Why is funding necessary for business?
Every business needs a funding source to grow; you can receive the fund for long-term or short-term purposes. Funding is essential to set up a business and run and grow the company; you need money to live in the same funds required for business.
The different sources of funding include
- Retained earnings,
- Debt capital
- Equity capital
Retained earnings
What has retained earnings?
Usually calculated at the end of each financial year by doing the profit and loss account and then deducting any dividends paid out. Then the balance carried forward to the following year and showed in the balance sheet.
The Purpose of Retained Earnings
There are various purposes for retaining, including buying new equipment and machines, spending on research and development, or other activities to increase the company’s growth. This reinvestment into the company aims to achieve even more earnings in the future.
Suppose a company does not believe it can earn a sufficient return on investment from those retained earnings (i.e., make more than its cost of capital). In that case, they will often distribute those earnings to shareholders as dividends or conduct share buybacks.
Debt capital
If it needs money, businesses borrow from banks or lenders to use it for capital expenses. Debt financing may include secured loans such as mortgages or leases.
The most significant disadvantage in debt financing is that you have to pay the interest plus the amount you receive as the loan. If you cannot, you will face default. bankruptcy
Equity capital:
You look out for investors interested in your business and want to become shareholders, buy shares from your company, and make payments for the claims.
Some investors pay your company without becoming a shares holder, expecting the return as a profit share. It is better than debt capital because you do not have to pay interest on your borrowings.
Other Funding Sources
Look to Angels
In this type of business, you will need more money as you need office space and hire people to work for you; therefore, you cannot depend on bootstrapping and crowdfunding, and you will need real investors. Then you will probably start to look for investors, and the best place to look for investors is to search Angel List; they usually have a high net worth and will always look for a profitable business.
Venture capital
Venture capital is a private equity investment where a business receives unsecured funding in exchange for its equity share. The aim of venture capital as a field is to make investments in early and mid-stage companies to profitably exit their investment at a later stage (usually within 5-10 years).
Fundraising
There are many forms of finding funds for your business.
Crowdfunding
I used crowdfunding for my business, but my business is not suitable for crowdfunding, but many companies raise funds using crowdfunding. Crowdfunding represents raising funds to fulfill a specific project or undertake a venture by obtaining small amounts of money from many individuals.
Kickstarter is the best platform for you to raise money for your business.