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4.1. Introduction
This chapter will discuss the various sources of funding that are available to young people who are aspiring to become entrepreneurs and establish a green enterprise. As the green economy continues to grow, it is becoming increasingly possible to find financial support in the form of loans, grants, and other forms for those interested in establishing businesses that aim to improve the environment, support sustainability, and reduce their footprint on the planet.
Green businesses can get funding from a variety of sources, including traditional loans and grants, venture capital, angel investors, and crowdfunding. Some of these sources may require the entrepreneurs to submit a business plan to demonstrate the viability of their projects, while other sources may not require the same level of detail. Each source carries its own set of advantages and disadvantages, so each funding option must be taken into serious consideration to ensure it is the most appropriate to be applied. To take full advantage and maximize the impact of these options, entrepreneurs should do their research and consult with professional advisors in the financial sector. Finally, by ensuring proper funding for their green enterprises, young entrepreneurs can help minimize the gap between starting up a green business and making it successful.
4.2. Funding sources
Starting and establishing a green enterprise, as in any kind of business, requires a variety of investments to be successful. Following an action plan on the most suitable financial options that will help start and sustain an enterprise is a major part of this process. For example, business loans, grants, and personal loans are among the most popular ways to receive funding, while business credit cards can act as complementary sources to cover financial needs. However, each funding source comes with its criteria, benefits, and also drawbacks. Therefore, both research and the identification of the right one are fundamental. In addition, knowing all the available funding solutions as well as how to use them is also important.
A common way to establish a green enterprise is to obtain a business loan, which is feasible but can also be proved challenging for new entrepreneurs. However, the chances of their approval can be improved by identifying the right type of financing, gaining better knowledge of their credit scores, and, finally, by searching for the most well-suited loan providers for them.
There is a procedure that should be followed to get a business loan, consisting of five steps:
Step 1: Choosing the appropriate loan type
It is common practice among entrepreneurs to choose traditional banks and credit unions for funding to get their businesses started. The typical ones are:
– Online term loans that involve a lump sum of money to be repaid in the bank with a set interest rate.
– Business lines of credit that involve interests growing monthly only for the part of credit lines accessed during a specific period, while the borrower has access to funds of their own volition after payment throughout the draw period.
– Asset-based financing that involves the possibility for a borrower to use valuable assets (e.g., equipment, property, etc.) as collateral, although banks can repossess them in case of the borrower declares default.
Step 2: Assessing Business and Personal Credit Scores
Loan providers assess the credit score of the borrower to decide about risk liability. A high credit score indicates a borrower’s consistency and improves approval chances. Business credit scores are available after the first semester and up to one year from the business start, forcing borrowers to guarantee to repay the loan debt using personal funds in case of business failure. The personal credit score of the borrower is also subject to checking.
Step 3: Collect the necessary information
The most common documents needed by loan providers for the assessment and the verification of both the borrower’s identity and his/her business are a thorough business plan that increases the chances of business loan approval and indicates financial stability, copies of business licenses, business sector registrations, and banking information.
Step 4: Search for a well-suited loan provider
The identification of a loan provider that is proper for establishing a business in line with its needs requires the entrepreneur to take into account the following criteria:
– Annual percentage rates – 9% in the beginning, higher for startup business loans or lower for the most qualified borrowers.
– Fees and other costs – origination fees from 3% to 5% of the total loan, used for the cost of paperwork procedures and application information verification, fees as prepayment penalties for early or late loan payoffs. Due to competitiveness reasons, there are loan providers that abolish these fees.
– Loan provider reputation is crucial for an entrepreneur to start collaborating with. So, a loan provider with red flags (e.g., bad customer feedback) should be avoided.
Step 5: Application submission
An entrepreneur should gather the documentation needed for proper application submission. Due to variations in this process depending on the loan provider, an entrepreneur has to apply either by physical presence at a branch or online, or via telephone. The submission of the loan application may be followed by the entrepreneur being reached out by a representative of the loan provider organization, if a need for further documentation emerges.
II. Business Grants
Taking a business grant is a great way to start a green enterprise, although obtaining it is not an easy process. To start with, for an entrepreneur who aspires to start this kind of business it is important to locate his/her source and to know the way to apply to ensure receiving the grant. However, before investing time and energy into it, understanding the criteria which are required by these grants as well as deciding if the enterprise is eligible for it is also crucial.
