Ways to Finance a Business Start-up
When launching a business, the essential components of your success are the quality of your ideas and your willingness to put in the work required to see those ideas come to life. In the milk of capitalist meritocracy, the cream rises to the top. With the use of intelligence, technical knowledge and a little rigor, nothing is stopping you from turning all the money that is currently languishing in your trust fund into a successful business enterprise.
But before you go ahead and make your mark on an opportunity-laden world, the first question that pops up is ‘how about the capital?’ Funding is an essential part of any business, as without the seed money you’ll be unable to fire the starting gun on your start-up.
Entrepreneurs are an incredibly smart and a hardworking industrious group, but many do not know how to better fund their start-up business, preferring instead to focus their energies on a core offering.
One supposes that reviewing funding options can seem like a dull, laborious task and time consuming when you are devoting your time and attention to your genius idea. In any case, great ideas can only fulfil their potential if they are backed by stable investment.
FRIENDS AND FAMILY
Another less-than-ideal funding solution involves hitting up your friends and family for money. It’s certainly a tempting route to go. However, it’s one thing to imperil your own finances with the inherently risky activity of starting a business. It’s quite another to put your close personal relationships in jeopardy. Consider the risk to which you’re subjecting your loved ones. Also consider the fact that having your family and friends’ money involved may drive you to stick with a losing proposition longer than is rational, should your business start to tank (as so many do).
If you do decide to seek business funding from friends and family, do yourself a favor: go through all the proper legal channels and have the paperwork professionally prepared. You should also make sure to request a loan, not equity investment. Ask for the latter, and your friends or family will have the legal right to be involved in major decisions involving your business. Do you really want your Uncle to be playing a role in running your company?
Also, the idea of hitting friends and family for cash doesn’t sit well with some entrepreneurs, but many of the world’s top magnates readily admit to borrowing from their social network early in their careers. As such, you should have no compunction about doing the same.
Soliciting short- or long-term loans from friends and family might lead to some domestic squabbles down the road, but you won’t usually have to pay them back with interest added. Indeed, you might not have to pay loans back at all, depending on the generosity of your creditor. On the other hand, it’s not easy to put together a hefty bankroll relying solely on family and friends; and you have to ask yourself whether you really want to risk straining meaningful relationships.
GET AN ANGEL INVESTOR ON BOARD
Instead of praying to the angels, seek angel investors. It is not difficult to reach wealthy individuals who already have several years of experience in supporting new businesses. The challenge, however, is to convince them that they are worth their investment.
There are many online investment networks, as well as local investor groups, where you can get in touch personally. Then do your research and submit your proposals. Find the right angel investor and enjoy not only your financial support, but also your wisdom because they often offer mentorship to supplement your capital. On the other hand, they generally offer less financial assistance than banks and venture capital funds.
PURSUE A GRANT
The less monied cousin of a bank loan is a grant. While you shouldn’t expect to be cut a massive check, there are dozens of grants available, offered by national and state governments (as well as private enterprises) in the interests of stimulating the economy and growing the jobs market so it’s worth checking out your options for funding your startup.
These financial injections can help you save money on premises and fixed rates, purchase cheaper IT or manufacturing equipment and fund staff training. The main drawback, of course, is the fierce competitiveness of such grants, as well as the box-ticking involved: it can be a frustratingly drawn-out process, but that’s the tradeoff for retaining equity.
CROWD-FUND
Crowd-funding is one of the favorites in the digital economy and probably the fastest way to obtain financing for a new business. You do not even have to be a technology expert to launch a crowdfunding campaign, but what you need is a convincing step, which relates in large part to your company’s growth potential, as well as a talent to interact with your money rich the community.
If everything goes according to plan, you will have the capital that you do not need to pay, without giving up any operational control. Alss as an added benefit, crowdfunding is an elegant form of advertising, a way to stimulate public interest in your company before it makes its debut. The difficulty, needless to say, is to make your voice heard in the vast landscape of collective financing.
BANK LOAN OR LINE-OF-CREDIT
If you have a solid credit history or existing assets which you’re happy to offer as collateral, as well as a workable business plan with clear profit forecasts, it is possible to launch your start-up with an infusion of bank cash.
The advantages of this option are that you retain full equity, you can feasibly obtain a large figure and that you can build your credit and all you’ll need to do is pay back it back when your business hits its profits.
MICRO-FINANCE
Small-scale entrepreneurs can access capital via micro-finance. This is an especially good option for people with a bad credit score or track record, as microfinance institutions are more willing to green-light loans to individuals normally deemed high-risk. In essence, such organizations exist to promote financial inclusion and cater for those at the bottom of the financial pyramid.
Pros of these are; no need for assets and the interest rates are low.
You will have to show various documentation like financial statements and business plan.
SEEK VENTURE CAPITAL
Finding a venture capitalist who shares your vision or at least who believes in your ability to turn your idea into a profitable business is a good way to make money.
Of course, a narrow economic model, perfectly evolutionary, is necessary. The main disadvantage of this option is that venture capitalists are usually looking for the next big thing and that many entrepreneurs are having trouble communicating about the scale-ability of their business. By their nature, venture capital funds have a short useful life because they usually try to buy back their investment, make a profit and then move on to the next new start.
RAISE THE MONEY YOURSELF OR FROM YOUR OWN ASSETS
Self-funding may not be realistic for many entrepreneurs. Yet the fact remains that (according to the nonprofit association SCORE) 57 percent of start-up business owners use their personal savings for start-up capital. It may not be the most appealing prospect but sometimes, entrepreneurship entails sacrifice.
Entrepreneurs are a hardy, headstrong group and many elect to fund their business all by themselves. Breezing past the bank, they sell their possessions, save money from their day job, invest in various endeavors and free up capital by remortgaging. By going it alone, you’ll retain complete control and be unburdened of the interest and strain of other avenues. And this decision has a precedent: over 90% of start-ups get up and running without the aid of loans or grants. On the other hand, raising money can become a full-time job in its own right – taking your attention from your business. To bootstrap or not to bootstrap: that is the question.
CONCLUSION
Needless to say, all of the above options require a good deal of consideration. What might be right for one budding tycoon may not be right for another.
For example, you may have an excellent bank manager whom you implicitly trust, and a robust line of credit, making a bank loan the perfect option. Or you could have a supportive network of financially-secure family and friends willing to back your idea to the hilt. Perhaps a combination of funding options is best, but only you will truly know. The important thing is to go with a funding option with which you are comfortable and confident so that you can focus on turning your business idea into a success.