Money & Investing

The Basics Of Funding A Business

by Nosa Ayanru

Accessing a reliable source of capital to fund business ideas and operations is a key success factor for entrepreneurs worldwide. For every business owner, the question of funding innovation and daily operations is persistent. Whether it is referred to as capital, finance, cash injection, or seed money, access to financing is the life wire of any business. As much as relevant idea generation is key to starting a business, it is almost always impossible for the entrepreneur to proceed with that idea absent funding. The funds are typically used to finance the purchase of equipment/ building, accounts receivable, and inventory financing. Having established the importance of capital to any business, the next question on the entrepreneur’s mind is, “where do I find the money?”

Sources of Finance in A Business

The source of finance or capital for a business has varied from different generations. For example, the sources of capital in the 1970s differed from the way capital was attracted in the 2000s. The goal is the same, and both methods are still very effective. Each method can also still be adopted in any era. However, it is important that we differentiate between Traditional(old-school) and Non- Conventional (new-school) Methods.

Traditional “Old School” Methods

1. Personal Savings: This is one of the most traditional sources of capital generation and probably the most limiting because of its finite nature. If an entrepreneur is going to take a risk in starting a business, it is natural that they are the first investor. While not all companies have personal investments injected, many have resorted to this as the first capital base.

2. Patient Capital: This is another common source of capital. Popularly referred to as “Love Money” or “Bank of Mummy and Daddy,” - These funds are usually from sources in the entrepreneur’s close circles. These are usually family members and friends. The reference to the term Patient Capital stems from the fact these sources are generally less strict in terms and conditions of repayment.

3. Banks: Banks are institutions authorized by the government to lend money to businesses enabling them to finance the acquisition of warehouse spaces, production units, equipment, and inventory necessary for operations.

Non Traditional Methods

These methods are regarded as non-traditional because they are less common strategies for accessing capital.

1. Venture Capital: This form of capital generation is common in the technology space. It typically involves the injection of capital into a business that displays high growth potential where the capital injector (venture capitalist) takes an equity or management position in the business being financed.

2. Crowdfunding: This is another non-traditional means of generating capital. As the name implies, it involves a process that allows an entrepreneur to generate capital to fund a new business by seeking small amounts from a large number of people. Crowdfunding is regarded as one of the most accessible forms of generating money. Investors and business owners usually meet through social media or crowdfunding websites like Kick Starter, Patreon, or Indiegogo. Business owners pitch a product or service in exchange for amounts as little as ten dollars from a large number of people/potential investors. Crowdfunding also allows business owners to validate the viability of the product or service they are launching; these platforms allow for feedback on the quality of their product/service offering.

3. Business Angels: These are usually high net worth and wealthy individuals with business experience looking to invest in start-ups. Angels (as they are referred to) are people who come on board with loads of business experience, the management or technical skill, and industry contacts.