Raising Finance

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The pros and cons of five SME funding options

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Raising capital remains one of most difficult struggle for entrepreneurs; many great ideas have died off without any shot at success and according to a bank survey, which suggested 82 per cent of businesses fail due to cashflow problems.

Hence, entrepreneurs seek out various funding options. Though there are a couple of different options businesses can choose from, it pays to do a proper in-house review of budget, goals and target, amongst other factors, and also deeply review different fundraising alternatives while paying close attention to the pros and cons before launching a campaign.

For the popular, most sought-after funding options, below are a brief description and their pros and cons to take into account to enable businesses make an informed decision.

(1) Bootstrapping

Some entrepreneurs still prefer to go down the the funding route used by some of the most successful companies – like Dell Computers, Apple, FaceBook Inc and so on.

Bootstrapping involves entrepreneurs doing away with loans, equity or other traditional funding options while choosing to self-finance their business from personal savings or other funds at hand. This works best for business ideas that don’t require much capital from conception.

Pros:

● Full control – Entrepreneurs who bootstrap are in absolute control of the business; ranging from decision-making to implementation of ideas.

● Learning key skills – Bootstrapping provides room for entrepreneurs to learn core skills like management and the efficient utilisation of available resources to drive the business forward.

● No profit sharing – A business that survives bootstrapping to a point where the business starts yielding profits will enjoy huge benefits as it is neither tied to an equity nor a loan.

Cons:

● Not all companies can be bootstrapped – Some require huge capital from conception and such large funds may not readily be raised through bootstrapping.

● Slow business growth – Handling all sectors of a business while also worrying about cash flow will definitely reduce a business’ speed of growth.

● Chances of running into debts – Businesses don’t immediately start yielding profits. It’s highly possible for a bootstrapping businessperson to run out of funds and run into loads of debts before seeing growth.

(2) Crowdfunding

This is one of the most popular funding options as a result of how easy recent tech advancements have made creating a crowdfunding project – and also because of its successes over the years.

The common criteria for creating a successful project involves having a unique idea and effectively communicating it to the audience, convincing them to fund the idea by showing a huge potential of growth and providing an enticing reward in return.

Crowdfunding can be effective as a funding option if well-planned and executed, but here are major pros and cons to help determine if it’s the best fit for your business.

Pros:

● No fees attached – If a crowdfunding project fails, all the funds raised will be returned to the investors and the entrepreneur will neither gain nor lose anything.

● It’s easy to set up – Platforms like Kickstarter, Indiegogo and CircleUp make it easy to start a campaign. You simply need to message the site with your idea, create a video upon being accepted and effectively market your campaign after getting published.

● It aids marketing and brand exposure – A successfully funded campaign gives the business exposure even before it is launched. Also, it makes for great PR.

● Building a strong customer base – Participants of a successful crowdfunding project oftentimes turn to loyal customers after the business is launched.

Cons:

● Crowdfunding does not prove very effective for companies needing large capital. It works best if you require $100,000 or less.

● Requires a lot of marketing – For a campaign to be a success, it takes a lot of marketing to get the campaign in front of a lot of audience, and this marketing can often times be very expensive.

● Your idea can be stolen – Without proper protection of your idea via patent or copyright, your idea can be stolen in the process of crowdfunding.

● If failed, project can damage your brand reputation.

Read on for further funding options such as venture capital and angel investment.

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