Sources of financing for entrepreneurs
The road for entrepreneurs is uphill, but it’s possible!
A venture can be easy, the complicated thing is to keep it alive and find the resources to finance it.
According to the “INEGI”, the life expectancy for new enterprises in Mexico is discouraging, 75% of Mexican enterprises close within two years of being born. Annually, 1.1 million businesses are created, but 884,000 die.
According to a study by The Failure Institute.
65% of companies in Mexico fail to have sufficient income to survive, and 38% have financing problems. That is why, we’ll introduce you to the top five main sources of financing for entrepreneurs:
1) Bootstrapping: It means paying the startup expenses without seeking external financing for a determined period of time, usually at early stages. This financing option is very common among young entrepreneurs, since they usually have no financial responsibilities and they can finance the start of their project themselves.
Advantages: you don’t have to report to any investor, and when you look for investment your startup will be better valuated, meaning you’ll have more leverage to negotiate.
Disadvantages: it can be very exhausting for the entrepreneur and could be months or years without receiving a salary or a stable income.
2) Friends and Family: This financing option is when the entrepreneur validates his business model and sells the idea to his friends and/or family, usually they are the closest people in his/her social circle.
Advantages: it can be very fast.
Disadvantages: since they are not used to making investments, or in the venture capital environment, they may want to participate in the operation of the company, that may result in inappropriate advice.
3) Angel Investors: They are natural figures within the ecosystem of entrepreneurship. In addition to providing capital to companies, they also contribute know-how, which is why their investment is known as smart money. They can contribute ideas /advice and open new window of opportunities.
Advantages: they can take the role of mentors.
Disadvantages: the amounts invested can become limited and they usually seek to participate in the board of directors of the startup (it can be good or bad).
4) Venture Capitals: Venture capital funds are the ones that usually invest in startups in early stages, whose potential and risk are high. In return, the entrepreneur sells a share percentage of the venture.
Advantages: Validate your business model and certify that your project is on track (due diligence).
Disadvantages: If your company does not have a validated product market fit or you are an entrepreneur with little experience, you may not be able to defend the valuation for the money you are trying to raise and you may end up giving up a large percentage of your company.
5) Credit: Traditional credit that you request at a financial institution. Financial Institutions have loans for small, medium and big enterprises.
Financing amount: 20,000 to 3 million Mexican pesos. According to CONDUSEF, interest rates can range from 6.6% to 24%.
Advantages: You decide completely the use of the resources loaned from the bank.
Disadvantages: The banks always win! if your venture fails, you will still have to pay the money loaned.
These are just some of the financing options entrepreneurs can find.