Capital is needed for an idea to become a real business. The better you have defined the idea and can justify its business case, the greater the chance you will be able to finance the project by bringing in investors or securing other funding.
There are various ways to finance an operation or a business idea. The most common methods are bank loans, investors, crowdfunding, and family loans.
Funding in general
When the company is in the idea stage, it can be expected that the entrepreneur will need to spend a significant amount of time working on the idea. The entrepreneur needs to view this time as an investment in the company. If you are not willing to take a risk with your own capital and time, why should others bet on your idea with their money?
It is advisable to find out early how much funding you need to move the idea forward. Sometimes, an overdraft from the bank or a long-term loan can be sufficient. If the idea involves significant innovation, you may be eligible for government grants. If you can demonstrate significant innovation and that the company has potential in foreign markets, your chances of convincing investors to bring capital into the business for a certain percentage of ownership increase.
The form and scope of grant applications vary, so it is advisable to allow plenty of time for them and not to apply at the last minute. It is a good idea to ask someone who is not connected to the project to review and critique the application for you. Most of the time, these are competitive grants, so it is very important to have a clear and strong application. Applying for grants can be a significant amount of work, but good preparation is key to receiving a grant. It is extremely important to carefully read the guidelines and rules for the grants to determine if the project is a good fit for a particular fund.
It is helpful to have a business plan prepared before applying for a grant; this demonstrates that the business idea is viable and that there is a solid operational foundation for it. However, there are some funds that provide grants to work on a business plan and develop the idea well before applying for a grant. Even if the idea is in its early stages, it is necessary to be able to explain what the project's innovation is, what problem the product is intended to solve, and to have a detailed description of the target audience. This is all part of the fundamentals of a business plan. In some cases, more detailed information is required, such as a complete business plan and a financial plan.
Usually, you apply for specific work packages, which need to be clear, realistic, and consistent with the project's stage at the time the grant is applied for. Preparing a grant application can be time-consuming, so it is crucial to carefully read the guidelines and rules for the grants to determine if the project is a good fit for a specific fund.
Bank loan
It is almost impossible to run a business without maintaining a good relationship with your business bank. Even if you are not seeking a loan from the bank, they offer various services to business owners that can be very useful.
It's a good idea to go to the bank and discuss your plans. They will surely give you good advice and tell you what's available.
The availability of loans for entrepreneurs from banks may vary at any given time. Therefore, it pays to check what is available at more than one bank to be sure to choose the best option.
It is undoubtedly better for you to have a business plan in hand. That way, the bank knows you are serious about your ideas, and it increases your chances of getting a loan. It can be a good idea to talk to bank staff in advance to find out what they want to see in the business plan.
Not everyone needs a large loan to start a business. Keep in mind that the risk of starting a business is lower the less debt you take on. However, a business may require significant capital to get started, but that also means the fall is greater if things go wrong. Often, a business is started with little to no bank loans, as the initial financial need is not great. If you are having difficulty getting a loan, you can review the startup costs and see if it's possible to lower them.
It is advisable to find out early whether you will need bank financing to get your business off the ground. Do you need a factory or an office? Do you need to hire employees? Does it take time to find customers? If you can't avoid these factors, it's foreseeable that you will need to borrow money, and having a good business plan helps.
The bank will likely evaluate your application on at least three factors:
- Management – your skills as an operator, including your ability to manage.
- How viable is your business idea – the market for your idea or service, your operating costs, and your financial plans.
- Risk – the risk the bank takes of not getting its money back. Keep in mind that if things go well, the bank does not share the profits with you, but it can lose money if things go badly. In the minds of bankers, any new venture is risky. For this reason, the bank wants to secure itself as much as possible before lending money, and it primarily looks at two things: equity and collateral.
Swan is a women's loan guarantee fund that provides loan guarantees to women-owned businesses and partners with Landsbankinn for loan services. Only businesses that are majority-owned and managed by women can apply for loans and loan guarantees.
Arion Bank, Icelandic Bank and The National Bank offer companies a wide range of services and various financing options.
Before you go to the bank:
Investors
Investors like to see plans for how their investment will be spent before investing in return-driven companies. How the funds will be allocated, what actions will contribute to the company's growth, what the estimated return on investment is, and what the investor's exit strategy is.
