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The 5 Most Common Funding Sources

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If you want to be successful in business, it is crucial to determine when, where, and how to obtain the funds you need. Whether you need $1,000 or $1 million to start or expand your business, if you can't raise this money, you can't build the business you want.

Before You Look For Funding

Before you look for funding, you need to create your business plan. In addition to explaining your business and your strategy for success, your plan must determine how much money you need and for what it will be used.

Also, it's very important for you to understand the timing of the funding. For example, do you need all the funding now (e.g., to build out a location), or can you receive your funding in stages or "tranches."

The amount of funding you seek will effect the source of funding you approach. For example, if you require $250,000 in funding, angel investors are more applicable then venture capitalists. If you need $5 million, the opposite is true.

While I have identified 41 sources of funding for your business, below are the 5 most common.

The 5 Most Common Types of Funding

1. Funding from Personal Savings

 
Funding from personal savings is the most common type of funding for businesses. The two issues with this type of funding are 1) how much personal savings you have and 2) how much personal savings are you willing to risk.

In many cases, entrepreneurs and business owners prefer OPM, or "other people's money." The four funding sources below are all OPM sources.

2. Debt Financing

Debt financing is a fancy way of saying "loan." In debt financing, the lender (often a bank) gives you funding that you must repay over time with interest.

You must prove to the lender that the likelihood of you paying back the loan is high, and meet any requirements they have (e.g., having collateral in some cases).  With debt financing, you do not need to give up equity. However, once again, you will have to pay back the principal and interest.

3. Friends & Family

A big source of funding for entrepreneurs is friends and family. Friends and family members can provide funding in the form of debt (you must pay it back), equity (they get shares in your company), or even a hybrid (e.g., a royalty whereby they get paid back via a percentage of your sales).

Friends and family are a great source of funding since they generally trust you and are easier to convince than strangers. However, there is the risk of losing their money. And you must consider how your relationship with them might suffer if this happens.

4. Angel Investors

Angel Investors are individuals like friends and family members; you just don't know them (yet).  At present, there are about 250,000 private angel investors in the United States that fund more than 30,000 small businesses each year.

Most of these angel investors are not members of angel groups. Rather they are business owners, executives and/or other successful individuals that have the means and ability to fund deals that are presented to them and which they find interesting.

Networking is a great way to find these angel investors.

5. Venture Capitalists (VCs)


VC funding is a suitable option for businesses that are beyond the startup period, as well as those who need a larger amount of capital for expansion and increasing market share. Venture capitalists are usually more involved with business management, and they play a significant role in setting milestones, targets, and giving advice on how to ensure greater success.

Venture capitalists invest in companies and businesses they believe are likely to go public or be sold for a massive profit in the future. Specifically, they want to fund companies that have the ability to be valued at $100 million or more within five years. They also go through an expensive and lengthy process of deciding on the best business to invest their money. Hence, the approval process usually takes several months.

Bottom Line

As you search for the best funding source for your business, you will discover that some financing options are complicated while others may offer a very small amount.

Choosing an inappropriate type of funding can lead to unfavorable outcomes such as feuds between the lender and business owner, shift of control, waste of resources and other negative consequences.

With this in mind, you should study the benefits and drawbacks of each financing option and select the ideal one that will help you meet your business goals. Because with the right source(s) of money, the sky is the limit for your business.


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