Different ways to get Funding, and their Pros & Cons

It might cost hundreds of ringgits to millions of ringgits to launch a business. What if you require money to support bigger company endeavours or get through challenging times during regular operations? You might need to consider the cost of marketing, hiring staff, purchasing equipment, or registering your business. 

The best part is that you have a variety of options for raising capital for your business plans. In this article, the six alternatives in Malaysia are listed, together with their pros and cons. 

Six Ways to Fund Your Business  

1. Personal loan 

2. Business loan 

3. Grants and schemes 

  • You can refer to the pdf file below for a list of grants and programmes offered by the government and businesses, or go to SME Corp. Malaysia, MaGIC, and MDEC to get the latest updated list.

4. Crowdfunding 

  • Donation Crowdfunding: investors make a free investment without receiving anything in return in this type of pro bono crowdfunding. 
  • Reward Crowdfunding: commonly referred to as product crowdfunding, is the most basic type of crowdsourcing. The financier provides a new good or service in exchange for a particular amount from the investor and a good or service of equivalent value from the investor. 
  • Equity Crowdfunding: everyone gets the chance to become a minor stakeholder in the company owing to this equity crowdfunding approach. 
  • Debt Crowdfunding: debt-based crowdfunding is increasingly prevalent oversea. It is a form of investment similar to loan; you hand over a specific sum to the other party in exchange for a commitment from that party to pay you a particular amount of interest, which will eventually be paid back to you with interest. 

5. P2P lending 

  • Peer-to-peer (P2P) lending, often referred to as debt-based crowdfunding, is when investors band together to lend money to companies. 

6. Venture capital and angel investors 

  • Venture capitalists are organisations or people who invest in companies with strong development potential. Their capital is a pooled investment from other people or businesses. An angel investor, on the other hand, is a wealthy person who contributes their own funds to start-up businesses. 

Pros and Cons 

Ways to fund business Pros Cons 
Personal loan get rapid cash for modest sums have a lower financing limit 
  simpler to obtain than business loans difficult to get approved if you own a business or work for yourself 
Business loan assist you in obtaining significant money harder to qualify for than personal loans 
  interest rates lower than personal loan limitations on how you may utilise the money 
Grants and schemes provide large grants there are qualifying standards for each funding programme 
  low-interest financing (or interest-free financing) certain grands are competitive 
Crowdfunding simpler to raise money than through grants and bank loans funds won’t be release if you don’t meet the target fundraising 
  qualifying standards may not be as strict   
P2P lending less stringent financial and operational standards higher interest rates 
  provide speedy financing   
Venture capital and angel investors offer substantial financing as well as mentoring or networking possibilities competitive 
  could not ask for any money back you might give up some power 

Pros and cons – Personal loan 

Even while a personal loan might not be the first thing that springs to mind when you think of “business finance,” it can be a useful tool for getting rapid cash for modest sums. This makes it appropriate for microbusinesses that don’t require a lot of funding, like a home-based bakery or a food truck operation. 

You’ll need a respectable credit score and a track record of steady income in order to get approved for a personal loan. These loans are typically simpler to obtain than business loans, which could necessitate that your company has been in existence for several years. Additionally, some loans distribute money in a working day or less, which is helpful for addressing emergencies. 

Although your limit may be based on your income, personal loans have a lower financing limit of RM50,000 to RM200,000. Additionally, they often have higher interest rates than commercial loans. Additionally, it could be more difficult to get approved for a personal loan if you own a business or work for yourself. 

Pros and cons – Business loan 

Business loans are harder to qualify for than personal loans. You might need to have operated for a certain amount of time. If you want to be eligible for larger sums of money, you could also have to put up collateral. Additionally, there may be limitations on how you may utilise the money you get, such as the fact that you can’t necessarily use it to invest in stocks or real estate. 

On the bright side, business loans may assist you in obtaining significant money, ranging from RM10,000 to millions of ringgits, however this will depend on your company’s performance and if you have any pledge able assets. They also have interest rates that range from 5% to 7% annually, which are often lower than personal loans, which can have interest rates of up to 18% annually. 

Pros and cons – Grants and schemes

Government or business programmes may provide large grants, low-interest financing (or interest-free financing), mentorship opportunities, or interest-free financing. 

However, there are a number of qualifying standards for each funding programme. Some programmes are exclusively accessible to certain populations or enterprises (such those wishing to improve their digital capabilities) (e.g. if you are a female entrepreneur or a Bumiputera applicant). A grant application may also need to pass through numerous rounds of examination since certain grants are competitive. 

Pros and cons – Crowdfunding 

Crowdfunding may make it simpler to raise money than through grants and bank loans since the qualifying standards may not be as strict. Platforms based on rewards or donations could not even require a history of commercial operations. 

But even if you invested time, money, and effort into creating your campaign, certain platforms won’t release any cash if you don’t meet the target fundraising. 

Pros and cons – P2P lending 

As they have less stringent financial and operational standards, P2P loans might be an alternative financing option if you don’t qualify for a bank loan. Additionally, they can provide speedy financing. If you’re borrowing less money (less than RM100,000), your application can be finalised in a matter of days. 

However, expect increasing interest rates. Since investors demand bigger returns in exchange for taking on more risk, P2P platforms frequently charge higher interest rates than banks (up to about 18% p.a.). This is in addition to the P2P platforms’ own costs, which might be a percentage of your loan. 

Pros and cons – Venture capital and angel investors 

Entrepreneurial businesses can benefit greatly from venture capital and angel investors. They may offer substantial financing as well as mentoring or networking possibilities. Furthermore, if your company fails, they could not ask for any money back. 

However, these chances are frequently competitive. You’ll need to demonstrate the long-term development potential of your company or business concept. Venture capitalists or angel investors will want equity or convertible debt (debt that may be converted into equity later) in exchange for their investment if you are successful in obtaining finance. They could also want to be part in the management of your firm, so you might give up some power. 

Already deciding between taking up a grant or loan but still feeling unsure? Check out our article breaking down the difference between the two here:  https://bossboleh.com/articles/differences-between-grant-and-loan

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