Different Types of Funding

I constantly meet young business owners who are in need of financial assistance to back up the initial costs associated in starting a company. With so many funding choices out there, increasing ones resources can be a complicated and somewhat frustrating process. The kind of funding you get into will depend on the particular business needs, age and the particular objectives you desire to accomplish. Getting to know the most typical funding choices gives you that important foundation you need to develop your very own personalized fundraising events strategy. So here is a quick summary of the most typical funding kinds for startup businesses.
1. Bootstrap
Sometimes the best funding choice is not to look for funding options at all but instead cut sides wherever you can and develop a strategy to help your company out of your individual savings. Besides costing you less, bootstrapping also helps you focus on the company’s performance and build funding without outside disturbance.
2. Equity Funding
Equity funding is a form of funding wherein you get money by allowing people to have shares of your stocks. Equity financial commitment can be very complex and there are different ways on how this type of funding is being done. Here are the different methods of equity funding.
a. Seeds Funding – is the small amount of money needed to boost the starting capital of the business which is what the name “seed” implies. Seeds funding is best used to cover for business expenses before the business itself starts to earn money on its own. Since seeds funding often comes in small amounts, this type of funding can be supported by friends and family members.
b. First Stage Funding – this funding usually falls in the range of $2M up to $5M with choices of 20% up to 40% stock shares in the company. This funding is usually grabbed at the starting phase of the business as well much like the seeds funding except that the risk is greater because of the bigger amount and stocks sharing.
c. Second Stage Funding – after the business has achieved certain objectives and is now on the brink of gaining stability then further financial assistance in the form of equity can be considered as second stage funding. The money earned from the funding can be used to increase networking opportunities and other marketing schemes.
d. Late Stage Funding – If the business is already well on its own but the business owner is not settling with it and still seeks for further expansion then this is where late stage funding can be useful. The money can be used to establish allies in other companies and establish a harmonious relationship of stocks sharing.
3. Financial Debt Funding
Debt funding is arguably the most viable funding choice. This is when you are going to borrow money from a finance or banking firm that you are going to repay sometime soon along with an interest rate. This is considered as a viable choice because both parties (lender and debtor) are going to have an interest at the transaction unlike other forms of funding wherein the business owner alone is investing interest on the funding while the other party is just looking forward to benefit from the financial assistance. The amount that you can borrow out of debt funding will depend on several factors. First off, the lender is going to consider the financial capability of the company and then they would take a peek at your banking accounts for them to be able to assess not just your business’ worth but your own personal net worth as well. The lender will also take a look at your credit report with the help of credit bureaus so that they will also have an idea of your credit reputation and financial tendencies. With the following in check, the banking or finance firm will come up with an assessment on how much they are going to lend you. The amount for this type of funding is actually limitless in accordance to you and your business’ finances. Of course, the lender is going to charge an interest out of the money borrowed but they will also try to be fair by not letting you pay the debt in a lump sum but divide it on to installments so that it would be more realistic for the debtor to slowly pay the debt off without hurting the business’ finances.
Taking advantage of the aforementioned types of funding can help you take your company to the next stage. However, do not seek for funding if your business is still very raw and your business plan is not established. You would be only creating problems for yourself if you seek for financial assistance yet your company is unable to pay back due to lack of profit or financial stability.