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Home›Finance›13 Sources of Finance For A Start-Up Business

13 Sources of Finance For A Start-Up Business

By Lun Sovann
January 14, 2020
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Maybe, you’re starting a business. You could also be trying to grow your existing business. You’re definite to need money. Investments roughly break down into two main forms, namely debt and equity. For the latter, you’d sell a portion of your startup to investors in return for cash. For debt, you’d borrow money from lenders and pay interest on that loan.

Startups find it easier to source money from individuals. Companies, on the other hand, have a track record of success. They’re more apt to get an audience with institutional lenders. Below, we present a comprehensive guide which lists funding options for your business. They’ll help raise capital for your startup. Remember, it’s highly unlikely that you’ll source all the required money from one source. Probably, it’ll come from several.

Bootstrap Your Business

Bootstrap Your Business

Often, first-time entrepreneurs have trouble acquiring funding without first demonstrating some traction and an excellent plan for potential success. You can easily invest right from your savings. Alternatively, you can acquire funding from your friends and family. That will prove easy as there will be less formalities or compliances. Also, you’ll get to enjoy less costs of raising the capital. Often, friends and family are quite flexible with the interest rates.

You ought to consider bootstrapping as your first funding options, especially because of its advantages. It’ll only be suitable if the initial amount required is small. There are those businesses which require money right from day 1. For such startups, bootstrapping might not be a recommendable option. Bootstrapping entails stretching the resources available as far as you can.

Crowd-Funding

Crowd-Funding

It’s among the newest ways of startups’ funding. In fact, it’s quickly gaining popularity throughout the world. It’s like acquiring a loan, investments, or contributions from many people at once. The entrepreneur will present a detailed description of their business on a crowd-funding platform. You’ll be required to mention the goals of that business and plans for making platform. Also, you’ll specify how much funding you require and for what reasons.

Consumers will read about your business and avail the money if they like your startup idea. Those providing the money will make online pledges. For example, they might promise to pre-buy the product or give a donation. Crowd-funding is an excellent source as it enables you to market the product alongside getting financed. Also, it’s a boon if you’re not certain if there will be demand for the product you’re working on.

It is a process which cuts out professional brokers and investors by placing funding in the hands of the ‘commons’. As well, it can attract venture-capital investment in case a firm has a successful campaign. But, bear in mind that crowd-funding is a competitive platform to source funding. Unless your business if rock solid and can gain attention through just a description, you might find it unviable. Popular crowd-funding sites include RocketHub, Kickstarter, Onevest, Dreamfunded, and GoFundme.

Angel Investment

Angel Investment

Angel investors are people with surplus cash who’ve got a keen interest to invest in startups. Also, they work on a network groups to collectively screen proposals before investing. Additionally, they might offer advice or mentoring, alongside capital. In fact, they’ve contributed to the startup of prominent companies like Yahoo, Google and Alibaba. Generally, this investing form occurs in a firm’s early growth stages.

Investors often expect equity of up to 30%. They prefer taking more risks in investment while expecting higher returns. As a funding option, angel investing has its shortcomings, too. The investors here tend to invest lesser amounts when compared to venture capitalists.

Venture Capital

Venture Capital

Now, here’s where you make the big bet. Venture capitals (VCs) are professionally managed funders who invest in firms which have huge potential. Often, they invest in business against equity. They’ll then exit in case of acquisition or an IPO. VCs provide mentorship and expertise. They serve as a litmus test to evaluate where the business is going from the scalability and sustainability point of view.

Venture capital investments are appropriate for businesses which have passed the startup phase and are already generating revenue. Fast-growth firms with an exit strategy put in place can acquire millions of dollars which will be used to invest and grow the firms quickly. But, there are several downsides to VCs as a funding option. First, they’ve got a short leash when it comes down to a company’s loyalty. They often look to recover investments within a 3-5 year time frame. If you’ve got a product which will take longer to reach the market, VC investors might not be interested in your proposal.

Typically, they seek larger opportunities which are more stable. They look for companies which have a good traction and a strong team. Also, you’ve to be flexible with the business. Sometimes, you’ll need to give up more control. Therefore, it might not be a preferable option in case you’re not interested in compromise or too much mentorship.

Business Incubators and Accelerators

Business Incubators and Accelerators

Early-stage businesses can consider Accelerator and Incubator programs. They’re found in nearly all major cities. They assist thousands of startup businesses. There are several fundamental differences between incubators and accelerators. However, these terms are often used interchangeably. An incubator is like a parent to a child. They nurture the business by providing shelter tools, training, and network. Accelerators are quite similar.

An incubator nurtures the business to walk. On the other hand, an accelerator will help it to take a giant leap. Normally, these programs run for 4-8 months. Also, they require time commitment from business owners. You’ll make good connections with investors, mentors, and other startups making use of this platform. Firms like Airbnb and Dropbox began with accelerators.

