Just like fuel makes a vehicle move, funds are responsible for the existence of a business. Countless business ideas never see the light of the day, all because of a lack of funds to execute them.

A startup failure post-mortems conducted by CBInsights revealed that 38 percent of the 110+ companies analyzed failed because they ran out of cash or failed to raise new capital.

Types of business expenses

The major reason anybody would seek funds for their business is to meet the expenses demand.

There are two major types of business expenses: capital expenditure and revenue expenditure.

Capital Expenditure: Capital expenditure (also known as CAPEX) includes all expenses invested in long-term assets. They are usually not recurrent such as purchasing a machine for production.

It may also involve purchasing a property for the operation of the business. The cost of registering your business and obtaining the necessary licenses is also capital expenditure.

Revenue Expenditure: Also known as OPEX, this accounts majorly for the expenses that a company incurs during its operation. These kinds of expenses are usually recurrent such as employees’ salary, office rents, vehicle fuelling, and workers’ commission, among others.

Difference between capital expenditure and revenue expenditure

The main difference between these two kinds of expenditure is that one can be capitalized and the other can’t.

Capital expenditure can be capitalized, and this means the worth of the asset it is used to purchase can be considered while evaluating the total worth of the company.

Revenue expenditure, on the other hand, is more of an operational cost. Companies usually find a way to reduce it to the minimum.

Funding options for business ideas/startups and when to use them

There are various means to fund your business expenditure. The funding options highlighted below are best for different situations and readily available for different business stages.

Bootstrapping

This is the easiest fund to access for your business but, unfortunately, not usually available. It is personal financing of your business idea or startup using savings or credit cards.

You may also take a mortgage. A business is bootstrapped or self-funded so far; the fund is coming from you; taking a loan in your name also qualifies as a bootstrap.

Although this might not settle well with many people who cannot stand their 9-5 jobs anymore, keeping your job while getting your company or business idea off the ground might be a good choice if you want to bootstrap it.

Family and friends

When personal funds are not available or do not suffice for the business, reaching out to friends, and family members might help.

Depending on your relationship with these people, funding from them might be in the form of support (cash gift), loan or investment.

If you are taking money from friends and family, signing a legal document stipulating the terms of the loan is important.

Why people are usually advised against this kind of fund is if any issue arises, it may significantly affect your relationship with them.

Grants

Grants are free. You are not required to refund them. They are offered by organizations, individuals, and the government to support businesses.

Mostly, grants are offered to businesses solving specific problems such as food shortages, healthcare, and climate issues.

Entrepreneurs with only a business idea may find it hard to access grants because they are usually offered to existing businesses and could take a long time before it is awarded.

Small business loans

Banks and other financial institutions offer small business loans at a specified interest rate. It is more likely that the interest rate and the amount of loan you can access will be determined by your business credit.

Lenders tend to give higher interest rates for loans they assume carries higher risk.

Equity funding

Funding your business idea may not require hard cash. Partnering with required professionals in exchange for equity in the company might help get things done.

For instance, if you need a web design to kickstart your business, partnering with a web designer for a specific percentage of the business can help get things off the ground without taking any loan for such expenses.

Fundraising

Startups can raise funds from individuals and corporate organizations. It involves various funding rounds, including Series A, Series B, Series C, Series D, etc., until the company decides to do IPO (Initial Public Offering).

IPO permits the general public to purchase shares in a company. At such a time, the company must have developed and cannot be considered a startup any longer.

Venture Capitalists

Venture Capitalists (VCs) are a member of a group of investors looking at purchasing equity in promising ventures. You can connect with VCs via their company’s website, social media pages, and an introduction from a friend.

The advantage of getting funds from a Venture Capitalist is that if the business fails, you won’t be requested to pay back the money invested. The disadvantage is that they are most interested in an existing business.

Angel Investors

They operate like Venture Capitalists but predominantly operate alone. They could be a retired company executive with lots of money in the bank.

Sometimes, they may not offer you funds for just equity but instead could offer the part of the fund as a loan and then the rest for equity.

Competition/Contest

This is recommended to explore if you are looking to fund your business idea. Competitions are conducted locally and at state levels to award winners’ ideas with cash and sometimes free consultations with experts.