Financing your first activity - how to get funds?

Service Business

Starting a business, as well as its development, requires the involvement of financial resources. Money is needed for investments (e.g. fixed assets, hardware, software), but also for day-to-day operations - from purchasing materials to paying for accounting services. Budget deficiencies are a common problem, especially at the beginning of operations, when the company is just taking its first steps. However, financing your first activity does not have to be difficult. How to finance an activity when it does not have sufficient revenues yet? We suggest in this article.

Financing the first activity - own funds

At the beginning of the activity, the entrepreneur always engages his own funds. It is worth guaranteeing them in such an amount that will be enough for the first 3 to 6 months of running a business, regardless of whether it will bring profits or losses during this time. Own resources include savings, but also full-time remuneration (some entrepreneurs run a business, at the same time work in another company) or income from the sale of property. Own funds are a cheap and safe way to finance your business.

Co-financing and loans from public institutions

The needs often exceed the possibilities of the entrepreneur. This is the moment when you should turn to external sources of financing. One of them are grants or loans offered by organizations and public institutions.

The best known form of subsidizing the first activity are those that can be obtained by people with the status of the unemployed in the Poviat Labor Office (PUP). Most importantly, such a subsidy can be applied for by those who have not operated in the last 12 months, so it is a source of financing for new companies. The amount of support may reach up to six times the average salary, and these funds must be used for the so-called one-off expenses (initial costs such as the purchase of machines, tools, fixed assets), they cannot be allocated to recurring fees or payment of social security contributions.

EU subsidies are also a popular source of financing. These funds can be obtained by meeting the conditions strictly defined by a given Operational Program. It is worth following the current competitions, as many of them concern business development and serve to support the functioning of enterprises and increase their competitiveness on international markets.

Money from the bank - company loan

Getting a bank loan for a novice entrepreneur is often problematic. Many people starting their business are reluctant to pay commission, interest and, above all, a fixed monthly installment, which becomes another obligation that requires financing from an already limited budget.

At the beginning of their operations, banks grant small loans, higher amounts can only be discussed when the first successes are documented - and thus profits. Therefore, it is more often entrepreneurs who plan to develop an already operating company that decide to take a loan, and not those who are at the beginning of their business path.

A bank loan brings a serious benefit to the entrepreneur: commissions, interest and all fees associated with it are tax deductible costs and reduce tax liabilities.

Factoring for problems with financial liquidity

Factoring is an even less well-known form of day-to-day financing. This solution works primarily in the case of companies that, due to the specificity of the industry, have delays in payments (i.e. those that have problems with financial liquidity).

Factoring can operate in two ways. As part of classic factoring, each invoice issued to the client is sent to the bank or company offering such a service. This institution pays a significant part of the receivables (e.g. 90%) usually within 24 hours and covers the costs and collection of receivables. The service fee is close to a few percent per year.

Reverse factoring can be likened to a short-term working capital loan. The factoring institution may pay the company's liabilities, which it then pays back late.

Or maybe leasing?

Leasing is primarily used for investments in fixed assets. It is an alternative to credit and in the case of companies, it is often more beneficial for them. Under the leasing contract, the entrepreneur receives the right to use the equipment, car or other fixed asset by paying leasing installments. After the end of the contract, the leased object can be bought back on favorable terms (usually for a few percent of its price) or returned.

There is also a form of reverse leasing, under which the company transfers its own fixed assets to the leasing institution, receiving funds for it. Thus, it undertakes to pay the leasing installments, as in the classic form of leasing.

For help to an angel ... business!

It happens that an entrepreneur has a great idea for a business, but does not have the resources for the initial costly investment to start functioning. This applies primarily to high-risk start-ups, which are sometimes very innovative, so they require a lot of investment. In such cases, the help of a business angel may be the best solution. Business angels are people who have been successful and have budgets that allow them to support interesting projects, even when they are at risk. In addition to financial resources, they also share knowledge and business support.

Business angels are anonymous at first. You can contact them via the so-called business angel networks. At the initial stage, you need to present your idea to a group of investors by providing all the necessary data and information on the application. Only when one of the angels decides to support, does he reveal his identity.

Venture capital

The institutional equivalent of business angels are venture capital funds. The difference is that they do not invest private funds, but those that have been entrusted to them. Due to the fact that they operate with someone else's money (private investors or institutions), they are always profit-oriented. Business angels sometimes support businesses for a different purpose (e.g. for the sake of the social dimension of a venture), but venture capital always invests funds to obtain a specific rate of return in a specific time perspective (e.g. 5 years).

For this type of funds, the most important thing is to increase the company's value in the shortest possible time. It often happens that venture capital supports very high-risk projects, expecting in return, in the event of their success, high rates of return.

Crowdfunding, or crowdfunding

The last possibility of financing the first activity that I want to mention is crowdfunding which is becoming more and more popular. It consists in supporting interesting projects by many independent people who often pay even very small amounts.

Crowdfunding takes place through specially created internet portals. The originator describes and shows (graphics, photos, films) the plan of his project and determines the minimum amount that is necessary to collect it. Often, investors receive rewards for the support provided (e.g. the first copies of the product).

As part of crowdfunding, innovative business ideas are most often supported, but also social or private projects - the only criterion here is the interest of users, prompting them to make a payment.