The 6 different kinds of SME funding

1. Self-financing SME funding

This is when you use your own personal savings to finance the business. Be careful though, mortality rates of new businesses are high and if the business doesn’t work out you’ve lost both your business and your personal savings.

2. Money from friends, family and business associates SME funding

Often the first place to turn to if they’re able to provide, family, friends and individuals you know will often invest in your entrepreneurial venture because they have confidence in you and your abilities as much as they have confidence in the business idea.

Unless your family and friends are particularly loaded though, they can get you through the start-up and development phase but you’ll need to look into other forms of finance when needing a substantial capital injection.

3. Angel investors SME funding

If an entrepreneur isn’t able to source funds from people they know or their own personal savings, angel investors are another option. These are individuals are often business people themselves or have significant funds and are looking to assist aspiring entrepreneurs in conjunction with a return on investment. In exchange for the funds, angel investors often require equity in the business.

4. Angel funds/alliance SME funding

This is a collective of angel investors who contribute money to a fund. From there they’re able to make a number of individual investments helping diversify their risk. A typical angel fund will have a submission process in which your business plan will be reviewed, you will present, and a vote will be cast whether to invest or not.

5. Venture capitalists SME funding

This is a well-known form of funding, but it’s by no means the easiest. As a professionally managed fund, they’re looking for a high return on investment and have strict procedures to follow. Equity is given to the VC and if a business is not able to live up to its expectations the VC is able to have the company sold in order to recoup its investment.

6. Bank loans SME funding

These institutions lend money to entrepreneurs and charge interest on the loan. They will not fund what they deem high risk ventures however, and they typically have strict, well-defined guidelines to determine suitability.

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