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? 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 start-up.
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, analyse 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 article for Canada’s Profit magazine, sources of start-up capital used by the successful firms surveyed were:
- Own capital (also known as “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 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 start-up.
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? The UK government’s own website offers useful advice, links, detailed explanations and more for most available sources of funding in the UK. With the current and next government committed to helping small business owners (both main parties have already pledged this in their manifestos), their website is designed to be as user-friendly and as informative as possible. The information is up to date and relevant, saving you both 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 start-ups, 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. Usually, equity should be the last type of funding you seek for your start-up, but aspiring entrepreneurs typically skip all the above mentioned steps and dive right into it.
Think about funding like online dating. Before finding someone to potentially spend the rest of your life with, 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. Our advice: don’t rush into a relationship like that. Play it slow and you’ll both be happier.
Follow these steps and you’ll find the right funding source for your start-up. 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.