What are the funding options for business owners?
Whether it is working capital or buying an asset for the business, entrepreneurs and business owners usually require some capital to start and grow their business. The common misconception among here is that banks are the only source of capital. Malaysia has a very dynamic debt market and banks, unsurprisingly has been the primary option for access to funding.
Nonetheless, banks typically work within a set of parameters and will only consider financing businesses which fall within that sandbox. So, what are the other alternatives if bank financing is unattainable?
1. Savings and Bootstrapping
Many entrepreneurs have started a business without external funds, using only their hard-earned savings from previous employments, and continue to bootstrap without injecting fresh capital into the business. This option gives you full control of your business without influence from external investors or financiers. The only major downside to this is limited capital which may lead to slower growth for the business.
2. Family and Friends
No one knows and supports you better than your closest family members and friends. This is common among entrepreneurs who intend to start a new business venture and have already exhausted their personal resources. There will also be less scrutiny and documentation as everything is usually conducted based on trust!
3. Angel Investors (“Angels”)
Angels are typically prominent individuals who are business owners themselves or seasoned investors with capital to invest in start-ups or early-stage businesses that are deemed to have high growth potential. Working with Angels can be beneficial as they also bring to the table their wealth of experience, connections and advice to help accelerate business growth and avoid common pitfalls.
4. Venture Capital (“VCs”)
Similar to Angels, VCs also invest in start-ups or early-stage businesses that are deemed to have high growth potential. As serial investors, VCs work closely with their investees to set the general business direction and goals, and continuous guidance on how to achieve them. VCs invest with the hope of business growth which would allow them to realise their investment via an eventual “exit” event, eg. IPO or trade sale (sale to another buyer).
5. Private Equity (“PEs”)
Moving up the value chain, PEs generally invest in undervalued and more matured companies which have demonstrated growth and profitability potential. The common approach is to provide growth capital which serves as “fuel” to accelerate business growth. Value creation takes centre stage as PEs strive to create value” by maximising the utilisation of resources and minimising inefficiencies. PEs aims to make a financial return by growing profitability and eventually monetising their investment via an IPO or trade sale.
6. Initial Public Offering (“IPO”)
An IPO is a process that allows a company to raise capital by offering newly issued shares to the public for the first time. As it is highly regulated, preparation for an IPO typically starts 1-2 years prior with many stakeholders involved including regulators, financial and legal advisors, etc. Post IPO, the company transitions from a private to public company where its shares will be listed on a stock exchange and readily tradable. In addition to raising capital, an IPO also serves as an exit for the company’s earlier investors and also for business owners to realise a return by selling shares directly to the public.
7. Equity Crowd Funding (“ECF”)
ECF is a relatively new alternative for private companies to raise capital online from the public but unlike an IPO, the shares of the company do not trade on a stock exchange and will remain relatively illiquid. Gaining access to Angels or VCs may be tricky for the average Joe while banks may be reluctant to finance something out of their comfort zone. The advent of ECF platforms have opened opportunities to tap on retail investors which traditionally was only accessible to matured companies via an IPO.
8. Peer-to-Peer Lending (“P2P”)
Like ECF, P2P lending has also disrupted financial markets and the role of financial intermediaries. Traditionally, banks have served as the primary intermediary by collecting deposits from the public, consolidate, and on-lend such deposits to individuals or businesses in the form of loans. P2P lending eliminates the intermediary role and matches individuals directly with businesses seeking for financing based on their risk appetite and preferences. This could be valuable for smaller businesses with limited access to bank financings or where the existing cost of financing is relatively high.
In the next article, we’ll explore the key considerations of banks and investors, and what you can do to increase your chances of securing an investment or financing from these capital providers