Sources of financing for businesses
A company that wants to grow and develop its business will sooner or later face the need for additional sources of financing. For financing to be optimal, it must be approached thoughtfully, taking into account the situation, capabilities, needs and goals of the individual company.
A company that wants to grow and develop its business sooner or later faces the need for additional sources of financing. For financing to be optimal, it must be approached thoughtfully, taking into account the situation, capabilities, needs and goals of the individual company. It is crucial that the company selects appropriate sources of financing, combines between different sources and at the same time is well aware that each source of financing has its own "price".
When a company considers potential sources of financing, it has the following options available (the most common):
- Internal sources of financing
- External sources of funding:
- grants,
- debt sources (credit, leasing, factoring),
- equity sources (business angels and venture capital funds),
- crowdfunding.
First, the entrepreneur uses internal sources of financing. These are resources that the company obtains from its own resources. The most common internal source of financing for a company is profit. Reinvested profits are one of the most common sources of financing for the successful growth of the company. In the very early stages of the company, these sources also include the entrepreneur's personal income and savings, which, with rapid and as large a sales volume as possible, combined with the greatest possible "tightening" of costs, build the company (financing according to the so-called bootstrapping principle).
It makes sense to think about external sources of financing when an entrepreneur has exhausted his own resources. The first and most attractive external sources of financing are grants. These are funds from a wide variety of tenders at the municipal, national and European levels, which are intended to promote entrepreneurship (from promoting self-employment, co-financing the development of new products, research and development, to co-financing investments in business, etc.). However, there are fewer tenders offering grants every year. Recently, tenders where the state only offers guarantees for loans with a subsidized interest rate have become more common. You can view current tenders for the economy on the following pages:
The next segment of external financing sources is debt financing sources. These include loans and leasing, as well as lesser-known sources such as factoring. Factoring is a service where a financial investor (acquirer) buys the receivables of an entrepreneur from his customers before they are due for payment. In this way, the entrepreneur can ensure liquidity before expecting actual payment from the customers.
The third segment is represented by equity sources of financing. This is a completely different concept. In this form, the company does not repay the money with interest in installments, but equity investors participate in the profits with the purchased share of the company. In this category of financing sources , business angels and venture capital funds are the most widespread.
Business angels are groups of investors or wealthy individuals who invest their capital in the early stages of growing companies. These investors invest in only the most promising and highly profitable business opportunities. In return for their investments, they receive a share or ownership stake in the company. They often also offer their experience, knowledge and contacts to help with the successful development of the company. The first and largest club of angel investors in our country is the Business Angels of Slovenia ( https://poslovniangeli.si/ ), which connects the most ambitious entrepreneurs who are in the initial stages of company development with the most qualified investors in Slovenia, Central and Eastern Europe and beyond.
Venture capital funds, on the other hand , invest their direct equity investments in fast-growing companies, usually in the later stages when the company is expanding its operations to international markets. Each fund also has its own specific investment policy (in which companies and in which industries it invests). The best-known private venture capital fund in Slovenia is the Silicon Gardens Fund ( https://silicongardens.com/ ), which is made up of prominent and successful domestic entrepreneurs. Two years ago, a new private venture capital fund, Suricate Ventures ( https://www.suricate.ventures/ ), was launched. Otherwise, there are only a few venture capital funds in Slovenia so far. The Slovenian venture capital environment has therefore been heavily dependent on foreign countries for years.
Crowdfunding has also become an extremely popular source of external financing in the last decade. It allows companies that need money for business projects to raise funds through online platforms from a large number of supporters, future users or donors who, by achieving a set goal, see the potential and success of a product or service. The most widespread crowdfunding platforms:
- Kickstarter - https://www.kickstarter.com,
- IndieGoGo - https://www.indiegogo.com,
- GoFundMe - https://www.gofundme.com.
The most successful Slovenian campaign so far on the Kickstarter platform is the Bird Buddy smart bird feeder project, which ended in January 2021. They convinced almost 23,000 backers, with the help of which they raised a record 4.19 million euros. Bird Buddy also raised funds on Kickstarter this year for two new products: the Smart Hummingbird Feeder and the Smart Bird Bath. At the end of the campaign, which ended on June 15, 2023, they managed to raise 2.87 million euros with more than 10,000 backers.
Several members of our Koroška Network Business Incubator have also successfully launched Kickstarter campaigns. The latest is the Opera Games team with their board game product Coupling, the Game. And even before them, the Mouzen company with its ergonomic armrest.
Each source of financing has its own characteristics, conditions and risks. It is crucial that a company carefully examines its needs and capabilities before deciding on a specific additional source of financing.
If you have any additional questions about sources of financing for companies, we at the Koroška Online Business Incubator (MPIK) are happy to assist you.
Author: Urška Krajnc, RRA Koroška doo – Network Business Incubator Koroška
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