Sources for Financing your Business

Depending upon the service or product an entrepreneurial venture requires certain amount of

capital to start with. In this situation, entrepreneur may face a major hurdle to acquire the

financing for the business because he/she may not have enough capital with him/her to start the

business. There are various sources for entrepreneurial financing. They are:

Self financing: Self financing is the fastest and best way to find fund for the starting business.

The major advantage of self financing is that the entrepreneur has the control of the business.

Shareholders opinion does not have to be taken into account during the decision making. But self

financing may not provide sufficient capital to reach the economies of scale.

Angel investors: Angle investors are the affluent individuals who provide capital for

entrepreneurial start up in exchange for convertible debt or ownership equity. The angles

investors have the experience in entrepreneurial ventures and can provide guidance and also

introduce to the angle network. But they may sometime try to take control over in the business.

Further, angle investment bear extremely high risk and they require high return on investment.

Venture capitalists: These are the investors who are willing to put forward a large sum of

money in exchange for the equity in the company. These venture capitalists get the money out

once the business is either acquired by another company or goes public. The equity is seen as a

loan by lending institutions such as bank and raising the venture capital in principle is the selling

of the portion of the company.

However, the venture capitalists have same goal as the entrepreneur. So, their partial ownership

does not harm the company. Venture capital allows focusing on business growth because

entrepreneurs need not to get worried about short term payables. In addition, venture capitalists

have sufficient amount of money to invest, they also have tools and networks to help the

continuous growth of the business.

Customer/vendor financing: Customers are often the most overlooked source of financing in

the entrepreneurial ventures. Getting down payments in advance of delivering goods and services

can be the important source of financing. Entrepreneur can also get financing from the vendors to

start a business. But this type of financing may limit the growth of the company and may lock

the entrepreneurs to customers/vendors.

Friends and family:  Family, friends and associates are the possible source of financing the

business based on the personal relationship rather than by the assessment of the business plan.

This type of financing is easy to obtain based and is based n the good relationship. This source is

more flexible in payback method. But this type of financing lacks sophistication to the

entrepreneur and investors require frequent update on the business.

Short term bank loans: Short term bank loans can be pursued as one of the financing source for

the commercial startup. Banks offer different types of financing options and interest rates thus an

entrepreneur can choose the suitable option available. But major hurdles in getting the bank loan

is that it is tedious and time consuming, a lot of documentation is required and the entrepreneur

owes to the bank loan whether the company succeeds or not. Bank financing is preferred when

entrepreneurial productivity is high and the entrepreneur wants to keep full control of the firm.