Find out how to obtain funds to start your project or business.
All the analyses on the problems surrounding entrepreneurship point to financing as one of the main obstacles to business development, which is why today we present this guide to obtain financing for your venture.
In this guide, besides helping you with the necessary guidelines to obtain financing, we will also explain which are the existing options, their advantages and disadvantages.
Get everything in order
There are different financial institutions or funders that can adapt to your needs and lend you enough money to start your business, but the first thing you must do is gain their trust. To do this, it is necessary that you present yourself as a formal company with all your documents in order.
Start by formally establishing yourself as a company, before the Tax Administration System (SAT). The best thing to do is to get advice from a lawyer or notary, and also with the registration comes your RFC, which will be a basic document for credit institutions. Determine your legal representative and make sure that he/she has at hand and in order documents such as CURP, official identification and proof of address.
Having these documents in order is the first step to gain the trust of the institutions that can fund you, because at the end you present yourself as a real company with legal activities.
Create a business plan
Putting together a business plan is one of the pillars for your company to succeed, but it is also a fundamental element to gain the trust of your funders. It is easier for institutions or people to want to invest in your project if they see that you have clarity in how you are going to achieve the things you propose.
It is important that the objectives are clear and achievable, and you must also specify how you are going to achieve these objectives. Also, it is important that you make a projection of expenses and profits, including the time in which you expect to start recovering the money invested.
For funders or institutions, the most important thing is to put their money on solid ground, so putting together a business plan and a projection of expenses and profits is the best way to show them that you are reliable and that your business is based on solid foundations.
Evaluate financing options
Once you have the accounts and plans clear and above all you already have the budget to start your business, it is time to start evaluating financing options, according to your needs such as time to raise funds or time to start making profits.
Here are some of the options that exist in Mexico to obtain funds for your business, as well as their advantages and disadvantages so you can evaluate which of them best fits your work plan.
The form of financing that we have more at hand is the FFF, maybe the name does not ring a bell, but surely you have thought of using it to obtain the first capital for your venture. The term FFF or triple FFF refers to the use of Friends, Family and Fools to borrow or donate money. It is an excellent option for those who are just starting out in the world of credit and business and there is no track record to back them up.
The disadvantages are several, for example, not having a circle of acquaintances with the capacity to lend enough money to reach the budget you need. The other important problem is that if you do not establish clear accounts among your family and friends about the loan or donation, it is very likely that you could lose those relationships.
Crowdfunding platforms aim to collect resources from a community in exchange for small benefits. There is crowdfunding for all kinds of actions from collecting money for social works to financing a company, accordingly the rewards for the donations received can be objects.
Many of the crowdfunding platforms dedicated to companies can offer small shares of them.
The advantages of this type of funding are many, because the requirements to start obtaining funds are not as rigid as with traditional institutions, so you will surely start to have money for your project very quickly and without many obstacles.
There are different platforms with different rules, that is why in some of them the funded money is a loan, while in other platforms, called investment platforms, the money received is not a loan, but the funders become small investors so you do not have to worry about returning the money.
Although it seems that there are only benefits with these platforms, you have to be careful, because they can also bring certain disadvantages. The first of them is that you may not get the necessary capital to start your project, because regularly the funding requests last only a few days. Another of the most worrying disadvantages with crowdfunding is that you are vulnerable to plagiarism of your project, because you upload it to a public platform from where it is very easy for someone to appropriate it.
3. Seed capital and angel investors
This is the name given to individuals who want to help entrepreneurs, i.e. investors who believe in the entrepreneurial ecosystem and are willing to invest in different projects.
One of the great advantages of this type of funding is that regularly these angel investors are successful entrepreneurs who, in addition to investing in your project, have no problem in providing advice on consulting and workshops so you can get your project afloat, so this type of funding is often called smart money.
You can access them through some investment clubs, such as Club de Inversionistas de México, and organizations dedicated to this, such as Angel Ventures México, or directly on websites such as Angel Investment.
One of the clearest disadvantages is how difficult it is to access these investors and convince them of the viability of your company. In addition, the amounts are usually low, on average investments do not exceed 500,000 pesos.
4. Venture capital
This type of financing is one of those that can make the strongest investments, these are investment funds that support startups in the growth phase. In exchange you deliver a percentage of the shares of your venture.
One of the most important advantages is that they can give you a high amount of investment, ranging from 500,000 to 20 million pesos, but more can be granted if your project is already growing.
The first one is that if you are not careful, they can keep an important percentage of your company or set conditions that will keep you away from your goals. The second is that convincing them is a very complicated process.
5. Government financing
Another of the most common ways to finance a small business is to resort to microcredits and funds granted by the government. Although almost all of these credits are concentrated in the Instituto Nacional del Emprendedor (INADEM), they are also granted by state governments or other government agencies.
Some of these resources are non-refundable, others help you with a part of your estimates, that is to say, they can put a high percentage of your budget while you put the other.
One of the advantages of this financing is that the credits can have very low interest rates, on average 6% per year. Another advantage is that you can get more than just money, as they can also help you in kind as work equipment or offer you workshops and consulting services.
The disadvantages are several, mainly the access to these supports, since you usually have to invest a lot of time to make the applications and gather the required documentation. In addition, many of these grants are awarded through exhaustive calls for proposals that can easily leave you out.
Usually one of the first options for financing that comes to mind is to turn to a bank. In Mexico, most banking institutions have loan schemes specially designed for micro, small and medium-sized companies.
Among the advantages of these loans is that you can access them more or less easily and you can use the money at your discretion. However, one of the biggest disadvantages, compared to other financing, is that they are usually high interest loans.
Incubators are hub companies that have the objective of supporting and developing startups. Most of their support consists of providing a physical space and work equipment for your startup, as well as consulting services. So, their main disadvantage is that you will get little funding directly from them, but they can help you get more through external means.
The best thing to do is to resort to several types of financing, because as you can see, some of them, although accessible, give you little money. Also check where you get the funding from, if you only receive money for the sake of it, you may end up allowing the interference of untrained investors who can waste your time and take you away from your business plan.
I hope these tips are useful and make the fundraising process easier for you. Tell us, do you know of other financing options?