In essence, a business grant is money provided by either the government or an organization to assist small businesses to be established and grow. Unlike loans, the entrepreneur is not required to return this money. In addition, no collateral is necessary, and no fees or interest are charged. So, this money is for an entrepreneur to keep and, consequently, fund his/her business. However, some rules dictate its spending.
As business grants are difficult to be obtained, improving the chances to do so can be achieved by finding the grant that is best suited for a particular business and collecting any information available before successfully applying for it. Understand what’s required in the application, when it’s due, and anything else that may be needed. This application, which requires much time to be properly filled out and submitted, should include an overview of the proposed work as well as financial information for the business. Financial experts’ suggestions are also always welcomed in this case.
III. Personal Loans
If an entrepreneur fails in his/her application for a business loan or a grant, an alternative is to apply for a personal loan. The application procedure for this loan type is less complicated than for the aforementioned ones, while the requirements set by the loan provider are less demanding, in general. A downside is that personal loans correspond to a smaller amount of money than a business loan, but it is accompanied by lower APRs, which stand at about 3% for the borrowers who are among the most creditworthy ones. Therefore, personal loans have great features and are a more proper option for an entrepreneur who aspires to start his/her own business without concrete revenue or financial projections. In the case of personal loans, providers may forbid borrowers to allocate funds to business endeavors, while borrowers are responsible for the repayments, exactly as in some business loans. Entrepreneurs should be aware that funding through a combination of business and personal loans can negatively affect the processes of accounting and legal support.
Owning a business credit card comes with benefits for an entrepreneur as it is a flexible way to access funding to cover a variety of costs from small purchases such as office supplies to larger ones such as equipment buying. Moreover, obtaining a business credit card requires following a more simplified procedure than the one required for business loan acquisition. An additional advantage is that business card issuing has as a prerequisite only checking the personal credit score of the entrepreneur, thus also facilitating its acquisition compared to a grant or a loan.
There are business cards with APRs between 13%-25%, while some of them have 0% APRs for start, thus allowing entrepreneurs to proceed with interest-free purchases during the first two years of their business. In addition, business cardholders’ interest is needed to be paid only in case of unpaid balances that continue to exist during the following billing cycle. Therefore, these credit cards are a helpful option for entrepreneurs to send money on month-by-month operating costs and, at the same time, avoid interest.
V. Crowdfunding
Another funding option for starting a green enterprise is crowdfunding, which offers entrepreneurs the opportunity to raise funds by avoiding taking loans either from banks or any other loan provider or from his/her acquaintances to do so. Entrepreneurs can establish a crowdfunding campaign, utilizing fundraising platforms that are available online such as Kickstarter or Indiegogo. After the organization and the initiation of the campaign, the entrepreneur will be able to attract funds from users that are interested in donating money to start his/her business endeavor. The availability of these funds is set at the end of the crowdfunding round. This funding option is entrepreneur friendly as it doesn’t require qualification criteria, while the generosity of the fund donors isn’t rewarded with business equity.
VI. Angel investment
Some investors who are willing to invest in the establishment of new businesses are called “angel investors”. They are experienced and successful ones who provide the amount of money to businesses and request a stake in return. Angel investment is a procedure where an entrepreneur needs to pitch his/her business idea to the angel investor and in case the investors assess it as invest-worthy, then he/she proposes either a portion of or the whole requested amount in exchange for a share of the business, most commonly this ranges from 2% to 25% of it.
This is the way for an entrepreneur to start a business having ensured that will be funded with a proper amount of money, however, he/she will be benefitted the most from an angel investor’s mentoring, support, and network of contacts. In addition, angel investors abstain from daily business operations despite investing time in addition to money in them. Angel investment can be performed both individually and by a group of investors who offer their funds and experience to the business.
VII. Venture capital
Venture capital is a more advanced funding option compared to angel investment. Venture capitalists invest money originating from various sources, from individuals to large organizations and funds, instead of their own such as angel investors do. Consequently, the amount of the money invested is also larger. For this reason, the target groups for their investments are mostly businesses that have high growth potential.
