Where do I look for financing for entrepreneurship?
published on 23.05.23
Success as an entrepreneur requires a well-detailed economic plan, knowing the revenue and expenses of the business, the margin needed, when the break-even point will be reached and how to secure the initial capital. There are typically many doubts when it comes to this last aspect, and for this reason we want to help you with this post.
Before seeking financing, three important points must be taken into account: the first thing you need to know is as basic as what type of investment you require: short, medium or long term. Secondly, and this is key, you should bear in mind that the best financing comes from ensuring a good collection system. And thirdly, you must have all the information properly prepared, as each source of investment may request different documents in specific formats (the business plan, the report, presenting the idea as a pitch, knowing the legal information, etc.).
With all that being said, we need to be aware of the various types of financing for entrepreneurship, so that we can find the best financial solutions to suit the type of project we are undertaking. There are many more than you may think and it is always better to diversify, so let’s take a look at five great financing options:
The first type of funding is self-financing. Projects often start out with capital from the people behind the project and also with some help and resources from their immediate circle, such as family and friends. This method of financing is actually very common and is humorously known as friends, family and fools: the three Fs.
Self-financing refers to the financial resources that an individual contributes as an entrepreneur. It can be money in a bank account or, if you are receiving unemployment benefit in Spain, you can ask for your entitlement as a lump sum, which is a very common mechanism for entrepreneurship, through which you receive 100% of the outstanding amount of your benefits.
Sometimes, however, self-financing is not sufficient and other options must be sought. It is essential therefore to be clear about the specifics of the business you want to launch and how much capital you need.
The second and more traditional financing model is through banks. But what is it that banks focus on when lending money to entrepreneurs? There are several factors: the amount being borrowed; who the people behind the project are; whether they are providing guarantees, collateral or capital for the project; whether the business plan is well detailed; whether the economic and financial information is correct; whether they are complying with tax obligations and contributions, etc.
As an entrepreneur, it is important to be aware of the different banking products for medium- or long-term financing. Loans (as well as microcredits) are the most well-known, but there are also others that may be of more interest for the type of project you are working on, such as credit facilities, leasing, renting, factoring and confirming. Before signing, you should learn about the features of each of them and check key details such as the interest rate, commissions, amortization and grace period. You should also be aware that banks provide a series of important perks for entrepreneurs, such as facilities for collections, payments, bank transfers, credit cards, etc.
Pro tip: always begin by “auditioning” banks. Identify which offer the best solutions for your business and sign up with the one that’s the best fit for your project.
Tax incentives are measures that the public administration implements to stimulate and incentivize certain activities, such as R&D&I (Research and Development and Innovation) processes, the legal form, the hiring of personnel, etc. In other words, they are tax allowances that help entrepreneurs with different taxes, which must still be paid, but at a reduced rate. The tax benefits and incentives that startups enjoy are a good example of this and include significant reductions in corporation tax, improved taxation of stock options and deductions for newly established companies. You can find more information about the Startup Law here.
Alongside tax incentives, as an entrepreneur, you can also apply for public aid or subsidies. It is important to remember that assistance is available for the creation of a business as well as other stages in the life of the company. This is an important factor, but not something you should pin all your hopes on, although, if you do eventually receive something, it can be helpful for overcoming financial hurdles at certain times. All available subsidies can be found on the websites of the Spanish Public Administration. For example, if you are setting up a business in Barcelona, you can apply for the public subsidies offered by the Ministry of Labor and Social Economy, those awarded by the Catalan Government, and others available from the Barcelona City Council.
If you are looking for alternatives to traditional funding, private financing may be an attractive option. In this section, we will examine two of the main sources of private financing, business angels and venture capital, along with an explanation of how to access them:
Business angels are professional investors who invest in projects with strong potential for growth and profit. Typically, this means startups, either in the initial seed stages or in the growth phase, which will return capital gains when the company reaches maturity. It is important to recognize that this investment makes the angels partners in the company. However, they usually have a minority shareholding, thereby allowing the people behind the company to retain decision-making power. In addition to capital, business angels can also contribute experience and valuable networking.
How can you reach out to them? There are two ways. The first and most common involves knowing that they are part of networks. Business angel networks put investors in contact with startups that are seeking financing. The angels are, of course, searching for the next unicorn company (a startup that achieves a valuation of one billion dollars), but they are also open to projects that are attractive based on market research and having a competitive advantage that sets them apart from the competition. Before approaching, it is important to have a good presentation of the project (pitch deck), a business plan and a feasibility study from an accredited entity. In Barcelona, the best-known network is BANC (Business Angels Network of Catalonia), while several others exist at an international level, such as EBAN (European Business Angels Network) and the Band of Angels in the United States.
The second channel for contacting business angels are investment forums and Summit events. These are meeting points where the entrepreneurial ecosystem comes together with investors and major companies. Normally, the organizing entities handpick a selection of business projects that will be presented to investors in pitch-deck format. We would like to highlight a few examples such as Keiretsu Forum, Latibex and SID.
Private financing can also be obtained through venture capital. This involves an investment of capital in exchange for temporary shares, facilitated by companies managed by experts. It is normally startups in the process of growth or restructuring that receive financing, with the size of the investment depending on the size of the project, and typically ranging from 300,000 to 1,000,000 euros, although the most well-established projects can achieve as much as 10 million euros. Venture capitalists usually enter a company in the growth stage, when the business has already entered the market but needs a significant investment in order to scale. One example that invests in Spanish startups is Draper B1, known for investing in projects with global aspirations that have a scalable business model, a fully developed product and have already made a profit.
Fintech is the term used to describe all the technological solutions applied to finance, covering everything from user identification to asset management and very interesting investment advantages for the entrepreneur. Financial technology offers two main types of financing:
Online loans and credit
Some fintech firms are financial companies that operate through digital platforms where entrepreneurs and companies can apply for and receive loans, usually for small amounts, which are granted swiftly with a specified interest rate. This is a quick and easy way to access financing, but it has its own pros and cons. Before entering into this type of financing, be sure to read the small print of the contract carefully.
Crowdfunding is collective financing through digital platforms, where investors contribute small amounts to projects that pique their interest. This represents an interesting investment solution for starting a business, creating an initial version of a product, and also for diversification. Numerous platforms exist, so it is important to be aware of their features, rules, security systems and fees. Furthermore, not all of them generate the same amount of capital or interest. The most popular are Verkami, Indiegogo, Patreon, Ulule, Kickstarter, Kiva, Dozen, Crowdcube, Crowdfunder and Lanzanos.
Different types of crowdfunding exist, choose the one that best suits your project:
- Reward crowdfunding: this is the best known in terms of the volume of funds raised. It is ideal for early-stage projects. Its objectives are to give the project exposure, conduct a pre-sale and the reward is never financial.
- Donation crowdfunding: this is highly solidarity-based. It is typically used for third sector projects of a social or humanitarian nature. Campaigns do not seek investors, but rather donors.
- Loan Crowdfunding or Crowdlending: these are digital platforms where those who contribute capital are lenders, which means they expect their invested capital to be returned to them plus a commission.
- Investment crowdfunding: A type of Fintech that is perfect for established entrepreneurs and startups that want to increase their capital. This approach allows investors to make long-term investments and receive shares (similar to business angels) in the company.
Author: Joan Margarit, Marketing and Communication Analyst
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