Putting all your eggs in one basket is never a good business strategy. This is especially true when it comes to financing your new business. Not only will diversifying your sources of financing allow your start-up to better weather potential downturns, but it will also improve your chances of getting the appropriate financing to meet your specific needs.
Keep in mind that bankers don’t see themselves as your sole source of funds. And showing that you’ve sought or used various financing alternatives demonstrates to lenders that you’re a proactive entrepreneur.
Whether you opt for a bank loan, an angel investor, a government grant or a business incubator, each of these sources of financing has specific advantages and disadvantages as well as criteria they will use to evaluate your business.
Here’s an overview of two typical sources of financing for start-ups:
#1. Personal investment
When starting a business, your first investor should be yourself—either with your own cash or with collateral on your assets. This proves to investors and bankers that you have a long-term commitment to your project and that you are ready to take risks.
According to Olivia Tan, the Co-founder at CocoFax “Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others.” They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge. Angels tend to finance the early stages of the business.
In exchange for risking their money, they reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency. Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels.