Every entrepreneur or startup owner faces the biggest concern of financing their business. With minimal experience and no experience in business, entrepreneurs find it very difficult to get money at the initial level. Whether it's working capital or provisions for hard times, you need money to run and grow your business. Let's discuss some of the options that can help you secure funding to fuel your business ideas.
ContentsEquity FinancingDebt-Linked FinancingVenture CapitalistFinal LinesBefore delving into the subject, it is necessary to go through two modes of financing your business:equity and debt. The stock option allows entrepreneurs to finance their business by providing an equity stake to an investor. Here, there is no obligation to refund. But then you have to give up some of your ownership in the business. It can also cause you to lose control of the business in the long run.
The debt option is like taking out a loan for a specific period. You have to pay interest on the amount. Here, the ownership of your business is not at stake. But if for some reason you are unable to repay the loan, the lender can put your business into liquidation. In such a scenario, you lose your business. The debt option is only worthwhile if you have a strong financial backup.
Self-financing- This is the safest way to fund your startup. You can use savings, personal debt, or both for your business. Additionally, you may consider selling assets like a second home or a boat to generate cash for your business.
Friends and family- It is a source of equity and debt financing. Although this seems like a convenient source of funding, you should be careful when allocating part of your business among friends and family members. Many businesses fail because key parts of the business fall into the wrong hands. Moreover, when the capital erodes, it hurts feelings and ruins friendships.
Angel investors and crowdfunding Affluent investors can bring capital into startups. They are known as angel investors because they are always ready to invest in ideas that they find lucrative in the future. Angel investors can also form a pool of investors to spread risk and help you do in-depth research. Local angels and the Chamber of Commerce are also good sources of funding for your business at the initial stage.
Crowdfunding is also a similar concept to angel investors. The only difference here is that there are a large number of people or investors who contribute to your startup idea as per their wish. Crowdfunding has certain standards and its success rate is lower than that of angel investing. Crowdfunding is based on either equity, debt or rewards. You can select the most suitable platform from hundreds of crowdfunding platforms.
Partnership- It is one of the strongest sources of funding for your business. Strategic partners can not only bring investments but also provide new ideas to take the business to the next level. Partners can also help your business by managing key processes. Take the example of a property management company. A strategic partnership with a property maintenance company can help that company provide 360-degree solutions.
Lenders- Many lenders and organizations lend money to small businesses and startups. They lend money at higher interest rates or ask for assets as collateral. Here, the interest rate is a bit tricky. For example, if the interest rate is 3% and the term is one month, the effective annual interest rate is 36%. This is quite high compared to a rate of 3%.
Lenders are of two types: Traditional and government lenders. Traditional lenders may be the first choice. Banks and credit unions are part of this type. These type of lenders, however, do not fund innovative or experimental ideas. Government lenders work with the arms of the government to obtain more funds with certain risks.
7a Loans- It is a type of loan that helps startups or businesses without collateral. Entrepreneurs without personal or business assets are the most eligible candidates for this type of loan. However, an ordinary man may not get this type of loan. What makes this loan attractive for entrepreneurs is the fact that the 7a loan has simple terms and conditions. Entrepreneurs must give an 85% repayment guarantee to take out this loan.
Banks- Public and private banks lend to SMEs and startups. But they need a track record and want to back their loans with some of your assets. Banks, however, are not very friendly to SMEs and startups. Many entrepreneurs tend to stay away from banks in the initial stage, as they have problems with working capital and initial financing. Currently, banks have quickly become obsolete for entrepreneurs.
See also:How to get a short-term business loan
They are essentially the business innovators. They are constantly on the lookout for entrepreneurs with money-making ideas. If your idea is able to work on a small level, you can easily convince a VC (Venture Capitalist) to back your business. Venture capital firms provide funds in two ways:equity or debt. Venture capitalists can lead your business to international success.
Some venture capitalists invest in companies by offering grants to entrepreneurs. Techpreneurs can take advantage of the benefits of these scholarships and become owners of small businesses or startups at a young age. Also, your business can get money with qualified business mentors through these venture capital firms. Simply put, VCs can help you launch your products while guiding your business at the initial level.
The SBA (Small Business Administration) is also a huge debt option. It has many options but these options require a money back guarantee.
Many options are available to finance your business at the initial level. If you have a unique idea that you think is worth investing in, you can definitely explore different options and find the perfect one for your startup.
