The basic definition of funding is any money that is provided, usually by a business, an organization, or a government, for a particular purpose. Investments, grants, loans, and even donations are all forms of funding.
Another important function of funding, especially in an unstable economy, is money that businesses obtain for urgent situations to ensure that their most critical expenses – usually employee payroll – are covered.
What kinds of business funding are there?
When seeking business funding, there are a number of different avenues a company can explore. Here are some of the most common:
- Loans: Some businesses look to take loans from their family and friends, which can be a risky move if the business is not successful. However, if a person is bootstrapping the business, (funding it themselves), it can be helpful to borrow from their own circles to avoid heavy interest rates.
- Credit cards: Interest rates for credit card transactions are high, but it is a quick way of obtaining funding, especially if the business has low but recurring costs. Each individual will have their own credit limit, and this will generally be less than they could get from obtaining a bank loan. On the plus side, credit cards are much quicker to activate and use.
- Line of credit: If an individual approaches a bank for a loan or opens a line of credit, they will need to show a business plan, a financial forecast, and prove that they have a strong history of paying back debt. In some cases, the business will need to put up collateral against the loan, which could be at risk if the business does not become profitable. During an economic downturn, it can be helpful to open a line of credit, even if the business doesn’t use it.
- Venture capital or angel investors: Investors may provide funding in return for shares or an equity stake in the business. They can also be extremely helpful with advice or contacts, as they have a vested interest in helping the business to succeed. Entrepreneurs and businesses should consider what stake they are willing to give up in the business in return for a specific amount of funding.
How do you start a fund?
Starting a private equity fund is a complex process. A business will need to create a unique strategy that is differentiated from any competitors on where they are likely to see the best returns. Once the strategy is complete, the legal structure will need to be organized. Choose a fund manager, who will be known as the general partner, and consider which investors the business will need. These will take the role of limited partners. At this point, consider data privacy, regulatory, and legal responsibilities.
The next step is to decide on a smart fee structure for the fund. For the general partner, factor in the costs of management fees, which will usually be taken as a percentage of the investors’ committed capital. Finally, it’s time to sell the fund. Here is where the business will convince investors of their stakeholders’ expertise, which should all be spelled out in the original strategy.