Do you have a great idea for a business? Great! You have passed the first step for staring your business. A detailed review of the steps involved in bringing a business idea into reality can be seen in this article. But in this article, we are only going to focus on the sources of funding for your startup. Financing is definitely one of the major aspects of any business. So, you’ll have to plan for it before starting the new business idea. Let us review the startup finance in this article, so you can go ahead with this step and establish your business in an effective manner.
Types of Startup finance:
Broadly, there are two categories of startup finance. These include debt financing and equity financing. Equity financing refers to the mode of financing in which the owner of the business does the investment in the business. Additionally, the ways through which the budget providers become the owners of the business can also be termed as business financing.
In opposition to the equity mode of business financing, debt financing refers to the mode of funding where the investment is borrowed from one or more sources. It usually involves credit ranking elements and the maintenance of strong standing in the market.
Ways of getting startup Finance:
As discussed above, the broad categorization of business financing can be done in two ways. But there are numerous other subcategories or ways using which you can actually get the finance for your startup. These ways would be discussed in this section.
1. Fund your Own business:
One of the most obvious ways to get financing for your business is to fund your own business. You might want to keep a reserve amount of money for fulfilling the ongoing need of cash in business until the time you won’t get it from customers to breakeven. Once you’ll reach this point, you can consider all the investment made till the day as the capital investment for your business.
However, this is not one of the easiest ways to manage the business. At the same time, is not something practical for most of us as funding the entire business for around a year is not possible with the limited resources? And you never know how much cash would be required by you in all this time. So, this can be one of the methods, but it is definitely not the recommended one when it comes to the financial experts.
One of the benefits of this type of funding source is that you would be entitled to all the profit and success that you would get once your business gets established. Additionally, you’ll be used to of cutting down the additional expenses from the very start of businesses, leading to the development of good habits for you and your business too. Moreover, you won’t be trapped in the debt if your business won’t succeed.
However, one of the problems with this source of funding is that you would lose all your money in case your business idea won’t work. Moreover, when you won’t have any external pressure to optimize your business, you might not put in the extra effort that you would have done if a third party worked as an observer for your business.
2. Ask for startup finance from friends and family:
You can ask for startup finance from your friends and family. Not all but a few people around you could be the investors in your business. Getting the budget finance from your friends and relatives can give you easier access to making your dream a reality.
The people around you can put in more faith in you as compared to the investors who don’t know you, your idea and your passion. Additionally, convincing a relative for funding in your business is a lot easier than the professional people who see return as the only factor. Although, it is and it must be the only factor. But sometimes, the passion in an individual can also lead an idea to success, but for that, you’ll need a support system.
Some of the advantages of using friends and family’s funds for business are that these funds come with trust in your abilities and ideas. Moreover, the rate of interest or the equity share demanded by these people is far less than what you would expect from the other sources. Additionally, your loves ones would give you enough time to give back the funds, if borrowed. This form of startup finance can also motivate you higher because the investment of your family is at stake.
The only problem in this source of funding is asking for money. All of you might not have enough terms with your friends and family to ask for money. If you are comfortable enough to approach your close people with your idea and even get the funds, then there are no other problems involved with it. Yeah, the risk factor is going to stay there.
3. Crowdfunding can be a solution:
You would have heard how crowdfunding is creating differences in the life of the entrepreneurs. The forums like Kickstarter are helping the individuals. So, you can also consider as a source of finance for your startup. You don’t need to limit this source of funding for one-time fundraising only. It can help you in continuous expansion and the management of additional activities of your business even when your business has taken a good start. So, this source of income can be considered the source of funding for your every business need.
Benefits of crowdfunding:
The benefits involved with this type of funding are that you can get a small denomination of funding from a number of investors, which actually helps you in getting closer to your target. Moreover, getting support from a large number of individuals also indicate that they all know that your idea is worth pursuing and it cannot only generate profits but would help the society overall. You might be expecting that with this form of investment, a number of individuals would have a role in the operational aspects of the business. But it is not true. Not everyone gets to have a part in the management of the business; it actually depends on the crowd-funding platform that you are going to choose for your business.
Drawbacks of Crowdfunding:
One of the drawbacks with this mode of investment is that there are certain terms and conditions of the crowd-sourcing platform that are levied on the individuals looking for the investment. So, you’ll have to abide by them. Moreover, keeping the interest of a number of investors in your business idea become highly difficult. Because the investors are exposed to many new business ideas on a regular basis. So, there is a high chance that another business idea would appeal to them more and they would no longer remain interested in your business idea.
If you are interested in this source of funding, then you’ll definitely have to manage the drawbacks associated with it and get the benefits of using this technique to work in the most appropriate manner for you.
4. Government grants or loans:
One of the important but often overlooked ways of getting the necessary funding for the business is through government grants or easy loans. This mode of startup finance definitely needs you to be operating in a certain industry and fulfilling the conditions of the government, but you can definitely get government support.
