Types of Funding Sources and Methods

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Introduction

Startup organizations experience financial challenges when implementing strategies to attract customers and increase their competitive advantage. Lack of resources can lead to poor performance and low profits, whereby some startup corporations become bankrupt. Thus, startup firms must focus on different funding sources and methods to acquire adequate capital and become more competitive. This report compares and contrasts personal, private, governmental and banking, and bootstrapping funding sources used by startup organizations and the challenges that startup companies experience when using these methods.

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Personal Funding Source Method

One of the methods that companies exercise to acquire resources is the personal method. The approach involves seeking financial support from family and friends (Mustapha & Tlaty, 2018). Unlike other methods such as private and governmental and banking, personal funding is easy to acquire. Additionally, its risks are lower than private and banking, which can involve auctioning if the borrower fails to meet the agreements.

One of the companies that used the personal funding process is Skyscanner. The founder acquired money from friends and became one of the leading firms in the organization (Hackernoon, 2018). However, challenges were experienced through the startup funding process. For instance, capital acquired was not enough, and the founder had to seek more finances from banks. Additionally, the company ensured that it utilized the funds to meet customer demands and become more productive.

Private Funding Source Method

The private method is another fundamental approach that startup organizations use to acquire funds. The strategy involves seeking investment capital from private investors and developing the firm (Mihaela, 2017). Unlike other methods, private funding requires parties to sign their terms regarding the money borrowed. The venture capitalists have provided capital to many small firms and helped them improve their market share (Bates et al., 2018). Although the approach requires more procedures than other methods, many investors prefer private funding due to the availability of ready cash. Thus, private equities have played a significant role in supporting small firms that wish to expand but do not have access to equities markets.

One of the corporations that used private funding is PaintNite. The organization acquired funds from private investors and used the money to increase its market share (Hackernoon, 2018). The firm focused on marketing and introducing new products and services using the resources from private companies. Nonetheless, it experienced challenges such as high-interest rates. The company guaranteed to raise venture capital by pairing art teachers with existing bars that wanted to sell wine on weekdays

Governmental and Banking Funding Sources

Governmental and banking are funding sources that have enabled startup organizations to develop and grow. The method involves local, municipal, state, and national institutional lenders. For instance, the Startup Loans Scheme is a government stimulus package that gives startup firms access to a low-cost loan (Garg & Shivam, 2017). Banking is another funding method, which involves borrowing money from the banks and signing agreements regarding the period of payment. Governmental and banking funding sources also involve much paperwork since the loan applicants have to provide various details, including their next of kin, similar to private funding. Additionally, the approach is vital since resources are available, unlike bootstrapping and personal funding, where a lack of adequate funds may be experienced.

Several organizations have benefited from governmental and banking funding sources. For instance, Alienware is a company that specializes in customizing personal computers for hardcore games. The firm acquired bank loans as its startup capital and used them to establish its elite brand. The organization experienced difficulties due to the low income during its first years of operation. Nonetheless, Alienware Company ensured that it received reviews from several gaming publications to attract more clients and increase its sales (Hackernoon, 2018). The approach was essential since it enabled the company to grow and acquire funds to pay the loan and expand its market share.

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The Bootstrapping Method

Bootstrapping involves using only existing funds such as personal savings to start and grow a business. Many firms have used the method since it does not entail signing agreements and paying interests, which is common in other methods such as private and banking (Waleczek et al., 2018). In most cases, many people who focus on bootstrapping have little money and encounter challenges such as competition from big firms. Thus, bootstrapping can be challenging since entrepreneurs must rely on their money and not from outside investments. Nonetheless, bootstrapping is less risky than other methods such as private and banking which can involve high-interest rates.

One of the organizations that started using the bootstrapping method is Rightsleeve Company. The firm was founded by Mark Graham and has grown to become a recognized brand. Graham started the cooperation with the little money that he had saved (Hackernoon, 2018). Therefore, the lack of adequate funds is the major challenge that individuals who practice bootstrapping encounter (Kolyaka, 2021). Nonetheless, Graham ensured that he marketed his organization by advertising the company’s services, leading to the growth of the business.

Conclusion

Funding sources are essential to every organization and can impact its development. Small firms have been encouraged to focus on acquiring resources and utilizing the funds to become more competitive. For instance, governmental funding is one of the approaches that can help startup organizations grow since the approach offers low-cost loans. Many businesses have also used other strategies such as bootstrapping, private funding, and personal funding. Therefore, there are various approaches that startup and small organizations can acquire their investment funds.

References

Bates, T., Bradford, W. D., & Jackson, W. E. (2018). Are minority-owned businesses underserved by financial markets? Evidence from the private-equity industry. Small Business Economics, 50(3), 445-461.

Garg, A., & Shivam, A. K. (2017). Funding to growing startups. Research Journal of Social Sciences, 10(2), 22-31.

Hackernoon. (2018). 50 big companies that started with little or no money.

Kolyaka, T. (2021). Financial bootstrapping as relational contract: Linking resource needs, bootstrapping behaviors, and outcomes of bootstrapping exchanges. Lund University.

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Mihaela, H. (2017). Financing small businesses: From venture capital to crowdfunding. Studies in Business and Economics, 12(2), 63-69.

Mustapha, A., & Tlaty, J. (2018). The entrepreneurial finance and the issue of funding startup companies. European Scientific Journal, 14(13), 268-279.

Waleczek, P., Zehren, T., & Flatten, T. C. (2018). Startup financing: How founders finance their ventures’ early stage. Managerial and Decision Economics, 39(5), 535-549.

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BusinessEssay. 2022. "Types of Funding Sources and Methods." September 8, 2022. https://business-essay.com/types-of-funding-sources-and-methods/.

1. BusinessEssay. "Types of Funding Sources and Methods." September 8, 2022. https://business-essay.com/types-of-funding-sources-and-methods/.


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