A solid business plan is one of the most important documents you’ll need to create for your company. This document provides a roadmap for your company’s future developments. However, no growth can occur without a sufficient amount of working capital. That’s why your business plan should include a source of funds section – it can remind you how to maintain the cash flow your company needs.
There’s another reason this part of your business plan matters. It can show certain lenders how much money you need beyond what the funding sources in your business plan can get you. That said, not all lenders will require you to share a business plan. For example, SmartBiz’s loan approval requirements don’t include business plans among the necessary paperwork. Either way, below are some source of funds examples in business plans.
What is a business plan?
A business plan is a document that guides your company’s growth. It helps define your business goals and provides a clear overview of how you’ll achieve them. You can also use it to plot out your marketing, operational, and sales approaches. Your business plan can be the foundation of a strategy to minimize risk and maximize growth.
Another reason why solid business plans are essential is that you’ll often need to provide them as you apply for business loans. Business plans provide an in-depth look at a company’s plan for profits, so lenders can more easily judge the borrower’s likelihood of repayment. Lenders are much more likely to finance borrowers whom they believe can pay back the loan amount in a reasonable timeframe.
8 source of funds examples
Having a source of funds – sometimes several sources of funding – is vital to growing your business. Common funding options include business loans, and sometimes, to qualify for them, you must show lenders your other funding sources. Understanding the below source of funds examples in business plans can help you better structure yours.
1. Personal savings
When you’re just getting your business off the ground, sometimes, the fastest way to fund it is directly from your current savings. However, entwining your personal savings into a company that could fail is a risky prospect – but it also shows commitment. Lenders and investors often respond well to a borrower who’s ready to go the distance with their ideas.
2. Money from friends and family
Money from family and friends, which you’ll also see called “love money,” is a viable source of funds in your business plan. However, just as it’s risky to get your own money wrapped up in a business, it’s dangerous with other people’s finances too. Plus, accepting money from a loved one can come with drawbacks. For starters, not everyone in your life has much to spare in the first place. Furthermore, if you borrow money from friends or family and you can’t repay it, the relationship could be damaged.
3. Federal and private grants
Occasionally, your business model can put you in line for federal grants. That said, rare is the business that qualifies for federal grants – technically, the government does not provide grants for small businesses growth. However, private companies ranging from FedEx to the NBA offer grants to small businesses that fit certain criteria. If there’s a chance your company could fit these criteria, you can include private grants as sources of funding in your business plan.
4. Share sales and dividends
Selling shares of your company to investors – as in, anyone who buys stocks – falls under a category of funding known as equity financing. This arrangement can be lucrative, which is a main reason why you see so many companies having initial public offerings (IPOs).
However, equity financing has a few drawbacks. For one, you’ll no longer have complete control over your company's future, as stockholders dilute your ownership. Additionally, you’ll have to account for dividends in your financial planning. You pay these sums to your shareholders every quarter.
5. Venture capital
If you need a large amount of cash, venture capitalists can be a viable option. Typically, though, venture capitalists are only interested in funding startup businesses in the tech sector with high growth potential.
Venture capital is a high-reward but high-risk funding source. It often requires you ceding a certain amount of ownership – and thus control – of your business. Furthermore, if your business fails, you may still need to repay any venture capitalists or firms that have funded your operations.
6. Angel investors
An angel investor is a wealthy private individual who invests in small businesses to help them get off the ground. They tend not to offer as much starting capital as a venture capitalist, but they can make up for the smaller amount with experience. Angel investors are often experts within a specific industry and put money back into it by investing in newer businesses within that sphere.
Although you’ll have to give an angel investor some control over your company, their experience and network can help your business grow. Additionally, the word “angel” in their name reflects that they typically don’t ask for their money back if your business fails. That makes them a safer bet than venture capitalists.
7. Business incubators
Unlike the previous funding options, a business incubator doesn’t offer direct monetary support. Instead, incubators help fledgling businesses thrive by allowing them into their workspace and letting them share resources as they get started. This type of funding is indirect – you’ll rarely get direct cash infusions, but you’ll get resources that would otherwise cost you money. It’s common in high-tech industries such as biotechnology, industrial technology, and multimedia.
8. Bank loans
Bank loans probably ring a bell for you. When a current or aspiring small business owner needs additional funds, these loans are often the first thing that comes to mind. They’re among the most in-demand funding options available given their large funding amounts, long-term repayment periods, and low interest rates. However, their high amounts introduce lender risk that can make them difficult to obtain. To minimize risk, most lenders impose strict qualification criteria that you might not make.
Why do you need to provide sources of funds in your business plan?
Providing a source of funds in your business plan paves a path toward obtaining and using your funding. Knowing where your money is coming from and what you’re spending can help with strategic financial planning. It also minimizes the chances of your business partners spending money the company doesn’t actually have.
In a lending context, your sources of funds may help you qualify for any loans you need in the future. Depending on the funding sources you’re using, lenders may view you as someone able to repay the debt financing they offer. For example, using personal savings shows your commitment to your business, meaning you’re likely a reliable borrower who won’t flake on a loan. You’ll show your commitment to your company and your business at the same time.
Parting thoughts
Reliable funding sources are essential to achieving your company’s objectives, and their presence in your business plan can help you obtain more funding. Namely, certain entities that offer small business loans require business plans as part of the borrower approval process. When your approval plan clearly shows why you need the loan money and how else you’re getting funding, lenders may trust you more.
However, certain lenders don’t require business plans. In fact, when you apply for SBA 7(a) loans, bank term loans, or custom financing through SmartBiz®, you don't need a business plan. Check now to see if you pre-qualify* – the business funding you need might be closer than you think.