Winning Contests

Winning Contests

The increasing number of contests has been tremendously helping to maximize opportunities for fundraising. They encourage entrepreneurs with ideas they can use to set up businesses. In these competitions, you’ll either prepare a business plan or create a product. Also, winning such contests can get you some helpful media coverage.

Your project will need to stand out in order to increase your chances of success. You can present your business idea in person. Or, you can pitch it using a business plan. But, it ought to be comprehensive enough to convince investors that it’s worth investing in.

Bank Loans

Bank Loans

Banks are normally the first place entrepreneurs go when they’re thinking about funding. Banks provide two kinds of financing: working capital loan and funding. The later involves the usual process of sharing your business plan, the valuation details, and project report, depending on the loan that’s sanctioned.

Working capital is the amount needed to run a complete cycle of revenue-generating operations. Often, the limit is decided by hypothecating debtors and stocks. Kabbage and many other sites can enable you to acquire a working capital loan online in just minutes. Kabbage approves small businesses by considering real-life data, rather than the credit score alone.

Microfinance Providers and NBFCs

Microfinance Providers and NBFCs

Now, what do you if you don’t qualify for a bank loan? Worry not. Microfinance is the access of financial services to those who don’t have access to conventional banking services. It’s increasingly growing popular for those with limited requirements. Also, it’s a viable option for those whose credit ratings aren’t favored by banks. Similarly, Non-Banking Financial Corporations provide banking services without meeting the legal definition or requirement of a bank.

There are several situations which might precipitate the need to head to a finance corporation. They include where your firm is fast-growing and will continually need the loan ceiling raised. Also, they’ll be handy if you’ve got a spotty credit history or your business has a high debt-to-worth ratio but with a strong cash flow. Since the finance corporations take on higher risk loans which banks can’t handle, expect higher rates and fees.

Product Pre-Sale

Product Pre-Sale

Often, this is an overlooked, yet highly effective means of raising capital for your business. Think about how Samsung and Apple usually allow for pre-orders of products ahead of official launches. Pre-selling your products is an exemplary way to improve cash flow. Also, it enables you to prepare your business for the consumer demand.

Credit Cards

Credit Cards

Business credit cards are a readily available way to finance startups. They can prove to be a really quick means to acquire instant money. Say you’re a new business without tons of expenses. You can make use of a credit card and keep paying minimum payments. But, keep in mind that interest rates and costs on credit cards can build up quickly. Carrying that debt can prove detrimental to your credit.

Government Guaranteed Loans

Government Guaranteed Loans

The Small Business Administration (SBA) serves as a loan guarantor to small businesses. If you’re pursuing SBA-guaranteed loans, you should try working with lenders in your locale who partner with the SBA. Funds provided or guaranteed by the SB can be used to start or build a startup. But, they can’t be used to pay off creditors, cash out investors, or to invest in real estate. Qualifications for SBA loans change over time with your business’s nature.

Generally, your business must meet the set size limits. It must be for profit entities, and the business ought to be independently owned and operated. Local, state, and federal governments have programs which are designed to finance small businesses and new ventures. Often, the assistance is in the form of government guarantees of repayment of loans from conventional lenders. The guarantee provides for the lender repayment assurance for loans to businesses which might be having limited assets for collateral.

Grants

Grants

Often, grants are availed to non-profit companies. But, some grants exist for ‘for-profit’ firms. Grants for business startups are nearly impossible to come by. Most grants are availed for the development of products or services which will benefit the public. Also, they’re a viable option for cases where you’re generating products or services which the government requires. Some local and state governments have grant money. Contact your local or state office of economic development to inquire about these possibilities.

Bonds

Bonds

They can be used to finance a specific activity. Bonds are a special type of debt financing as the debt instrument is issued by the firm. They differ from other debt financing instruments in that the company specifies the interest rates and maturity dates. Also, the company won’t have to make any payment on the principal until the maturity date. The price paid for bonds at the time it gets issued is known as the face value.

A firm that issues a bond guarantees to pay back the face value plus interest. Bond issuing offers the company an opportunity to access financing without having to pay it back till the funds are successfully applied. The investor’s risk is that the company might go default or go bankrupt even before the maturity date. But, bonds are ahead of equity holders for firm assets as they’re a debt instrument.

You want to grow fast. Probably, you need external sources of capital. A plethora of lending options is available. They make it easy to get started. It’s a whole new world of business financing, right? Yes, all traditional forms of raising capital are still here with us. Approval rates by institutional lenders and banks have hit highs. But, banks and other traditional forms are no longer the only choices. Today, your small startup has lots of options to choose from when you’re trying to raise capital. With all the financing options available, you’ve got no sound reason to not launch your venture.

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