Today’s SMEs exist in a new economic landscape that forces creativity and out-of-the-box thinking when it comes to financing. It is therefore necessary to broaden the range of financing instruments available to SMEs and entrepreneurs, in order to enable them to continue to play their role in investment, growth, innovation and employment.
1. Fund It Yourself
Most entrepreneurs these days have come to the realization that they will have to self-fund (also known as “boot-strapping”) their projects for a significant amount of time until more formal funding opportunities become realistic. There are many ways to accomplish this from savings accounts and zero interest credit cards to leveraging other personal assets. It may take a bit longer to save some money before you start and grow organically, but the advantage is that you don’t have to give up any equity or control.
2. Crowdfunding Approach
This newest source of funding, Crowdfunding, allows individuals or organizations to invest in start-ups in return for equity. Entrepreneurs pitch their ideas online to the community, set a target and see if the funds come back in. It’s possible to raise huge amounts in a short space of time. Besides, it can help to generate plenty of exposure and a wealth of useful feedback to the business. Certainly, an option if you are comfortable with putting your idea out there for all to see.
3. Family and Friends
Entrepreneurs often turn first to family and friends as a likely and friendly source of financing. This is a natural option and certainly one you might want to pursue. If you do so, be sure your agreement is carefully and specifically spelled out – don’t treat it casually with just a conversation and a handshake. It’s important to set expectations realistically, and critical that investors understand that their money is totally at risk.
4. Bank on Loans and Credit Guarantees
A more traditional route would be to get a loan from a bank for either startup capital or for the purpose of business expansion, or purchase of business assets. The issue with getting these loans is the requisite of a guarantor and collateral. The government does offer a Working Capital Guarantee Scheme (for viable companies with shareholder equity below RM20 million) as well as an Industry Restructuring Financing Guarantee Scheme (for investment in high value-added activities), both of which have government guarantees of 80% of the financing limit.
5. MDEC Grants and Funding
Malaysia Digital Economy Corporation or MDEC play an integral part in developing and nurturing talent to drive digital innovation around the world, while attracting participation from global ICT companies to invest and develop cutting edge digital and creative solutions in the country. With the right platform to provide capital support, further growth and kick-start new projects, MDEC is committed to groom Malaysian tech companies to reach their full potential in today’s thriving IT industry.
6. Angel Investors
An angel investor is usually a private individual or group investing their funds into a venture to help them take their first steps. The investor will usually be given private equity as part of the arrangement. That being said, much of it has to do with timing and leveraging the right contacts. Angel investors, for the most part, contribute in the beginning stages of a business, and may or may not get hands-on with the business.
7. Venture Capital (VC)
The advantage of getting venture capital funds is that a VC will usually have access to more funds than angel investors. However, there are more caveats and strings attached with VC funding, where VCs will usually require a seat on the company board and business decisions will need their input and approval. For entrepreneurs who wish to have singular control over the company’s direction, the requirements of VC funding might chafe at their vision. However, in the interest of accelerated growth, some compromises must be made to fit in with current business realities.
8. Interest Scheme
The Companies Commission of Malaysia (SSM) is advocating the use of Interest Schemes as a platform for entrepreneurs or SMEs to seek alternative financing. Interest schemes are a channel for SMEs to raise funds by pooling investors’ money to start or expand their businesses. Unlike buying equities, interest scheme investors do not have ownership rights and cannot influence or direct the operations. The schemes typically have a lock-in period of three to five years. After three to five years, the investors can sell their interest to the operator, depending on the conditions laid out in the trust deed.
Putting together the financing to launch a new business takes serious planning and effort. The diligent entrepreneur must weigh the benefits and downsides of available funding options and determine which sources of cash provide the greatest flexibility at the least cost. But you don’t have to limit those options. Many SMEs are started with money obtained from a mix of different sources. However, there will always be unanticipated events and expenses. Fortunately, the rise of new financing sources like crowdfunding means that prospective SMEs owners now have a greater range of financing options at their disposal than ever before.
Source 1: http://www.theedgemarkets.com/article/cover-story-better-protection-interest-scheme-investors
Source 2: https://www.thebizjuice.com/5-way-finance-business/