Tuesday, May 26, 2020

How to finance a business creation project?

Your market research looks good, but your business plan shows a need for financing greater than the capital you have? You are in the right place!

We have prepared this guide to help you understand what are the different alternatives available to you to finance your business creation project.

In a schematic way, you can contact 4 types of actors to obtain financing for your business creation project:

  • Equity investors
  • Banks and credit institutions
  • Crowdfunding platforms
  • Public bodies

Let’s see the most in details.

Equity investors

Equity investors

Equity investors will take shares in your business in order to make a profit in a few years.

This type of investment is obviously only possible if you create a company, not a self-business or a sole proprietorship.

Investing in equity offers 3 major benefits.

The first advantage is that you have no obligation to repay the funds. Your investors will hope to realize a strong return on their investment by receiving dividends or realizing a gain on the resale of their securities, but if things do not go as planned you will not have to pay anything back.

The second advantage is the credibility that this brings to your project. The capital contributions made by investors will strengthen the capital of the company, which will give you greater credibility vis-à-vis banks and your trading partners.

Finally investors can also bring you, in addition to their money, their expertise and their address book.

The equity investment nevertheless has two disadvantages. The first is that in return for this investment, you will have to give some control over your business to investors. The second is that own funds are the most expensive form of capital for the company in the long term (need to offer an attractive return on investment to attract investors).

You can request an equity investment from different types of investors.

You can first approach your associates to offer them advance money to the company on a current account of partners in addition to their contribution to the starting capital of the company.

You can also turn to your loved ones to solicit an investment in love money.

Finally, you can approach professional investors: business angels or specialized funds depending on the sector and the level of progress of your project.

Banks and credit institutions

Banks and credit institutions

You can use specialized banks and credit institutions to finance a portion of the company’s assets.

To put it simply, you need 3 things for your project to be financeable by the banks:

  1. demonstrate that your project is credible: existence of a market, management team familiar with the sector, etc.
  2. Assets to be Funded: Banks lend to small businesses only on the basis of historical assets or cash flows
  3. a contribution in equity allowing a fair distribution of the financial risks between the bank and the project leaders

The main advantage of bank financing is that its cost is relatively low compared to equity. The main disadvantage is that you will have to comply with the payment schedules of interest and repayment of principal.

There are a large number of specialized products at your disposal here: from overdraft to borrowing and leasing. We have grouped the presentation of the operation and cost of these products in the following 2 guides:

  • investment financing
  • financing the operating cycle

Crowdfunding platforms

Crowdfunding platforms

Crowdfunding platforms allow you to collect donations, loans, or investments from a large group of people.

The idea behind this concept is that it is sometimes easier to find 1,000 people who can contribute € 1 to the project than a person who can contribute € 1,000 alone.

You can find more information on the functioning and actors of crowdfunding in our crowdfunding guide.

Public bodies

Public bodies

The last type of actors with whom you can apply for financial assistance to finance your business start-up project are the public bodies.

We find in this category the aid granted by employment pole, the financing proposed by Astro France, and some subsidies proposed by the State and the European Commission.

Public funding has not been discussed too much on our blog. We will soon add articles on this subject, but in the meantime you can find more information on the Public Service website.

That’s it, we hope this guide to business start-up project funding has been helpful to you. Do not hesitate to share it on social networks and to share your reactions in the comments.

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