What is funding ? definition, meaning and types.

Most of the entrepreneurs looking to start a business get stuck in getting the financial resources to finance a need , program or a project. In general this term is used when a firm fills the need for cash from it’s own internal reserves, and the term financing is used when the need is filled from external or borrowed money. Now the point that arises over here is that what would be the best source of funding to seek for a startup. With the too many options there present in the current market, choosing the ideal source of financing can be an overwhelming process and every process will have few pros and cons. However, weighing the pros and cons of each source will help you choose the ideal one to go ahead with. Here we have listed some common funding sources, with a brief explanation of each that will help simplify things for you.

Personal Savings:
It’s no secret that the most popular source of startup financing is the personal savings of the business’s founder. But while almost everyone will tell you that you must use your personal savings when starting a business, very few people will advise you on the more important question: What percentage of your personal savings should you use? Should you pour all your savings into your budding business? Should you use 50 percent less? Well we will have an answer to that in our upcoming blogs as this is the most appealing source of financing, because you use your own money to jumpstart your business and don’t owe anyone else in the process.

Pros:

• You will know exactly how much money is available to run your business and you will not have to spend time trying to secure other forms of funding from investors or banks.
• Self-financing your business gives you much more control than other finance options. It also means that you don’t need to pay back or rely on outside investors or lenders, who could decide to withdraw their support at any time.

Cons:

• Using your own money to finance your business may put a strain on your family and personal life. You may not have enough money left over to cover your living costs. You should try to leave a contingency fund, in case you need extra money to see you through a difficult period.
• As going into a business there is always a possibility that your business can endup as a fail. If that happens you could lose your home and other personal possessions.

Family and Friends:

It is one of the most common forms of startup funding out there. Banks and independent investors might not want to risk money on you. But those who are close to you and believe in you might be willing to take a chance on your fledgling business. This type of funding has more to do with the relationship itself, rather than the assessment of a feasible business plan. The aim of this type of funding is to help kick off a business to a point where it can seek and get other types of funding.

Pros:

• Raising money from your personal network can also be a step toward securing money from future investors, because it demonstrates that you are grounded in a network of family and acquaintances who have already bought into the business plan.

Cons:

• Family and friends provide the funding without assessing the viability of a business plan itself.
• Brings nothing to the table except for the initial capital investment.

Crowdfunding:

Crowdfunding is essentially the opposite of the mainstream approach to business finance. Traditionally, if you want to raise capital to start a business or launch a new product, you would need to pack up your business plan, market research, and prototypes, and then shop your idea around to a limited pool or wealthy individuals or institutions. These funding sources included banks, angel investors, and venture capital firms, really limiting your options to a few key players. You can think of this fundraising approach as a funnel, with you and your pitch at the wide end and your audience of investors at the closed end. Fail to point that funnel at the right investor or firm at the right time, and that’s your time and money lost.

Crowdfunding platforms, on the other hand, turns that funnel on-end. By giving you, the entrepreneur, a single platform to build, showcase, and share your pitch resources, this approach dramatically streamlines the traditional model. Traditionally, you’d spend months sifting through your personal network, vetting potential investors, and spending your own time and money to get in front of them. With crowdfunding, it’s much easier for you to get your opportunity in front of more interested parties and give them more ways to help grow your business, from investing thousands in exchange for equity to contributing $20 in exchange for a first-run product or other reward.

There are three major types of Crowdfunding present in the business market.

i. Donation based Crowdfunding

Broadly speaking, you can think of any crowdfunding campaign in which there is no financial return to the investors or contributors as donation-based crowdfunding. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, nonprofits, and medical bills.

ii. Reward based Crowdfunding

Rewards-based crowdfunding involves individuals contributing to your business in exchange for a “reward,” typically a form of the product or service your company offers. Even though this method offers backers a reward, it’s still generally considered a subset of donation-based crowdfunding since there is no financial or equity return. This approach is a popular option here on Fundable, as well other popular crowdfunding platforms like Kickstarter and Indiegogo, because it lets business-owners incentivize their contributor without incurring much extra expense or selling ownership stake

iii. Equity-Based Crowdfunding

Unlike the donation-based and rewards-based methods, equity-based crowdfunding allows contributors to become part-owners of your company by trading capital for equity shares. As equity owners, your contributors receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution.