Before you and potential investors take on financial risk, it is important that you can demonstrate your plans and that they are well-thought-out, as well as your ability to respond to any problems that may arise. A well-crafted business plan answers most of these questions and builds investor confidence in you. It should also include plans for each investor's stake in the company for a specific investment.
Angel investors are wealthy individuals who want to invest in new projects. It is common for the projects to be in a field where the investor has strong beliefs, interest, and considerable knowledge. Angel investors often get involved in projects early in the development process and assist the entrepreneur in working on the project.
When an angel investor comes into the company, it's good to consider whether the investment brings something more than just capital to the business. You should look at whether the angel investor has knowledge or business connections that will benefit the company. Capital alone is usually not the most valuable thing an angel investor brings to a company. Angel investors invest in people they believe in and look at how credible the team behind the business idea is.
Typically, entrepreneurs do not approach angel investors through traditional channels, such as grants, bank loans, and investment funds. Often, an angel investor is someone the entrepreneur knows or has been connected with through a personal network. Look closely at your network and see if an angel investor might be hiding within it. Many people meet investors at events related in some way to the projects they are working on, for example, annual meetings, startup events, etc. It is then important to have practiced the mutation and be well-prepared if you meet an investor who might potentially invest in your project.
Investment funds usually want to invest significant amounts in each startup and acquire a significant stake in each company. The funds usually look at how likely the business is to become profitable and only invest in companies that have demonstrated their potential, and even those that have already received smaller investments and/or grants.
Below is a list of investment funds. Please note that this list is not exhaustive, but it can provide indications of where to seek funding.
Innovation Fund for the Business Sector is a venture capitalist who invests in innovative and startup companies where significant value creation, strong returns, and a good rate of return from operations are expected. The Innovation Fund of the Business Sector emphasizes working with other domestic and international investors and participates in fund-of-funds to promote venture capital investments in promising innovative and startup companies, both domestically and abroad.
Eyrir Invest / Eyrir Startups is an international investment firm that invests in promising industrial companies that aim to be leaders in the global market.
Frumtak II began operations in February 2015. The fund aims to invest in startup and innovative companies that have graduated from an incubator and are poised for growth and international expansion. Frumtak II invests in Iceland but is authorized to invest abroad to the extent permitted by law and necessary for the international expansion or market entry of companies owned by Frumtak II into foreign markets.
SA Initiative / Brunnur Growth Fund It is an investment fund that provides assistance with financing to innovative companies. The fund invests in Icelandic innovative and growth companies that sell or aim to sell products or services in foreign markets.
Thule investment Manages the operation and administration of the professional investment funds Brú Venture Capital and Brú II Venture Capital Fund S.C.A. SICAR. Investments are made in companies that have developed a product or service ready for marketing and have the potential to use the funds to grow rapidly.
Respect is an independent financial services company. Its purpose is to operate domestic and international mutual funds, investment funds, and funds for professional investors.
Is the operating plan ready?
Crowdfunding
Crowdfunding is becoming an increasingly common method for financing startups, and there are many crowdfunding platforms around the world. The most well-known are probably Kickstarter, GoFundMe, and Indiegogo. The Icelandic funding platform Karolinafund has also enjoyed immense popularity in the country and partners with other Nordic funding platforms.
Crowdfunding works by setting up the project online and establishing a specific funding and time goal. For a certain amount of money, a consumer can, for example, buy a product before it has been produced, receive a specific gift in return, or even get a stake in the company, depending on how the project is set up.
This funding method has proven successful for projects that, for some reason, are not considered particularly investable, but nevertheless have clever solutions or products that consumers want to see on the market. Crowdfunding can serve as a "proof of concept" for further investment. If an entrepreneur can demonstrate that a certain number of people are willing to buy the product, it provides an indication of its future potential.
Crowdfunding can certainly be a good marketing tool, but it should be aimed solely at the product's target audience. The campaign must be prepared with the goal of reaching the intended audience, not to acquire a new one. You need to understand the target audience well, create interesting offers/business opportunities for them, and demonstrate that the project is exciting.
Good preparation includes, for example, finding the right crowdfunding site, but they have different focuses. You need to decide what is on offer for the person who supports the project and how to get the most out of the support provided. It has proven successful to prepare a good video and use other media to promote the crowdfunding project to the target audience.
Is crowdfunding suitable for your project?