How can I obtain investment for my business?
Economic environment of the Region of Murcia.
In times of crisis, maintaining employment is the first objective. When employment has been irretrievably lost, self-employment becomes one of the main alternatives. As a self-employed worker or as the head of a company, crises also present opportunities for growth.
Personal development is one of the reasons to create one’s own business, start it and watch it grow; another is to detect an opportunity for success in an innovative business, or simply to take advantage of the reduced competition in some sector and enter it by exploring the possibilities of a novel approach.
There are as many reasons to create a new company as there are new companies every year. In this sense, and despite fears of a greater decline, the year of the pandemic did not take a particular toll on the creation of companies. In 2020, 79,151 new companies were set up in Spain, 16% less than a year earlier. In the Region of Murcia, with 2,263 newly created companies, the decrease was 7%. It is true that there were fewer companies than in 2019, but with greater capital endowment: 63,000 euros on average in Murcian companies compared to 42,000 euros of average capital subscribed by each of those created in 2019.
Significantly, the balance sheet of the companies still shows positive features. Looking at 2020, in Spain 20,259 companies were dissolved (79,151 were created), and in the Region of Murcia the dissolution reached 204 (2,263 were created).
As has been indicated in the number of companies, there were no significant variations in the number of self-employed workers affiliated to the Social Security either, at around 3.2 million in the country as a whole, of which 100,000 correspond to the Region of Murcia.
Knowing the reason why each person might want to set up a company and having defined what business it is, the main obstacle is financing.
Key factors to invest in my company
- Own capital
This formula is known in English by the term bootstrapping, which in reality would mean starting the project with few resources. Of course, it depends on one’s resources. The formula is reminiscent of entrepreneurs who started their companies with little more than a telephone in the family garage. Having overcome this nostalgic image, the capital to invest in the company can come from savings, from the capitalization of unemployment benefits or from the compensation received after a dismissal or closure of the company in which he/she worked as an employee.
A positive aspect of this type of financing is that it encourages a culture of savings, increases creativity and avoids financial dependence on third parties.
On the other hand, the lack of resources can limit the capacity for growth and sometimes prevents access to commercial operations for which debt capacity or financial margin is necessary.
- The help of family and friends
It is known as the Friends, Family and Fools option, which literally translates as ‘Friends, Family and Fools’. Fools’ is understood as the ‘fool’ who ventures to invest in a project.
These are loans made to the entrepreneur by his closest circles and are based on trust in the person or in the project, whether or not they are unaware of its viability.
Their advantages are obvious. In most cases there are no repayment terms or interest, the link with the entrepreneur makes it easier for them to believe in the business and it is not common for investors to try to influence business decisions.
However, it also has its disadvantages: the amounts contributed are not usually abundant, delaying the payment of a refund or the bankruptcy of the business can generate family conflicts or that some of the ‘investors’ as ‘shareholder’ claim to participate in the running of the business and is the origin of the first conflicts.
- Bank credit
After the own resources and the help of the family, the bank credit is the most commonly looked for source of financing; but it is neither easy to obtain it nor will it ever be enough. Rarely will banks or other financial institutions that work with products such as leasing or renting for the acquisition of assets believe in our word alone and trust a project, no matter how wonderful it may be, if it is not accompanied by a business plan and/or personal guarantees and endorsements.
The main mission of banks is to finance families and companies to sustain the economy and help develop businesses, but we must not forget that their objective, like that of any other company, is to obtain profitability. In other words, to make money on loans.
The entrepreneur must make sure that he/she will be able to repay the loan and pay the interest, for which he/she will be required to provide personal guarantees or collateral. If this does not cover the loan or if tangible assets are not available, it is usual to resort to guarantors.
In any case, before going to a bank to request a loan to start a business project, it is practically indispensable to have a business plan to evaluate its technical, economic and financial viability.
- Business Angels
The ‘business angels’ could be considered patrons with the difference that, in addition to providing money, they provide experience and contacts. Business angels are individuals, not companies, willing to participate in developing or expanding companies, and their main characteristic is that they get directly involved in the business by making their knowledge available to the entrepreneur.
The profile of these ‘angels’ is not unique. They are usually businessmen or company managers, savers who want to invest or other successful entrepreneurs.
The advantages for the entrepreneur are not only financial, but also that he receives confidence for the rest of the market and credibility at the beginning of his business project when he arrives backed by a business angel, usually already known in the sector.
- Venture capital fund
Similar to business angels, but venture capital funds are collective. That is to say, they are not constituted by a single individual but by financial, business and public collectives… These collectives provide capital both in the early stages of the company (seed), as well as in its subsequent development and expansion. Their objective is to obtain profits, even if they assume ‘risks’. This type of investment would not be advisable for a conservative investor. On the other hand, for a technological entrepreneur it may be the solution to his main liquidity problem.
Startups focus a good part of their line of business as they are companies that have new technologies or innovative business models, which would allow them to grow rapidly and successfully or, on the contrary, to collapse soon, a risk that this type of investor likes to assume.
- Startup accelerators
Being present in a startup accelerator does not mean directly obtaining financing, but it does mean receiving a definitive impulse, often definitive, to obtain it.
Accelerators are part of entities or companies that accompany entrepreneurs through training and mentoring programs. They provide them with knowledge and sometimes technological support to develop their business idea. Subsequently, and this is the most interesting part, the projects are presented to potential investors.
Normally in the accelerators they work together, several startups can share spaces with other business ideas and entrepreneurs can receive emotional support from other colleagues when they face difficulties and even find innovative solutions in the workshops organized.
Large consolidated companies are partners of these accelerators or have them within their organization and after working on the development of the project can enter the capital of the new company, forming a joint venture or directly acquiring the new company.
- Crowdfunding
This type of crowdfunding was initially used to support cultural and artistic projects, or campaigns for charitable causes. However, this fundraising formula is also used to support the development of products or microenterprises.
Entrepreneurs ask for small contributions that multiplied by many individual investors can generate significant sums. The application for financing is made through the many existing platforms. In them, the entrepreneur must present a realistic project and the economic need, in addition to explaining what the reward for the micro-investor will be (return of the money, profit dividend or appearing in the credits of a movie, for example). A deadline must also be set for the funds to be raised.
Thousands of projects in technology, fashion, cinema, video games, crafts or music have been financed through crowdfunding, a recent formula in Spain but with a long tradition in the United States and the rest of Europe.
- Bartering
The term is usually associated with marketing and advertising. However, there are frequent commercial agreements between companies without money involved, either for the exchange of products or services.
It is not a direct financing formula, but it does reduce costs and savings that can be used for other investments.
- Public subsidies
The administrations do not finance business projects, or at least not all of them, but there are lines of credit or non-refundable contributions for the acquisition of technological equipment, expansion of infrastructures, new production lines or internationalization plans.
The different autonomous communities, as well as some local administrations and the Ministry of Industry have subsidy and aid plans to finance projects, especially technological and innovation projects, as well as those of the ‘green economy’ based on the environment and sustainability.
- Business project competitions
The aim of business project competitions is to encourage self-employment and promote the culture of entrepreneurship.
The organizers -both public institutions and private companies- look for the best business ideas, either generic or in a specific sector: technology, leisure, environment….
The prizes are usually in cash and although sometimes the amount is not enough to fully develop the project, at least they are a first impulse, as they are usually completed with training programs and business mentoring both in Spain and with scholarships to stay abroad.
Entrepreneurs who are considering entering these competitions should be aware that the jury will evaluate the degree of innovation and originality of the product or service, the impact on the environment, the repercussion on economic activity and, of course, the technical, commercial, economic and financial viability.