One of the most pressing challenges entrepreneurs face is gaining access to financing. Generally, access to resources is associated with credit instruments; however, the most appropriate financing source for the healthy development and growth of a company will depend on which stage it is in.
In the early stages of a company, when it has yet to reach its point of equilibrium, and it is still developing and prototyping the product or service it will offer or defining and launching its business model, alternative sources of financing to a traditional bank loan tend to be more appropriate.
Startups and early-stage companies commonly use financing through seed capital or venture capital with business assistance. For this reason, the Development Bank System has made available to the business ecosystem financial instruments of this kind to support the generation of new companies. Additionally, a series of Business Development Service programs have been set up to support companies’ development in their different stages.
Common alternative sources of financing for early-stage companies include:
Financial resources contributed by the entrepreneur who generally seeks supplementary resources. It is important to know that any other investor who contributes to financing or capital will require that the entrepreneur contribute his or her resources to ensure that he or she assumes part of the risk of the undertaking.
A common source of financing in which the entrepreneur’s closest circle contributes resources to a startup or existing company. In other countries, these resources are jokingly referred to as the three “Fs”: Friends, Family, and Fools.
Non-reimbursable grants awarded by cooperation entities, public entities, etc. These resources are generally granted based on the fulfillment of certain requirements established by sector-specific programs.
Individuals with sufficient capital and income to invest in emerging companies in exchange for shares or convertible notes. These investors can also help the company to grow by contributing knowledge and contact networks.
These invest in emerging companies with high growth potential in pursuit of above-market average returns. Participation is through the capital stock, so generally, they take positions in the issuing company’s corporate governance structure. These funds tend to be specialized by sector and assist in growing the company.
Once the company is generating a profit and requires resources to accelerate its growth, credit instruments become more feasible in later stages. To access these, the company must demonstrate repayment capacity and provide collateral, as required by each financial institution.
Financing is essential for the development, startup, and acceleration of new companies. However, this financing must be appropriate and in line with the intended business to ensure its financial sustainability and growth.