Business innovation refers to when an individual or organization aims to introduce new practices, ideas, products, services, or methodologies. Implementing a business innovation into existence can be challenging. It requires massive financing, especially if you’re new in the industry. However, that shouldn’t prevent you from going the extra mile searching for a business idea. There are plenty of ways to finance a business innovation and watch it grow into a stable business with good returns. Here are the best ways to finance business innovation:
Government Funding or SRED
The government has been a lifesaver to many business innovations through financing in grants, rewards, incentives, and more. Government funding can be acquired by different businesses and for various purposes. Certain criteria are followed to evaluate the business’s eligibility and the funds it can receive from the government. On the other side, Scientific Research and Experimental Development (SRED) is a form of government funding offering tax incentives to business innovations related to scientific research and developments. The program has benefited such businesses for years, triggering citizens to develop new and better innovations for the field. SRED is a reliable source of government funding due to its credibility.
Personal Funding
You don’t always have to acquire external finances to implement a business innovation. Sometimes, you can use your savings or funds to finance a business innovation. Even so, many funding institutions will inquire about your financial efforts to make the idea a reality.Personal funding can be in the form of other investments, valuable collections, equity in mortgages or real estate, and savings.
Family and Friends
Another way a business can finance innovation is by requesting funds from friends and family. The good thing with this kind of financing is that the business can set flexible terms and conditions for repayment. Again, the funds from family and friends come faster than other sources. If you choose family and friends to finance a business innovation, ensure to put the agreements and conditions down on paper to prevent misunderstandings in the long run.
Venture Capital
Venture capital is when investors offer start-up financing to business innovations to earn equity in return. Financial institutions, investment banks, and well-off investors provide the funding. Venture capital has plenty of advantages but not without drawbacks too. This source of innovation financing is beneficial to the business as they connect to other businesses and acquire financial advice and other business resources. However, with Venture Capital, the financed business has little or no control over its operations, ripping off the prestige of sole ownership.
Debt Financing
Debt has been the most popular way of financing business innovations. It means acquiring funds from a bank or other financial institutions to be paid later with a specified interest. Debt financing benefits the business, including retained ownership and prestige. Also, it has flexible terms and repayment duration with fixed interest rates. Although, if the business innovation fails, the owners may be personally responsible for repaying the loans.
Angel Investors
Angel investors offer funding to business innovations after seeing their potential in them to gain equity in the long run. The good thing with Angel financing is that the investors provide longer periods of repayment of the ‘loan.’ Again, they offer businesses financial and general advice since they have lasted longer in the investment industry. However, with Angel investors financing the innovation business, the ownership is divided into two, where the financiers may acquire the larger portion. Additionally, Angel investors are rare, especially in the current tough economic status.
Factors to Consider When Choosing a Source to Finance Business Innovation
Choosing the most suitable source of finance for your business innovation can be distressing, especially with the current uncertain economic conditions. Below are various factors to consider in such situations to avoid making financial mistakes that would cost you more:
- Risk: You must evaluate the possible outcomes if you fail to adhere to the commitments of your preferred source of finance. Different sources of financing business innovation come with various commitments.
- Cost: The cost of finance shouldn’t be overwhelming for the business due to the uncertainty of innovations.
- Urgency: Urgency refers to the time the business requires to collect enough finances for its innovation. If innovation isn’t so urgent, businesses can acquire long-term sources of finance.
- Prevailing economic conditions: Some economic conditions may not be favorable to various sources which finance business innovation, while others are favorable.
As highlighted earlier, financing a business innovation is no child’s job. A business owner needs to evaluate different sources of financing business innovations and go for the most favorable one. You should consider the repayment options, payment duration, interest rates, and facilitation fees. Most importantly, consider the above factors to avoid making financial mistakes that might be complex to repair.