Funding from venture capital is usually long-term, carried out in cycles of 5 to 10 years, while the investment is realized in rounds. It starts with a few thousand Euros as a seed investment and has the potential to reach several million after some rounds. During each funding cycle, venture capitalists expect growth and return from their investment. In addition, venture capital firms usually expect to be involved in the management of the businesses they invested in by having a seat on their board, indicating the way that the business operates but also assisting it to reach its potential. In conclusion, venture capital funding can help a business experience large growth short term.
VIII. Personal Savings
There are more options to fund the establishment of a green business than taking a loan. Despite most entrepreneurs don’t have enough personal savings to fund the start or the growth of a business at an early stage, if an entrepreneur has adequate financial resources, then he/she can utilize a portion of them for doing it so. So, in this case, the advantage is that there is no need for paying interest or origination fees to a loan provider, thus allowing them to relinquish equity to investors. However, the stakes are high for the entrepreneur as there is a significant risk of savings loss if a business default occurs.
IX. Borrowing from family and friends
Finally, an alternative private funding option for an entrepreneur to start a green business can be borrowing an amount of money from family or friends. In this case, there are no qualification requirements, however, the relationship between the loan provider and the borrower will become complicated considering that in this way it will have a different status compared to when was originally established. Therefore, borrowing money from family or friends may be a challenging factor for existing relationships in the entrepreneur’s inner circle, thus setting concrete terms for the provision of loans as well as their comprehension by all parties involved are crucial. To avoid possible conflicts, the agreement between the loan provider and the borrower should be in writing, in a document filled out with the loan amount, any interest rate, repayment terms as well as the rest of the factors.
4.3. Advantages and disadvantages of funding sources
When starting any business, including a green one, there are a variety of resources that entrepreneurs can utilize to raise the necessary funds. The entrepreneur needs not only to have a thorough understanding of the different funding options. This is an overview of the advantages and disadvantages of the nine funding options mentioned in the previous section:
I. Business loans
– the entrepreneur has full control of his/her enterprise
– no requirement for assets as security
– flexibility in paying off
– fixed interest rate
– professional support during the application process
– mentoring for free
Disadvantages
– eligibility criteria need to be fulfilled
– insufficient amount of money loaned
– needs for checking personal credit scores
– charges in case of business default
II. Business Grants
– no requirement for paying off the grant
– high credibility
– mentoring for free
Disadvantages
– limited funds available
– strong competition among businesses
– spending rules and restrictions
– the requirement for investment that matches the grant (optional)
III. Personal Loans
– simple application procedure
– little loan requirements
– low APRs
– no requirements for concrete revenue or financial projections
Disadvantages
– personal liability
– insufficient amount of money loaned
– create complications in the accounting and legal procedures of the business
IV. Business Credit Cards
– the entrepreneur has full control of his/her enterprise
– cash flow can be manageable
– cash is immediately available in case of an emergency
– extra benefits (e.g., rewards points and cashback on purchases, periods with 0% interest, etc.)
– option for additional cards issued for other staff members
Disadvantages
– possible unavailability for new businesses
– potentially high-interest rates
– costly cash withdrawals from ATM points
– annual fees need to be paid off
V. Crowdfunding
– effective alternative to traditional funding
– developing a loyal investors-customers base
– flexibility in setting funding targets
– fast funds’ raising
Disadvantages
– lack of guarantee that the needed funds will be raised
– giving up control of business up to a point
– dependency on marketing
VI. Angel investment
Advantages
– lack of cost for a business
– no requirement to pay off the money
– high credibility
Disadvantages
– giving up control of business up to a point
– possible restrictions on the use of invested money
VII. Venture capital
– an investment of a large amount of money
– mentoring from experts
– lack of cost for a business
– no requirement to pay off the money
Disadvantages
– giving up control of business up to a point
– lack of guarantee regarding business growth
– strong competition
– not all businesses are suitable
– difficult to attract the investment
VIII. Personal Savings
– no need for paying interest or origination fees
– flexibility in choosing the amount of money invested
– the entrepreneur has full control of his/her enterprise
– no requirement to pay off the money
Disadvantages
– lack of sufficient personal savings
– lack of guarantee regarding business growth
– the significant risk of savings loss in case of a default
IX. Borrowing from family and friends
Advantages
– no eligibility criteria to be fulfilled
– flexibility in choosing the amount of money invested
– the entrepreneur has full control of his/her enterprise
Disadvantages
– a complication in personal relationships
– usually need to keep an oral agreement
4.4. Tips for raising funds for a green enterprise
Establishing a new green enterprise can be an exciting prospect, but to make it a reality, securing the right funding is important. Raising enough money can be challenging, but with the right strategies, it’s achievable. Here are some tips for doing it so successfully.
