Most start up businesses need to grow over several years before they generate profit, and you as an entrepreneur should essentially be prepared for this from the beginning. During the early stage of your business, before sales of your products or service, you need a startup money (startup capital). Even if your company is not new you may still need more money to expand your business.
Where can you find money to start your business and pay your business costs if your profit is low? This is a key question.
Start-up financing is one of the biggest challenges a new business owner and an entrepreneur primarily faces. Lack of financing is not only a headache of a startup business owners. Small and medium sized business owners more often face a big lack of money to pay for the cost of their daily business activities. It almost always forces entrepreneurs and business owners to ask for help from financial institutions. (We talked before about the challenges and obstacles immigrant entrepreneurs face in Sweden. http://www.ponture.com/attempts-of-immigrant-entrepreneurs-in-sweden/ )
|What is financing mean?||Financing is the act of providing funds for business activities or investing. Financial institutions and banks are in the business of financing as they provide capital/money to businesses, entrepreneurs and investors to help them achieve their goals. (Source Investopedia)|
What are the common alternative ways of financing your business?
There are multiple choices you as an entrepreneur have in order to finance your business. When you consider the financing options, some are nearly risk-free and others involve high financial risk and should be used with caution.
1. Raise Money from our Family and Friends: Ask for money from family and friends is the most common way to finance a start-up business. But when you ask people closed to you to take their money, you are risking their financial future and jeopardizing important personal relationships which needs to be handle in a very open and honest approach. Make sure you tell them about your project business plan openly and show them all the pros and cons of your business idea.
2. Bank loan: Another common way of financing your business is through loan from a bank. A bank or financial institute offer you cash upfront in return you repay the loan in addition to loan interest over a determined period of time to the bank.When you apply for a bank loan, there are various requirements that you should full fill. For example, your bank will want to review your business plan and personal credit history. The bank will use these documents to assess how much your business is valued and how low or high the risks are. Essentially, through this process, the bank is trying to determine whether or not you can reasonably afford to repay the loan you’re requesting, and in that way how likely the bank is going to get their money back from you.
3. Invoice Financing: Invoice Financing can be an effective and quick way to get money for your business. Through Invoice Financing you ask a bank or financial institute to give you money based on an outstanding invoice you have given to your customer. This will help you not to have to wait for your customer to pay to your invoice,instead, you get money for the invoice immediately and the bank waits for your invoice to be paid to recover their money.
Therefore, bank will ask you to pay a small fee in advance for your invoice. There are two main methods of Invoice Financing:
- Invoice Factory is essentially a sales transaction in which a business sells their unpaid invoices to an invoice purchasing company (factoring company), in exchange for immediate cash. Typically, the factoring company will take over your invoices. You will receive money for your business and the factoring company will wait your customers to pay to them.
- Invoice Discounting is a type of loan/credit based on your invoices. In other words, your unpaid invoices serve as collateral (security) for a loan. The bank will lend you money according to your invoice and your business should pay back the money in addition to interest to the bank when you get paid by your customers. Invoice Financing is a good alternative for businesses which are in need for quick access to money and it does not often require any other type of collateral/security since the invoice used as collateral.
4. Crowdfunding: Crowdfunding is relatively new way of attracting money from people to finance your business. There are several ways to do this
- Reward and donation based: That you post your business idea online and people see it and they give you some money without expecting any return. Its considered like a gift and you will not your sell your company shares.
- Debt based (Crowdlending):-Your post your business plan online and ask different people (the crowd) to give you money as loan. You repay them back within a certain time period with interest.
- Equity based: Your post your business plan online and ask different people (the crowd) to give you money in return for shares (equity) in your company. This allows you to sell your share of your company online to individual investors without making your company publicly offered in stock market.
5. Capital from Professional Investors: Capital is the money that is provided by professional investors to businesses which has a potential to reshape the markets and to grow very fast. The money comes from professional investors usually comes from institutions, corporations or wealthy individuals who are looking for a serious potential businesses. The money is invested in your business in return for equity/shares in your business. The investors in your business expect a great return on their investment usually in long-term.
6. Subsidy and Financial Grants for innovation and growth:-Governments often has systems that support a startup businesses/entrepreneurs. In Sweden there are several good sources of financial grants and subsidies available to entrepreneurs:
ALMI loans which has offices in every part of Sweden. It provides the first initial money in terms of loan with a discounted interest which has often favorable terms for start ups.
Vinnova Sweden’s official innovation agency based in Stockholm. Vinnova provides funding through a range of grants aimed at different industries.
Tillväxtverket Swedish agency for economic and regional growth. They have various grants and financial supports for startups in Sweden.
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