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12 Ways to Fund Your Business
One of the biggest challenge most companies face, is raising business funds that can help then run their day to day operations. According to data from the Bureau of Labor Statistics globally about 20% of businesses fail in their first year, and about 50% of small businesses fail in their fifth year.
There could be many reasons tied to this, but one key reason is lack of funds or rather the fact that entrepreneurs struggle with raising business funds. The biggest question on every entrepreneur’s mind is where to find the funds to run your operations smoothly.
We have since compiled a list of 12 sources of funds that can help you run your business or boost the finances to keep your business running:
- Banks:
Though viewed as a traditional way, bank loans are among the greatest and reliable sources of finance for any business. This is because banks offer you flexible loan payment options, which makes the loan repayment journey easier especially for young entrepreneurs. Unlike other ways of raising business funds, banks will give you a contract that best suits your need.
Whether you are looking for short, mid or long-term financing for your new startup, banks are the best place to get it as long make sure you generate enough revenue to repay the bank loan and its interest.
In fact, today, most banks even have tailor made products for SMEs. For example, banks like Jamii Bora has a product called Biashara Boost Product, KCB also KCB SME Banking, a platform that helps unlock the potential of the entrepreneurs in the rural and urban areas to scale up and grow.
- Asset Financing companies
The other option of raising business funds is through Asset Finance Companies. Asset Finance Companies are the financial institutions engaged in the principal business of financing physical assets that correspond to productive/economic activity such as machinery, automobile, tractors, material handling equipment, power generators.
This type of financing is used when the company is seeking the short-term borrowing such as working capital and often the cash is borrowed against the bills receivables.
- Competitions and Grants
Competition and Grants is another way to raise funds especially for the early stage companies. Most notable competitions in Kenya though are the corporate competitions which include famous competitions like the Lion’s Den, Spark Fund, SeedStars, Tech Crunch start-up battle field, Total Start-upper, DEMO Africa etc.
On the other hand, Grants are non-repayable funds or products disbursed or given by one party often a government department, corporation, foundation or trust, philanthropists to a recipient, often a nonprofit entity, educational institution, business or an individual. To receive a grant, some form of “Grant Writing” often referred to as either a proposal or an application is required.
- Sector specific Funding supporters
These are organizations that opt to fund companies that are within a specific sector. For example, in Nairobi Garage we are home to sector specific funding supporters’ companies including Producer Direct that often tends to support and help farmers in rural areas or innovations in Agriculture sector in the rural areas. Trine, who also sit in Nairobi Garage, help support companies that invest in solar energy in growing markets with a mission of give people a triple return on investment
- Impact Investors
Impact investing refers to investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.
Impact investments provide capital to address social and environmental issues. They can be made in either emerging or developed markets, and depending on the goals of the investors, can target a range of returns from below-market to above-market rates.
Impact investors actively seek to place capital in businesses, nonprofits, and funds in industries such as renewable energy, basic services including housing, healthcare, and education, microfinance, and sustainable agriculture. Impact investing occurs across asset classes; for example, private equity venture capital, debt, and fixed income.
A great example of such a company is our member Blue Orchard, a pioneering impact investor, that fosters inclusive growth while providing attractive returns for investors. The company offers premium investment solutions to qualified investors and provides debt and equity financing to institutions in emerging and frontier markets.
To date, Blue Orchard has invested USD 5 billion in 350 institutions across 80 countries, providing access to financial and related services to over 37 million low-income individuals.
- Incubators and accelerators
Mostly preferred for companies looking to start off on the right foot. Accelerators and incubators offer entrepreneurs good opportunities early on. Founders get help to quickly grow their business and they often better their chances of attracting a top venture capital (VC) firm to invest in their startup at a later point.
Accelerator programs usually have a set timeframe in which individual companies spend anywhere from a few weeks to a few months working with a group of mentors to build out their business and avoid problems along the way. Globally some notable Accelerators include Y Combinator, Techstars, and the Brandery. Locally some of the great Accelerators included Growth Africa, Villgro, Village Capital etc.
- Philanthropists
Another great source of funds for businesses is through foundation or Philanthropists Grants. Foundation grants are mostly given to companies that are starting off but at their best they can be innovative, flexible, forward-looking, and understanding.
The good thing about these grants is that they are less restricted than other grant. However, don’t look on them as a lifetime solution. Foundations will give you money for a few years, but their grants tend to shrink over time rather than grow, and there are a limited number of foundations interested in your work no matter what your work is.
The different foundations release funds and call on different companies to apply for these funds probably on an annual basis. Here are some of the great philanthropist’s foundation in Africa – Jack Ma foundation focuses majorly on Netpreneurs, Tony Elemelu foundation, Bill Gates Foundations.
- Equity Investors
Equity investors are people who invest money into a company in exchange for a share of ownership in the company. Typically, equity investors have no guarantee of a return on their investment and may lose their money should the company go out of business. If the company is liquidated, the equity investor may be entitled to a share of the assets.
However, before you begin seeking investors, make sure that you understand the ins and outs of this type of investment.
- Venture Capitalists and Angel Investors:
Angel investors and venture capitalists are always good options, but not every business is able to meet their stringent requirements. Angel investors aim for helping companies in the very early stages of growth and expect to get a 20 to 25 percent return on their initial investment.
While angels are willing to help new businesses grow, venture capitalists only work with businesses that can prove they have steady revenues pouring in. They typically put a five-year time frame on recouping their investment and don’t have time to coach or spur growth themselves.
If your company is growing quickly and is serving an innovative solution while not being profitable yet, then venture capitalist might be a good financing solution as they will provide you with capital and contacts.
- Smart Lease
Entrepreneurs can also lease their fixed assets to get some cash for their companies. Never put a lot of money down that you must spend the same amount of cash, as you would have done if you have bought the asset with a down payment. As compared to bank loans, this method of raising business funds, one might be required to pay a little extra for leasing, but this higher cost is more than justified because you do not have to worry about the down payment.
- Bootstrapping
Another interesting way of raising business funds is through bootstrapping. Though really a way for start-up companies, the biggest downside of external funding is that the investors play a major role in decision-making and you must share a big chunk of what you earn with them, which kills the main purpose you are starting your own business. If you keep your finances in order from day one, you can easily fund your own startup and will not have to depend on external sources for help.
- Crowd Funding
Crowdfunding is actually a very popular form of financing in today’s market. And while it’s difficult for most businesses to gain traction via crowdfunding especially if your products and services aren’t sexy and millennial-friendly—the potential benefits are huge.
Websites like Kickstarter let you start a campaign, set a financing goal, and offer small rewards to people who give. The best part about crowdfunding? The money is all yours. You don’t have to give away equity or even repay the money. There’s a whole science to raising money via crowdfunding sites, though.
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