A Funding Source It is a useful tool used by companies and entrepreneurs to obtain the necessary financial resources to be able to carry out activities with a specific purpose. Learn more about the sources of financing for a business next.
Having a business idea is the easiest part of the process of becoming an entrepreneur. The real challenge comes in carrying it out and having the necessary capital to be successful. For many Mexicans, getting funding sources It has become an almost impossible mission due to the lack of knowledge on the subject.
Most think that the easiest way to have liquidity is to approach a bank and obtain a loan. The truth is that There are other options, easier and more accessible, to boost business in Mexico.
Next, we will talk about what are the sources of financing in Mexico, how they work and what types exist to boost your business.
What are the sources of financing?
The sources of financing are the institutions, private or public, to which companies and entrepreneurs resort to obtain the necessary and being able to carry out activities with a specific purpose.
In addition to being a perfect option to start a business, financing sources are also ideal for companies looking to grow and achieve goals faster.
Despite having the same objective, the funding sources will have different results depending on the goals that are in mind.
Characteristics of financing sources in Mexico
In Mexico there are different types of entities that offer financing, but they all have certain characteristics in common which we are going to mention next:
- Are the origin of an economic resourceon many occasions essential for the operation of a company;
- They get a benefit in return of the offered investment;
- They may be internal, external and also private or governmental;
- They divide the financing to short and long term.
To understand more of these characteristics, we will share more details about the types of financing sources.
1. Internal funding sources
This type of financing comes from within the company, generally from partners.
They are also known as social capital, term used to refer to the money contributed by the partners or shareholders for the operation of the company. This amount includes the initial investment, as well as its increase or decrease over time.
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2. External financing sources
This term, like the previous one, is easy to identify. When we talk about external funding sources we refer to money that is lent by a third party, which has no relationship with the company.
To access them, certain requirements must be met, such as a good credit history. Some examples of external funding sources are loans, lines of credit, crowdfunding, private equity funds, incubators, business accelerators, among others.
3. Short-term financing sources
The ideal choice for obtain immediate liquidity. If you are looking to cover any expenses or increase your operations to generate income, take this option into account due to its payment time.
Short-term financing sources are offered in periods of less than 12 months and are sought after by entrepreneurs who need to receive an economic benefit greater than the financial cost of the credit.
In these cases, the interest rates are low if we compare it with long-term loans and, sometimes, they do not require a guarantee.
💡 TIP: If your business is an SME, choose this since it requires fewer requirements and they generally have simple applications.
4. Long-term financing sources
If you have in mind to use the financing for a large project, such as opening a new branch, buying a building to convert it into offices, Look for an option in which the return of the money received is greater than one year.
To be eligible for long-term financing You must have a good credit history and have a stable company that does not represent a risk for the entity that will offer you the loan.
Take into account that this option has higher interest rates, which if not handled with care, can cause financial instability for your business.
💡 TIP: This type of financing can be renegotiated over the months (or years) and can help you improve your company’s credit history.
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Main sources of financing for entrepreneurs and companies
In Mexico there are various sources of financing that can help meet your needs. Of course, they all have their advantages and disadvantages, but the key is to identify your payment solvency, what you will allocate the acquired capital to and for how long you are willing to pay.
Below we present the main options available, how they work and their main attributes.
1. Banks
The traditional credit par excellence, but this does not mean that it is the best option. With almost all financial entities in Mexico you will find loans for SMEs with interest rates that you will have to pay monthlysomething that will raise the final amount in case you suffer arrears.
The financing amounts and payment periods vary depending on what you are looking for, but generally you can request from 20 thousand to two or three million pesos.
Before deciding on this option, consider that if unfortunately your business fails, You will have to continue paying the credit until it is settled.
2. Triple F
This financing option in Mexico is very common among entrepreneurs. The term “Triple F” refers to Friends, Family and Fools (Friends Family and Fools) and it is nothing more than asking your close circle for money to start your business.
By not having a credit history to support you, this option becomes the most viable to start operating. Take into account that the amounts you can obtain are not as high as a loan with a financial institution, so you should think very carefully about what you will use it for.
💡 TIP: Approach people who know you and who you can convince with your business plan. Offer them guarantees to return the investment and take their advice into account without deviating from your original goal.
3. Venture Capital
A Venture Capital, also known as risk capital, are groups of investors that they contribute money to finance SMEs in exchange for receiving a percentage of their shares. They are generally the ideal option for startups (companies with a few years of life).
Here, because the potential for growth and risk is high for investors, it is not a very viable option for entrepreneurs who are just starting out. We recommend that you analyze the possible scenarios well, since if you make a bad decision, you could end up losing a very high percentage of your business.
4. Seed capital or angel investors
Investor angels are natural or legal persons who have the objective of helping entrepreneurs. They are also known as seed capital or smart money because they not only invest money, they also share advice and give advice.
The main difference they have with Venture Capitals is that they are not demanding with growth, they focus more on the commitment of the entrepreneur and his small achievements.
The clearest examples of this type of financing are , or .
💡Type: If you have a Tiendanube and are looking for growth capital for your marketing campaigns, inventory costs and logistics, get to know .
5. Crowdfunding
Crowdfunding is a relatively new source of financing. These are online crowdfunding platforms where you can raise capital through donations, equity, or loans.
Its operation is very simple. To convince users you should publish details about your business, the amount of money you need to reach your goals and a reward for those who decide to help you (It can be a discount, free product or some exclusive benefit).
Once you meet these requirements you can start receiving financing. The platform will take care of all the management and will give you the money when you reach the amount you are looking for.
6. Government financing
Government funding sources in Mexico come from the public sector and seek to support entrepreneurs and SMEs. Agencies such as Nacional Financiera and the (INADEM) are some of the options that you can consult.
To access this type of support you will have to approach the entities already mentioned to know requirements, calls and characteristics. Some programs offer non-refundable investments, others manage a help scheme in which you will have to put a certain percentage to complete the financing.
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7. Incubators and accelerators
Business incubators and accelerators are companies that aim to create and develop small businesses, supporting them during their growth with advice, courses and tutorials.
They offer short-term programs with the intention to direct entrepreneurs to low-cost or free financing sources. At the end of these consultancies, those registered must present finance and marketing projects to a group of investors with the intention of obtaining the necessary investment to achieve the goals set.
What are the sources of financing for a company?
A company’s sources of financing can often be private equity, term loans, and venture financing. They are often external funding sources such as investors and banks.
What source of financing does the government or state have?
The main Funding Source of the government is of public origin. The collection of taxes, the sale of bonds, CETES and titles are some of the mechanisms that serve as a source of financing for the state.
5 tips for choosing sources of financing in Mexico
Since you know more details about what are the sources of financing and have you understood the differences between external funding sources and internal, we share five tips that will help you choose the best depending on your needs.
- Before choosing, define well what you will use the financing for, how you are going to manage the money and be clear about your ability to pay. The last thing you need is to suffer with interest rates.
- Work on a business plan that offers clarity about your objectives, the problems you need to solve with the requested investment. This will help you close better deals.
- If you want to solve a problem or need immediate liquidity to increase your inventory or pay suppliers, decide on a short-term financing option.
- Long-term financing sources have higher interest rates, but…
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