1. Reach out to entrepreneurs that are non-competitors and have existing green enterprises, and create relationships with them, as they can help you contact their funding sources and their network generally.
2. Apply to investors that are sustainability-focused for mentoring and funding to get your green enterprise started. Finding them requires market research as they usually share relevant information online or in the press.
3. Pitch your idea to attract investors using the right stats for the green business sector, considering that is up and coming, thus indicating the significance of starting an enterprise in it.
4. Check thoroughly the qualification criteria for grants or public funding, as much of it is targeted at helping enterprises do business in the green sector.
5. Understand the unique funding needs of your business to select the type of funding that is best suited for it. These funding needs may include startup costs, operating expenses, product development, marketing, paid research, license fees, legal fees, and finance costs.
6. Negotiate an agreement for the funding after you find investors that show interest in financing your business’ start to ensure offered the best deal possible. In this case, you should ensure the mutual understanding of the agreement terms for all the parties involved as well as their commitment to the plan.
With the right approach and diligence, entrepreneurs can easily find the funds they need to launch their green businesses.
4.5. Funding support at the EU level
On an annual basis, the EU assists around 200 000 businesses financially. Financial support from the EU is offered to all kinds of businesses, which comprises entrepreneurs, start-ups, micro-businesses, small and medium-sized enterprises, and larger companies. There are several funding options available and accessible, including business loans, microfinance, guarantees, and venture capital. However, financial institutions such as banks, venture capitalists, and angel investors at the member-state level are eventually the ones that choose to provide EU funding. These institutions are responsible for setting the funding terms and determining several aspects such as the amount of money, duration, interest, and fees.
In this section, the main EU funding programs and instruments are presented shortly, which are the following:
– European Investment Bank (EIB)
EIB is the main lending institution in the EU. It offers a variety of products including loans, equity, and guarantees, as well as professional advice and partnership opportunities. EIB provides funding to SMEs indirectly, through its collaboration with various financial intermediaries. Any stakeholder interested in funding options offered by EIB can access them via this link: https://www.eib.org/en/products/loans/sme-mid-caps/intermediated-loans to find a suitable partner from each EU member-state and beyond.
– European Investment Fund (EIF)
EIF, a member of EIB, is a risk funding provider to SMEs in Europe. It utilizes its resources or the ones from EIB, EC, EU Member States, and other third parties. Its goal is to facilitate the access of SMEs to funding by designing and delivering customized financial solutions to its intermediaries; namely, banks, guarantee and lease firms, micro-credit providers, and private equity funds. EIF products are in line with current and future market demands. These products include:
🡪 equity products
🡪 debt products
🡪 inclusive finance.
– Employment and Social Innovation (EaSI) programme
The EaSI programme is a financing mechanism provided by the European Commission to foster high-quality, long-term employment. Currently, it functions under the European Social Fund Plus (ESF+) framework. It is a way to assist entrepreneurs, with a special focus on young people and vulnerable groups, with micro-credit, particularly for those who are facing difficulties in accessing the traditional credit market. Any beneficiary of this programme can access the list of financial intermediaries in each EU member-state via this link: https://ec.europa.eu/social/main.jsp?catId=983&langId=en and explore the available options.
4.6. Conclusion
Overall, starting a green enterprise requires a careful and thorough consideration of available funding sources and detailed research and preparation for it. As various funding sources are available, an entrepreneur should be aware of their advantages and disadvantages. So, it is important to choose wisely the most proper one in line with his/her business idea. Finally, taking the necessary steps to ensure successful funding will help the green enterprise be off to a good start. With appropriate funding, a green enterprise will be well-prepared and equipped to continue on its journey to success.