaning that the people behind the project have to spend a lot of time promoting the project, sharing updates and getting their networks to also share the project. But in all cases, there is no guarantee that the fundraising will be successful.
9. Commercial banks
When you go to a bank to ask for a loan, the quality of your business plan, your business track record (how long you have been in business) and your financials (profit & loss statement, balance sheet, cash flow etc) are the main things a bank will look at. The bank will then do their own assessment to:
- determine your debt capacity (how much money they can lend to you at limited risk)
- evaluate the industry you are operating in
- evaluate how the market in that industry is developing
- look at the economic situation in the country and
- determine the quality of their own loan portfolio
All these things together make it very difficult for a business that is just starting or that is not doing too well to get a loan. Funders prefer to give money to a business that they believe is going to continue doing well (all things considered) as compared to one that has not yet proven itself.
10. Angel investors
Angel investors, also called business angels or “informal investors” are rich entrepreneurs who are looking for ways to invest part of their money in other businesses. There are 2 main reasons why they do this:
- To get more profit as compared to saving their money in the bank or investing it in stocks
- To share their business experience with the businesses that they invest in.
Angels investors require you to give them partial ownership of your business in exchange for money and advice. They will usually demand 20 – 49% of the business, but it may be more. The more your business has potential, the higher the percentage of ownership that a business angel will demand.
The investor will also take a seat on the board and as a co-owner, they are allowed to vote on business decisions. Sometimes they can even overrule the business owner. This is why some entrepreneurs do not want to work with angel investors; the price they charge can be very high.
The amount a business angel will invest in your business can be as low as $5 000 or as high as $50 000. However, they prefer to invest as a group to reduce their risk.
To work with angel investors, your business needs a good track record and things like recordkeeping and financial management skills need to be in order. It requires an advanced level of professionalism.
11. Venture capital investors
Venture capital, or VC, is the most advanced type of business funding. VCs are large investors who demand partial ownership of your company and a seat on the board in return for their investment. If your business does not perform, the VC can even sack the owner and bring somebody from outside to run the business.
Usually, VCs will not invest less than USD 1 million. Many will not invest below USD 5 million, though there are a few that start from USD 250 000.
The level of professionalism required from a business is high. Also, VCs only invest in businesses that they believe will grow very fast and make large profits. For most VCs, their interest is to at least double the money that they put into your business. As a result, it is difficult for businesses to get VC funding, even in more advanced countries.
12. Social impact funds
These are also called impact investors. They are investors that do not only consider how much money they will make on their investment. They also take into account the social, economic and/or environmental impact of the investment.
But make no mistake, these are investors and we are talking business. They may not demand the same high return as normal VCs, but the criteria they use to evaluate your business and the level of professionalism that they require are very similar to VCs.
In the news we often hear about this or that business raising millions of dollars in funding. But the truth is that most entrepreneurs start their business using their own money and money from friends and family.
Maybe consider other ways to bootstrap your growth until you are in a better place financially. These strategies can include cost reduction, dynamic pricing, better cash flow management and getting more customers.