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Sources of Financing for an Entrepreneur

Updated on August 13, 2019

Sources of financing for an entrepreneur

There are two major sources of financing for any entrepreneur and they include;

  1. Equity financing
  2. Debt financing

Equity financing

This refers to capital or personal funds from equity investors who are willing to provide financing in exchange for part ownership in the business venture.

Forms of equity financing

  1. Venture capital

This refers to a pool of equity that is co-invested with the entrepreneur to fund an early stage of business in exchange for part ownership. The main objective of the venture capitalist is to raise money for a high potential high growth business to enable them to reach their full potential as soon as possible and also in the process, receive substantial returns for their investments.

Sources of venture capital

  • Wealthy individuals
  • Pension funds
  • Insurance funds
  • Endowment funds

Venture capitalists can also ensure that the business venture succeeds and they can do this by;

  1. Carrying out sufficient market research so as to establish the best practices of the business and find the best places to sell the product or service
  2. Developing strategies such as customer attraction and retention strategies by ensuring customer satisfaction
  3. Overseeing management of the business for efficient utilization of resources
  4. Negotiating technical contracts on behalf of the entrepreneur
  5. Recruiting of new employees
  6. Managing risks to mitigate against loses
  7. Developing new products and services
  8. Arranging for additional financing

A venture capitalist will also see to it that;

That there is a strong and competent management team and also ensure that there is a viable exit strategy after the deal is done

  • Partnerships

This comes about by seeking equity partners who will bring on board to finance the business

  • Personal funds

This refers to the funds provided by the entrepreneur for the business. Sources include profits from other investments, personal savings, funds from the sale of assets, pension funds, life insurance, inheritance, and gifts.

  • Business angels

These are invisible groups of wealthy investors who have usually experienced entrepreneurs or retired professionals who invest in business startups in exchange for part of the ownership

They may share the vision of the new venture and in most cases have personal experiences in business ventures or an interest in the industry of the new venture.

  1. Family and friends

These are the most available people who can easily fund a startup be it through personal contribution or a fundraising event.

Debt financing

Forms of debt financing

  1. Government agencies

These are parastatals that are formed by the government so as to such startups and encourage the citizens to be part of the agencies by making interest-free loans and times grants. NGOs also chip in to help startups financially by providing capital, pieces of training and various mentorships to the upcoming entrepreneurs

  1. Cooperative societies

These are institutions that give loans to their members after fulfilling some requirements. They are known for lower interests compared to commercial banks.

  1. Commercial banks

This is the major source of financing for any entrepreneur tough they do not fund ventures at the early stage. They have to ensure that there is the viability of the business, availability of collateral, creditworthiness of the entrepreneur and ability to repay back the loan

  1. Life insurance

This comes in hand where an entrepreneur borrows from an insurance company against their insurance policy

  1. Strategic partners

This is basically the kind of financing that comes as a result of good networking with potential investors willing to provide funds. Partners can even go beyond just the finances but they can also bring in mentorship and other resources

  1. Savings and loan institutions

These institutions major in taking deposits and offering mortgages to businesses to help them buy pieces of land and even buildings

  1. Microfinance institutions

These are institutions that target small and medium enterprises in order to enable grow and expand by providing financial support to them

  1. Crowdfunding

This refers to the act of funding a business venture by raising money from a large group of people. It can be done through the internet such as social media and other online platforms

Factors to consider when selecting a source of financing

  • Availability of finances and the size of the projects to be undertaken
  • Type of business venture
  • Length of time finances will be available
  • Need for financing and the cost of acquiring the finances
  • Accessibility of the required finances
  • Preferred ownership and control of the business

Equity Financing Versus Debt Financing

See results

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