D1 Obtain Additional Finance
Entrepreneurs may obtain external finance to grow their business due to limited personal funds, time needed to accumulate retained profits and high startup costs. External finance provides fast access to larger sums of money allowing entrepreneurs to grow more quickly which can help them gain a competitive position in the market.
Options for raising additional finance include;
Business loans
Angel Investors
Crowdfunding
Government grants
Business Loans
Business loans are when entrepreneurs borrow a set amount of money from banks or other lenders. They must pay it back in installments (usually monthly), plus interest, over a specific time period.
Check how much you would need to repay using this business loan calculator.
Advantages of business loans include lower interest rates than other borrowing options such as credit cards and overdrafts and the ability to raise a large amount of capital quickly. Some challenges of business loans include difficulties in being approved as banks often want detailed business plans, credit history and/or collateral and challenges in making repayments.
Crowdfunding
Crowdfunding is a way to raise money for projects or businesses by gathering small amounts from many people online. If the fundraising goal isn't reached, no money is collected, and backers get their contributions returned. Depending on the model used, businesses may provide rewards for investments such as free samples or use a donation based model where no rewards are given.
Check out Kickstarter to see how it works.
Advantages include being able to see if an idea is popular before investing and dependending on the model, entrepreneurs not needing to repay funds or give up any equity. Challenges include the marketing and community engagement pressure to gain support and the fees to use the money rising platforms.
Angel Investors
Angel investors are wealthy people who fund young companies in return for shares or convertible loans. They are typically successful business people themselves who invest in start-ups with high risk but also high profit potential.
Check out a platform used in Hong Kong to connect entrepreneurs to angel investors.
Advantages of angel investors include the additional support often provided such as industry experience and connections and the flexibility to the terms of investment compared to traditional loans. Some of the challenges include loss of control as the investors request input into the running of the business as well as the pressure of providing returns on investment influencing strategic decisions.
Government Grants
Government grants are sums of money given by the government to encourage activities that benefit society such as job creation, research, innovation and community development. Grants do not have to be paid back, making them an appealing source of finance.
Check out some areas where the UK government is providing grants.
Advantages of grants include the cost savings gained from not having to repay them, credibility benefits of being approved for a grant and the increased likelihood of being approved again in the future. Challenges include the extensive requirements in the application process and follow up reporting to the government, high levels of competition making it difficult to be chosen and compliance requirements.
