How to finance your business

We have analyzed our personal finances and calculated the start-up costs of the business. We already know the capital we will need. It is time to analyze if you want, or more importantly, if you need to obtain external financing or if you will try to do it by your own means.

This is an important decision because it determines the organization of your business and its management. Whether you need a lot or little money, you must think about what method to use to raise it and be able to finance your venture.

It is different for each company, there is no magic solution, you must choose. It will depend on your personal finances and how much you are willing to risk to achieve your vision.

Tips to get an investment

Find an investor: If you do not know any you can do a networking exercise, start with your circle of friends, people you know, join groups and societies, attend fairs and congresses, rely on social networks. Many times they are wealthy people looking for an investment opportunity.

Research the investor: get references, and see what projects they have invested in, if they have experience in your type of business.

Convince the investor: their main motivation is to make their money grow. They have certain criteria to invest and look for businesses that fit that profile. You will convince them with numbers. Hence the importance of having ready and updated all the documentation they may ask for, your business plan and your financial projections. They will analyze your market and your products/services in detail. They will also want to know if other partners are involved and their experience. Finally, make your presentation interesting and persuasive, focusing on the benefits for them.

Legalize the investment: if they are interested, the next step is to draw up the contract with the terms and conditions of the financing. You must have legal advice and review well before signing.

Make use of the investment: Once the terms are agreed upon, the investment becomes effective and the investor's participation begins. In many cases the funds are delivered little by little as the business plan is fulfilled or the company reaches certain goals.

Types of financing

There are many opportunities to finance your business as long as you have a product/service that really benefits the market. If you have clear objectives and a good business plan, all that is left for you to do is to thoroughly investigate the options available. And this is something you can do not only at the beginning of your business but at different stages to accelerate your growth. You just have to find the best option for you.

There are even alternative finances you can investigate such as startups that fund other startstub, microloans and the blockchain-based decentralized finance market (DeFi). Here are the most popular types of financing.

Self-funding: This is the most available method as you use your own money. It can be your assets, savings or a retirement account, equally you can ask for money from your close circle of friends and family.

It is also known as bootstrapping where you work from home, investing your resources and making your own equipment and furniture available to the business. You start with very little money and reinvest through internal financing, according to your profits.

It has a slow progression but if well managed the growth will be constant and consistent. You will go at your own pace and make all the decisions, without external pressure and keeping control of expenses.

In short, it means total control of your business but it also has its downside. The risk is all yours, you can lose everything, so you have to set a limit with the expenses. You need to get customers right away because you depend on your own profits to keep the business going.

If you decide on this option it is best to seek financial advice. It is a risky and difficult path, but very satisfying.

Financial leverage: This is a combination of self-financing and using credit, which means taking on debt. For new businesses it is more difficult to access a loan, especially a bank loan, if you do not have a successful or credit history. You have to prepare very well to apply and have all the documentation in order. You should also check the interest rates, terms, commissions and guarantees requested. The larger your fund, the more you will be able to invest and the greater the benefits.

Debt financing: This is a type of external financing, usually a loan that you have to pay with interest at a certain time and under previously agreed terms and conditions. It can be from a bank or a private lender.

Banks are generally reluctant to finance inexperienced entrepreneurs or those who cannot demonstrate their ability to repay the money. It is easier if your business already has more than 2 years of good management. But it is not an option to discard immediately as there are banks that are expanding their services to favor this type of business.

Equity financing: It is another type of external financing but you receive money from investors. It can be an equity partner, an investment fund or an angel investor.

Equity partners and investment funds are willing to invest capital in exchange for a share of your business and play a decisive position. By investing equity they become partners and will share in the profits and losses. If you consider that you will need several capital injections in a short period of time, this may be your option.

Most investment funds are guided by very specific objectives, a specific sector, location or stage of the business.

Including other people in your business can be stressful, especially if you are inexperienced. It can change the structure you have in mind by giving up some of the control, management and decisions.

Angel investors are usually entrepreneurs, who want to bet on new ventures. In addition to investing their money, they bring their expertise and guide the businesses in their early stages. They do this in exchange for a percentage of the profits, but they are also involved in the processes.

When investing their capital, they look for businesses with high growth potential and a good return on investment. They offer a longer term than a tradi