Pros:

• By using a crowdfunding platform like Fundable, you have access to thousands of accredited investors who can see, interact with, and share your fundraising campaign.
• Presenting your concept or business to the masses affords an excellent opportunity to validate and refine your offering. As potential investors begin to express interest and ask questions, you’ll quickly see if there’s something missing that would make them more likely to buy in.
• One of the best things about online crowdfunding is its ability to centralize and streamline your fundraising efforts. By building a single, comprehensive profile to which you can funnel all your prospects and potential investors, you eliminate the need to pursue each of them individually. So instead of duplicating efforts by printing documents, compiling binders, and manually updating each one when there’s an update, you can present everything online in a much more accessible format, leaving you with more time to run your business instead of fundraising.

Cons:

• Requires time and dedication before results may be realized.

Angel Investors:

Angel investors are a class of well-to-do investors, usually experienced industry folk who take equity stakes in startups. They take very early-stage businesses under their wing. These are wealthy individuals who will provide funding in exchange for a share of equity in the business. Some investors work in groups and screen deals together before providing funds, while most work on their own.

Pros:

• Provided money isn’t a loan.
• Angel investors can offer valuable advice and guidance since they have experience in the industry you’re in.
• Flexible business terms.

Cons:

• You may be forced to give up control of your business to some extent.

Venture Capital:

Venture capital is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding. Venture capital funds are private equity investment vehicles that seek to invest in firms that have high-risk/high-return profiles, based on a company’s size, assets and stage of product development. These are investors who put in a considerable amount of money in exchange for equity in the business, and get returns when the business goes public or is acquired by another company. Venture capitalists are all about the money, and only invest in businesses that have the potential of providing good returns on their investment

Pros:

• Venture capitalists not only provide funding, but can offer expertise and mentorship to help develop the business.
• Venture capital funding gives the business immediate credibility and opens other doors to a wide network of important individuals, such as future investors and partners.

Cons:

• You may be forced to give up a large chunk of your business due to the significant amount of funding provided.

Bank Loans:

During periods when investors are concerned about rising interest rates, demand for bank-loan funds tends to spike. As their name makes clear, these funds invest in bank loans. Banks typically make such loans to companies as part of a leveraged buyout deal, and then they sell these loans to institutional investors and mutual funds. The yields on the loans rise and fall along with interest rates, which helps cushion the effect of interest-rate changes on the funds’ NAVs. Bank loans are a popular source of funding for many startups. Before applying for a bank loan, it’s important to ensure that you are well educated about the various options available, and the interest rates that come with each option.

Pros:

• Suitable for medium- and long-term borrowing needs.
• The loan amount, length of term, repayment schedules and type of interest rate can be tailored to suit the business, including both cashflow and income generation.
• You don’t have to give up control of your business.

Cons:

• Not as flexible as short-term solutions. For example, if the loan is repaid early, additional fees may be applicable
• Requires a lot of documentation, which can be tiring and time-consuming.
• You need educate yourself about the best option available for you; otherwise, you might end up choosing a deal that will eventually hurt your business.
• The money has to be paid back whether the business succeeds or not, failing which may lead to loss of your assets, if any.

Small Business Administration (SBA) Loans:

This involves funding from a government administration devoted to assisting small businesses to succeed. SBA’s help small businesses get capital and ensures that a certain percentage of contracts are awarded to the small businesses.

Pros:

• Helps improve the relationship between lenders and borrowers.
• Increased chances of obtaining a bank loan if the SBA loan is properly managed.

Cons:

• Strict qualification guidelines.

These were the few listed funding sources that you can move on with if you are planning to startup a business. To help you choose the ideal funding source for your business, make sure to review your financial needs, qualifications, and the urgency of financing. Some funding sources need certain requirements to be completed before you qualify. It’s thus important to ensure you are well educated on the various options available to you, and their respective advantages and disadvantages. And if you are planning to get yourself started with Crowdfunding than stay tuned as we have something for you.