Funding Process, Types and Methods – Complete Overview

What does funding refer: It is an act of rendering the resources to finance a program, a need or a project. Usually, many people link it to money, but it is not true always, sometimes it takes the form of time and effort from a firm or organisation. Mainly this term is used when a company uses its domestic or internal resources to meet its necessity for capital or cash. However, this term financing refers to the act of taking money or wealth from an external source.

Some sources of funding are donation, credit, grants, venture capital, taxes, subsidies and savings. Allocation of funds can be done for both long-term purpose and short-term purpose.

Types of Funding

The term “crowdfunding” or “soft funding” is used for subsidies, donations, and grants that do not require a direct return of investment.

Equity crowdfunding refers to the funding that promotes the exchange of stock ownership of a particular company for investment in capita via an online portal of financing (according to the act Jumpstart Our Business Start-up Act or Jobs Act 2012 U.S).

Purpose of Funding

1. Research Funding

The fields of social science or technology use such kind of funding. There are two divisions in Research funding: non-commercial and commercial. The development and research departments of an organisation generally provide commercial research funding. On the other hand, non-commercial research funding comes from government agencies, charities, research councils. The companies which require such financing have to go through various levels of competition for selection. The one with immense potential is selected.

Funding is essential in assuring the maintainability of particular projects.

2. Launch a business

The Entrepreneurs having the business idea would want to gather all the essential resources, including a venture to capital into a financial market. Funding is part of this mechanism, as some companies require large sums for a start-up that individuals might not have. These funds are essential for providing a kick-start to the idea. Without this, no idea can be bought in the business world as entrepreneurs would not have the capacity to carry forward it.

3. Uses on investment

Funds management firms collect a substantial amount form many traders and use it to buy the securities. A trained investment manager manages these funds. These may produce more significant returns with mitigated risks by using security diversification. Their size varies ranging from few millions to multi-billions. The main of these activities is to pursue firm or individual profits.

Methods of Funding

1. Grants From Government

The allocation of funds is done by government agencies or government itself through selection procedure to the plans that provide benefit to the students, public, organisations and even researchers. The two panels examine each application: internal research award and external peer-reviewers committee.

2. Crowdfunding

It has two types, equity-based crowdfunding and reward-based crowdfunding. In the former supporters purchase a portion of shares of a company by exchanging money whereas, in latter, small companies can pre-sell a service or product to start a business.

In reward-based crowdfunding, project makers set a deadline and target for funding. Interested candidates can guarantee on these projects. For carrying forward, a project needs to reach its target amount. Once the plan reaches its end with sufficient funds, creators should make it clear that they have completed the project on a given timeline and delivered the services.

3. Self-organised Funding Allocation

SOFA is a process of allocating funding for research in the field of science. In this process, every researcher is given an equal amount for financing and is needed to allocate (anonymously) a portion of their funds to the others research. The defenders of SOFA argue that it would end in the same distribution of funding (according to current grant system), but with smaller overheads. The SOFA test pilot began in 2016 in the Netherlands.

4. Raise from investors

For raising the capital market, one requires the funds from the interested investors. To fulfil this one has to provide the investor with high-return plans. This displaying will help to attract more investors to put money into the project. The dividends of the investment are shared with the investor after a particular time (usually years). It propels the investor to invest further.