Ways to get grants and Loans:
If you have got an innovative idea especially in the fields that your government wants to promote, there is a high probability that you’ll get a loan. Additionally, if you want to start any business on the small or medium scale, your chances are bright that you’ll get at least a bit of the government support because governments are usually supportive towards SME industry. SME industry drives the economy of any country, so you can grab this opportunity.
The limitations that you can expect from this source of funding are to complete a lot of paperwork to describe your idea and source of return. If you won’t be able to prove the profits of your business in the first few months, you won’t be granted a loan or the grant at all. Additionally, giving back the money would also become a problem as these grants and loans are available for a limited time.
5. Use of accelerators or incubators:
The startup finance can also be arranged through accelerators or incubators. The accelerators are the firms or organization who provide the short term funding to the new business ideas in order to help them fasten their growth and achieve success, in return to the business equity.
Similarly, incubators have the same benefits for the startup, but they protect and overlook the business for a comparatively higher time period in comparison to the accelerators.
One of the advantages that you can expect here is that you can get the coaching from the experts in the industry so that you can make better strategies. Moreover, the funding required is the most important thing that you would get from this source of investment.
However, this technique comes with a number of problems. Firstly, you might have to forgo the original spirit of the idea that you have introduced, as you have to coordinate with others for the execution. Moreover, the element of commercialization and earning return would be more dominant in comparison to the basic idea of business. In addition, you’ll have to forgo a lot of equity share of your idea to compensate the accelerator or the incubator supporting your idea.
6. Venture Capitalist:
This is a form of equity investment in which an investor is willing to invest the money in your idea. The unique feature of this type of investment is that the investor or the venture capitalist is willing to take the risk while providing you with startup financing.
The problem with this type of investment is that a venture capitalist expects to get a huge return from the investment, so the commercialization aspect is quite prominent in it. Additionally, only limited projects with the potential of high pay-offs are considered for investment purposes. The investment made by the venture capitalists is usually in millions, so either you have a big idea for seeking their interest, or you must start your business on your own, and once you need investment for further expansion, you must get in touch with them.
7. Angel Investors:
As the name says, angels, you can expect them to be the angels for your business. These investors have the money of their own and want the others to flourish and live their dream. Usually, the investment made by them is very small, in most of the cases it is just thousands of dollars and doesn’t even get above $10000.
They can be involved in your business in different forms. You can agree to give them an equity share or a percentage in the income of your business for a particular number of years. This settlement depends on the type of idea and the investment that is being made by the angel investors.
8. Loan from Bank:
Another obvious way to get money for your business is through the loan from the bank or creditors. This is a difficult type of funding method because the bank or creditors would really want a solid guarantee that you would return their money.
In case, you have a good credit rating and an asset to pledge with the bank. You can get it pledged and get a personal loan for investment. However, it involves a lot of risks if you won’t be able to pay back, your asset would be gone as well. Other creditors can have even tougher terms and higher interest rate. So, you must be very sure about your decision, if you really want to have the startup financing from this source.
It would be very difficult and inconvenient to get a loan in this form. This is why it is advisable that you must avoid this source of funding if you can employ any of the above sources. But if none of them works, then you can definitely use this startup finance.
Requirements for getting Startup finance
Many methods for financing up your business have been highlighted in the above section. With all these methods there is some specific conditionality attached that you are expected to fulfill. However, there are some specific characteristics for attaining the equity of debt type of financing. So, we are highlighting them in this section:
Requirements for getting equity finance:
If you are seeking equity financing, you must have the following characteristics:
a. Willing to share equity:
The equity investors would come with a hope to have a share in your business. So, you should be willing to share your equity with them to get investment from them.
b. The idea must be different:
In the case of equity financing, you’ll be expecting investors because of the wonderful idea that you have. You must ensure that you have a wonderful idea and you have refined it enough to attract the attention of the investors.
c. Presentation of the idea:
Most of the ways of getting equity financing require you to present your business idea in the form of a proposal to get startup finance. So, you must know how to pitch your idea in a way that can impress the investors.
Requirements for getting the debt finance
The requirements for getting the debt finance are provided below:
a. Credit Worthiness:
Your creditworthiness must be important. If you haven’t got a loan up till now, then you can establish your credit rating through credit cards. Make sure to pay the bills on time and establish a good reputation with the bank. In case you have had the loan before, your payment history would matter a lot. So, make sure to keep a good one.
b. Business Age:
The age of business has an important role when considering the business loan. It is highly likely that a startup would not be given any importance by the bank or creditors. Because being a startup your businesses prone to many risks. Moreover, you are considered an amateur unless you establish your business successfully.
c. Security available to offer:
Banks do not give credits without proper security. Therefore, if you have solid security that would satisfy the amount of loan that you have applied for, there would be a higher possibility that you would get a loan. So, you must be ready to offer something to the bank as the security for the loan.
These are some of the ways to get the finance for your startup. You’ll have to decide if you want an equity mode of financing or the debt one. It will help you in getting a better option from all the funding sources discussed. But this is an important step and you must take any step cautiously. We hope that your venture would be a great success.