Business Funding Options & Building Capital AbundanceApril 6, 2021
When looking to fund your business, you are ultimately looking to find out if your wants are short-term or long-term. You need to be prepared to pay back the loan in a timely manner, whether short-term or long-term. Investment money will ideally turn into assets, but it is important to understand if you need cold-hard cash right now or in monthly periods. As a business owner, first consider the following question:
“Are you single-handedly prepared to take the risk if your firm fails to succeed or you want a partner to share the burden with you?”
(Angel Investor Report)
There are two types of business funding options that are used for various types of businesses depending on where they are in the life-cycle. The two types of business funding options are: equity business funding and debt-based funding.
Equity Business Funding Options
Some of the most common equity business funding options, in which investors gain equity in your company in exchange for a monetary investment, include:
- Family and Friends
- Your personal savings
- Private Investors
These private investors include important angel investors and VCs. These will be the most important investors when you are ready to take your company public.
Debt-Based Funding Options
The second business funding option is debt-based funding. This funding is the opposite of equity funding, and involves selling debt instruments instead of shares. Some of these debt instruments include bonds and notes issued by the company. This debt should be paid in a timely manner. It is risky for investors because they might not be paid if your organization or company does not make the required profits to cover. Some of the most common debt-based funding options include:
- Bank Loans
- Vendor Financing
- Family and Friends
- Credit Cards
As a business owner, you should always consider what the invested capital needs to cover in order to eventually make a profit and securely go public.
“Companies raised more capital in 2020 (in the midst of a pandemic) than any time in human history”
– The Economist
How to create capital abundance for your business?
There are many ways to fund capital for your business. There are three areas, discussed by CEO Peter Diamandis, that are primary areas to focus on when leveraging the capital abundance spectrum.
The first area on the lower part of the capital abundance spectrum is an area known as crowdfunding. Crowdfunding is essentially a network of your peers in which you can ask for funding. Modern day crowdfunding has created a digital network for investors and businesses to more easily pitch business ideas. This digital space makes investing in a business and idea-sharing more timely and professional to expedite the funding process.
Even during a global pandemic, crowdfunding has continued to grow to even $225 million in the US. Crowdfunding allows anyone with an idea and motive to have access to the capital they need to launch it. According to Peter Diamandis, “Experts project crowdfunding to reach $30 billion by 2025.” Crowdfunding has hit a growth spurt through the pandemic and will continue to expand post-pandemic with emerging business ideas.
Acquire Venture Funding
Venture funding is the more additional approach to capital investing in which VC’s outsource the funding for equity in your growing company. The types and size of these investments vary depending on where your company is in the life cycle. For example, if your company is in the beginning stages, seed money investments may be smaller than investments during the growth stage of the company after launch.
The pandemic has sparked a world that is looking to cultivate new ideas in the business sector, and venture capitalists are all over it. Diamandis noted that in 2020, venture capital investments in the US alone reached a new record $156 billion. The industry and market leaders in the business sector have been rapidly changing as a result of the pandemic. Many venture capitalists are looking further into biotech and health companies to grow post-pandemic.
Raise Funding through SPACs
Special Purpose Acquisition Companies, also known as SPACs, are companies who raise money by issuing public shares to eventually merge with an operating company in a two-year time frame. SPACs are on the lookout for private companies to take public with adequate funding for an IPO. When considering this merge, it is important to ask yourself if you, your board members, and your finances are ready to be public. It is also important to have a strong growth plan in place to continue growth after going public and to not loose potential investors.
There are many benefits to going public with an SPAC. Companies may prefer to go public with an SPAC because of the available capital and the expedited process of going public with an established IPO. SPACs also look for a variety of private companies and do not discriminate based on market trends. Another benefit of merging with an SPAC is that the “sponsor” of your company typically chooses to keep a large equity portion after going public, similar to an angel investor. If your private company is in the later growth stages, it would be highly beneficial to merge with an SPAC.
Madeline Pernecky is a Dallas based writer for Global Leaders Organization. She is also an undergraduate student at Southern Methodist University, working towards a bachelor's degree in Business Marketing as well as minors in Advertising and Spanish.