Are you looking for sources of finance for business in 2022? This post was written to give you a few ideas.
A source of finance refers to where a business gets money to fund its activities. Businesses can get finance from either internal or external sources.
Putting all your eggs in one basket is never a good strategy. This is especially true when it comes to financing your new business. Diversifying your sources of finance allows your start-up to weather potential downturns better. It also improves your chances of getting the appropriate funding to meet your specific needs.
Sources of Finance For Business
We have put together seven sources of finance for a business that you can explore in 2022. Check them out below:
Owner’s Capital
Owner’s capital refers to the money that the owner of a business invests in their business. This often comes from their personal savings. Personal savings is money that an entrepreneur saves over a period. This source of finance comes at no cost to the business as there are no interest charges.
Retained Profit
Entrepreneurs can also raise capital from retained profit. Every business should leave some part of its profit for reinvestment into its operations. This source of finance also doesn’t incur any interest charges or payment of dividends. Because of this, it is one of the most desirable sources of finance for small businesses.
Sale of Assets
In some cases, businesses can raise funds from the sale of certain assets. Usually, such assets are no longer in use by the business. Instead of having such assets consuming space and eating up maintenance funds, you can sell them off. Examples of business assets that you can sell to raise business funds include machinery, equipment, and excess stock.
So far, we have discussed internal sources of finance. These are funds that come from within the business. The remaining sources of finance that we will discuss below are from external sources.
Family and Friends
Entrepreneurs can raise funds from their family members or friends in different ways. The easiest is to get cash gifts from these individuals to invest in their business. Another means is to seek loans from friends and family members. Such loans hardly come with interest so it is easy for the business to pay back. Finally, you can invite these individuals to invest in the business as partners. In this case, they bring their funds but don’t partake in the running of the business. The business gives them returns after making a profit for an agreed period.
Bank Loan
A bank loan is a money borrowed from a bank by an individual or business. A bank loan is paid off with interest over an agreed period of time, often over several years.
This method is the most commonly used source of finance for small and medium-sized businesses.
Venture capitalists
Venture capitalists take an equity position in the company to help it carry out a promising but higher-risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business.
Government Grants
Government grants are a fixed amount of money that the government awards to businesses. The recipient businesses must meet certain criteria such as providing jobs in areas of high unemployment before selection. One major advantage of government grants is that businesses don’t have to pay back the money.
However, getting grants can be tough. There is always stiff competition and the criteria for awards are often stringent. Generally, most grants require you to match the funds you are being given and this amount varies greatly.
Generally, you will need to provide:
- Detailed project description.
- Explanation of the benefits of your project.
- A detailed work plan with full costs.
- Details of relevant experience and background on key managers.
- Completed application forms when appropriate.
There are also business incubators (or “accelerators”), they generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization, and hosting and sharing services.
Commonly, incubators will invite future businesses and other fledgling companies to share their premises, as well as their administrative, logistical, and technical resources. For example, an incubator might share the use of its laboratories so that a new business can develop and test its products more cheaply before beginning production.
Conclusion
That’s it for our different sources of finance for businesses in 2022. Which ones appeal to you the most? Let us know in the comments section. Also, don’t forget to visit SME360 for other articles about business financing.