Entrepreneurs have different ways of financing depending on the characteristics of their projects. Each format has some advantages and disadvantages that must be clear when going out to look for money. Among other things, you have to look at the trajectory, the profile and the numbers of partners, the sector or the state of the market. In this post, we show you seven types of financing.
Seven types of financing:
- Bank financing
- Public subsidy
- Business angels
- Venture capital
- Participative loan
- Bank financing
- Bank financing: Traditional financing is one of the most difficult doors to open for the entrepreneur. It is only available for very solvent, worked and realistic projects, in which the objective of the money that is requested and the way of returning it is explained with great precision. The main advantage is that it is fast and solid. It is the most indicated for traditional businesses, with guarantees to respond and own resources that sustain the project.
- Public subsidy: Very limited both in amount and in the use that can be given. They should be considered more as an incentive than as financing in itself. Their main advantage is that they do not have a refund obligation. However, it has a direct impact on the working capital of the company. Also, they tend to be slow.
- FFF: Family, friends and people close to the entrepreneur. It is about the investors closest to the entrepreneur, which is a significant risk. Premium the personal relationship, almost completely lost, between investors and the entrepreneur. The positive thing is that it does not require great justifications, and it has a lot of flexibility as regards the form of return. However, they tend to be small, and limited to startup. It can be useful for small projects.
- Business angels: They are private investors who contribute their capital, their experience and their contacts in the market. They put money, but they have a more mentor profile. The know-how they bring is as important as the capital. The problem is that they may intervene too much in the management of the business. They can be useful for niche projects in the same sector and geographical area as the Business Angel.
- Venture capital: These are entities that have as their objective the taking of shares in the capital of companies not listed on the main stock market. They are the second source of professional financing, after the banks. They are regulated. The main advantage is that they are solvent investors, with all the legal guarantees and with strong resources. But they are not very flexible. It is valid for companies that are already in operation and with strong growth potential.
- Participative loan: In this modality, the lender makes a bet for the project and unites his luck with the entrepreneur. It is a financial instrument characterized by the participation of the financial entity in the benefits of the finance company, in addition to the collection of a fixed interest. That is, if the entrepreneur is doing well, the lender will earn more. The advantage is that it supposes a financing that can be returned in comfortable installments in the difficult beginnings. The problem is that part of the benefits if they come, will go to the lender. It is useful for companies with a relatively high risk.
- Crowdfunding: It is a democratization of the financing of business projects. The entrepreneur requests funding from the community, anyone who may be interested in their project, usually through the Internet. The contributions are rewarded with some type of consideration related to the project (material delivery, explicit recognition of the financer, etc.). It multiplies exponentially the FFF financing since it extends to the Internet. The problem is that it is a discontinuous financing, almost impossible to plan.