While everyone loves the concept of “free money”, it is important for entrepreneurs to take the time to understand the different sources of funding and their key factors. Be efficient in identifying and validating the appropriate funding opportunities available for you. While your thoughts might get clustered with all that money on your mind, ask yourself, ‘Which funding program is right for me? Which funding will get me the highest ROI on my application time?’
Before you start applying for funding, there are a couple of things you need to understand regarding criteria for funding applications and what you need to prepare before applying for funding. Here are a couple of suggested steps you should include in your funding process.
Ask yourself, Which problem am I solving? Am I proposing a commercially viable solution? Meaning, will people want to invest in me? If the answer to the first question is no, then you should stop what you’re doing and reassess the purpose and goal(s) of your startup.
Now that you are onto something, do you have the right team to accomplish it with? Who is with you on this? Having an idea isn’t enough, you need a great team to support and help you execute it. Once you have the right team in place, make sure you take the time to build a solid business plan, draft detailed financial projections, analyze the market, and understand your competitors.
How much cash do you have in hand? Do you have any personal savings, or any friends and family you can ask to financially help you start the business? In this Profit magazine article, sources of startup capital used by the successful firms surveyed were:
- own capital/bootstrapping (98%)
- friends and family (22%)
Bootstrapping forces you as an entrepreneur to focus on your MVP, stay lean, and allows you to be independent.
If you cannot bootstrap, or it is simply not enough, then it’s time to look for external funding opportunities, such as government funding. Before we get ahead of ourselves, let’s first understand the different types of government funding.
Government Grants are non-repayable contributions provided by the public or private sector to support targeted objectives carried out in specific industries for strategic activities. A grant must be applied for and approved before the expense is incurred. If you are strapped for cash and need a boost to cover fundable activities, a grant is definitely the right choice for you.
Tax Credits are government refunds and tax reductions/credits to encourage certain investments. Tax credits are claimed and provided at the end of a company’s fiscal year, after the investment period is over. The tax credit comes as a sort of forgotten money to the entrepreneur once his/her claim has been filed, processed, and approved.
Loans are repayable contributions and can be provided by both the private sector and public sector. Loan guarantees are also available to either guarantee the loan or a portion of it, in the event that things do not work out well for that startup.
Always start by working your way from grants and tax credits to loans. These are the cheapest and easiest funding sources to access. There are many available funding opportunities out there, but you need to find the right one for you.
Also, remember that time is money. Be wise in spending your time on this research effort and maximize online tools and systems. Do not get trapped in applying for everything.
Don’t know where to start looking? Go on Fundica! When Fundica first launched, its founders faced the common startup challenge of not knowing where to look for funding. To help other entrepreneurs avoid that initial struggle, Fundica has put together a free, comprehensive, funding identification tool for entrepreneurs with a for-profit business. The tool is easy to use and will match you with relevant and up-to-date funding opportunities (grants, loans, loans guarantees, tax credit and equity), saving you time and money.
If you still need cash and you have exhausted the available government funding options, you may want to consider a bank loan. Private sector loans, like bank loans, are challenging for startups, as the company cannot prove cash flow or provide assets that a bank or government can lend against. Ultimately, the entrepreneur may be able to lend against personal or other assets to provide funding for the business.
The last source of funding to explore is equity. We constantly hear and read about the latest big round of investment a startup just closed with a big VC or Angel. It’s so appealing, it makes you yearn for your own next big round. Usually, equity should be the last type of funding you seek for your startup, but aspiring entrepreneurs typically skip all the above mentioned steps and dive right into it.
Think about funding as if it were a marriage. Before tying the knot and committing, you typically want to explore all the relevant opportunities that best match your profile. Equity investment, from the right investors, could definitely be the best thing to happen to you and speed track your company’s growth, however, the disadvantage is that you now have financial stakeholders seeking very high returns. Don’t rush into a relationship like that before you find your best ever after.
Follow these steps and you’ll find the right funding source for your startup. With a marketable idea and the right team to back you up on it, your best approach for finding funding is: identify it, understand it and close it.