It is not enough just to make your own financial contribution when you open a business - you often need a cash injection when you want to purchase new equipment or scale up your business. What to do in such a situation? Learn about the most popular external sources of business funding and solve your capital problems.
Sources of corporate finance - what is available to us?
Every business goes through different stages and cycles, in which case external sources of finance may be necessary to help us achieve our goals. The method of raising finance depends on various factors: the size of the company, the current level of business development, the industry and even growth prospects. When thinking about sources of finance, the solution that immediately springs to mind is net profit - that is, the sum remaining in the company's account after all liabilities have been paid. However, we do not always have enough capital and this is when external sources of finance come in handy.
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External financing: grants and subsidies
A grant is a non-refundable cash injection that is a form of assistance to help a business achieve a specific goal. The grant can be government or EU funding and you will receive it for:
- starting a business,
- further business development,
- bringing innovation to the market.
This type of source of funding is particularly important for small and medium-sized companies, as they are the ones most often struggling to raise the necessary capital. It is worth bearing in mind, however, that the funds received must be earmarked for specific expenditure - usually related to the creation of new products or services.
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External financing: bank loan
Entrepreneurs who have succeeded in growing their business can be supported by a bank loan. This solution will unfortunately not be available if you are just starting out in business, as you will not be able to present a reliable credit history. Banks generally offer two types of loan: a loan secured by a mortgage and an unsecured loan. If we opt for the first proposal, we will be able to obtain a significantly larger amount. However, the loan involves additional costs, such as the bank's margin, commissions and monthly fees.
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External financing for companies: leasing
Popular with business owners, leasing works well as a way of acquiring the equipment they need. It is based on an agreement between the owner of the asset and the entrepreneur on the terms of use of the asset for a specific period of time. Leasing often involves vehicles, computers, specialised machinery or real estate. The lessee pays leasing instalments and interest. It is worth knowing that expenses caused by leasing can be charged to business costs, but this only applies to operating leases.
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External sources of funding: Business Angel
Another form of external financing for a company is the so-called business angel, i.e. a person who has been successful in running his or her own business and wants to invest money in a new venture - the industry does not matter much. A business angel generally selects risky projects and supports companies in the early stages of development. In addition to providing capital, the business angel can become a mentor for the entrepreneur: sharing his or her knowledge and experience, as well as valuable business contacts. The owner of the company guarantees such a person a share tailored to the amount of money he or she has invested. Business angels very often associate themselves into clubs. There is, for example, the Amber Business Angels Network and the Lewiatan Business Angels.
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External sources of finance: venture capital
Venture capital, or investment funds, are a good external financing option for start-ups and companies with an innovative business model. The capital support received will be useful for further development, any activities related to research or product improvement or entering completely new markets. It is not uncommon for innovative companies to have no chance of being granted a bank loan, so the only salvation in some situations will be the specialised funds. It is they who assume the risk of investment by introducing a venture capitalist to the company's management. Of course, the entrepreneur then loses some control over the company, which is a definite disadvantage of this solution.
Summary
As we can see, there are many sources of business financing, so we should have no problem choosing the right option for our business. We must always take into account the current stage of development of the company and set the most important goals. Many entrepreneurs opt for several sources of financing, which protects them from suddenly having to pay back the borrowed money.
