Business Funding: Types and How It Works

You must have probably read this several times - about how capital is the lifeblood of a business. But have you ever wondered how businesses secure capital and what is your role in the funding environment? Let’s understand.

How Business Funding Works?

Funding, in the context of business, refers to the monetary resources that companies use to operate, expand, and innovate. So, how does this whole funding thing work? Let's understand with an example. Assume you have a business, then:

• Business Valuation:

First things first, you need to figure out how much your business is worth. This involves looking at everything you own, owe, and the money you're making.

• Pitching to Investors:

Once you know your value, it's time to convince others why investing in your business is a great idea. You create presentations and pitch decks and share your business story with potential investors.

• Due Diligence:

Investors then dig deep into your business. They check your finances, market potential, and the team behind the scenes to make sure you're a good investment.

• Negotiating Terms:

If investors are interested, you start negotiating the terms. How much are they willing to invest? What share of the business will they get? It's more like a friendly financial negotiation.

• Closing the Deal:

Once you're all on the same page, you put it in writing. Legal documents are signed, money changes hands, and your business gets the boost it needs.

Types of Business Funding

Let’s understand the different ways of funding a business:

• Bootstrapping:

This is the do-it-yourself approach, where you fund the project with your own funds, sweat equity (working extremely hard), and possibly the sale of ancestors’ assets.

• Angels and VCs:

These are the glamorous investors you see on TV. Angels are usually wealthy individuals who invest in early-stage businesses, while VCs (venture capitalists) manage pools of money from various investors and like to see bigger, more established companies.

• Crowdfunding Platforms:

As mentioned earlier, crowdfunding platforms like Kickstarter, Indiegogo, or GoFundMe allow businesses to raise funds by pitching their ideas to a broader audience.

• Debt Financing:

While equity financing may feature prominently in media portrayals like Shark Tank, debt financing also plays a vital role in business funding. This method involves securing loans from banks and financial institutions, or issuing bonds. Unlike equity financing, where ownership stakes are relinquished, debt financing doesn’t result in a change in ownership.

• Grants and Subsidies:

Grants and subsidies offer financial support to eligible businesses, typically provided by governments, organisations, or institutions. They are tailored to specific criteria and objectives, such as fostering innovation, bolstering particular industries, or advancing research and development.

• Initial Public Offering:

You've got a growing business, and you're ready to take it to the next level. An IPO is the ticket for you. An IPO is when a company decides to sell its shares to the public for the first time. When a company decides to go public, it means they're opening up their ownership to everyone, not just a select few investors. This is a big step because it allows anyone - everyday people, big investors, and institutions - to buy a piece of the company by purchasing shares.

Choosing the right type of funding depends on our goals and where we are in our business journey.

Conclusion

Understanding the funding environment is crucial for any business. The choice of funding method can significantly impact a company's growth trajectory, risk profile, and overall success. Entrepreneurs should carefully consider their financial needs, assess the pros and cons of different funding sources, and develop a strategic approach to securing the necessary resources. As you embark on your journey in the business world, remember that a well-planned and executed funding strategy is a key driver of sustainable business success.