Having an idea for a business is the first step of starting any business, the next – is finding sufficient funds to make the idea into a reality. Let’s face it, not every one of us are born with a silver spoon or have avenues of strong financial backing from friends and family members. Thus, as an entrepreneur, it is only sensible to identify the various platforms to fund your business.
In this article, we will look at 5 funding options for start-ups and SMEs.
1. Venture Capitals
Venture capitalists are usually looking for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications and biotechnology. However, these list is not exhaustive and there may be other investors that cater to yours. It is important that you look for investors who bring relevant experience and knowledge to your business.
Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project and this involves giving up some ownership or equity in your business to them. Venture capitalists also expect a healthy return on their investment which may be generated when the business starts selling shares to the public. (Source: BDC)
2. Angel investors
Angel investors are individuals who invest directly in small firms owned by others. They are often leaders in their own field who are able to contribute their experience, network of contacts and their management knowledge. They tend to finance businesses in their early stages with investments in the order of $25,000 to $100,000.
Their benefit from investing is having the right to supervise the company’s management practices and this involves a seat on the board of directors and an assurance of transparency.
They tend to keep a low profile and you have to contact specialized associations or search websites on angel investors. If you’re looking for an angel investor in Singapore, you can check out Singapore Angel Investors and Angel Investment Network. (Source: BDC)
3. P2P Lending
For many startups and small businesses, they may not be able to fulfill the criteria for an angel investor as they require high returns. Hence, peer-to-peer (P2P) lending may be able to help small businesses that want to tap on smaller funding amounts.
Peer-to-peer lending involves borrowing money from your peers, including other business professionals and investors who are interested in relatively small financing amounts.
The benefits of P2P lending includes no collateral is required, lower interest rates and you can repay the loan early and not have to face prepayment penalties. Since it operates as an online lending environment, the businesses are able to get faster approval and no paperwork needed except for a few online forms and a digital signature. (Souce: Forbes)
Crowdfunding has been one the latest ways of seeking funds for entrepreneurs worldwide. It is the activity of raising money (funds) from a large number of individuals (crowd) through an online platform.
The most popular examples of such platforms around the world include GoFundMe, Kickstarter and Indiegogo. There are now more than 600 crowdfunding platforms globally with fundraising reaching billions of dollars annually.
There are a few types of crowdfunding, but for companies that are looking to increase their funds, they can tap into securities-based crowdfunding.
Securities-based crowdfunding (SCF) is further divided into lending-based crowdfunding and equity-based crowdfunding. Lending-based crowdfunding is when individuals lend money to a company and the company commits to repay the loan at predetermined intervals and interest rate. Equity-based crowdfunding is when individuals invest in shares sold by a company and receive a share of the profits in the form of a dividend or distribution. Both types of securities-based crowdfunding are subject to securities regulations prevalent in the jurisdiction where the online platforms are based.
In Singapore, all SCF platforms are licensed and regulated by the Monetary Authority of Singapore (MAS). They are granted a Capital Markets Services License (CMSL) under the Securities and Futures Act. The Authority mandates that all licensed crowdfunding platforms must ensure proper segregation of investors’ monies and keep proper records of transactions.
Additionally, if investors in Singapore invest in securities offered by an issuer in another country, their rights will be subject to the laws of that country and you may be liable to tax, transaction costs and capital controls. (Source: SME Portal)
5. Government grants and subsidies
Government agencies in Singapore provides financing such as grants, subsidies and programs that may be available to your business. You can visit the SME Portal and Enterprise Singapore to know more about the various government programs and grants for SMEs and start-ups.
In conclusion, start-ups should know that funding your business is no longer just limited bank loans. Showing that you’re able to tap on various financing alternatives demonstrates to lenders that you’re a proactive entrepreneur.
Whether you’re opting for venture capital, an angel investor or using P2P lending, each of the financing options have their own pros and cons, and specific criteria used to evaluate your business thus it is important for entrepreneurs to do their research to know which platform they should tap into.