Do you have brilliant and innovative products or services in mind that you want to share and introduce to the market? If so, maybe it’s time for you to build your startup. But the big question when starting a business is, how will you fund your business?
Funding: An Essential Part of a Business
Funding is among the most critical elements of starting a business. It’s the bloodline of any business, and without it, all your brainstorming sessions, business model planning, and other efforts will all be in vain.
Also, you have to think about how to finance your business continuously. Funding isn’t only essential at the launch of your startup and the continuity of it. According to experts, many businesses fail in the first year of their operation due to a lack of funds. So, what are the workable strategies to finance your startup?
In this article, you’ll learn different ways to fund your startup, including bootstrapping, small business loans, crowdfunding, and other startup funding organizations. However, it’s worth noting that every source has risks, so it’s important to note what’s best for your business.
1. Bootstrapping
Bootstrapping, also known as self-funding, is a viable way to finance your startup business. In most cases, starting entrepreneurs may find it difficult to source funds from other financing options, and many would require them to show feasible plans for success before their loans get approved.
To avoid dealing with these challenges, small businesses use their funds to start their own. Other than your hard-earned savings, you can consider borrowing money from family and friends without interest rates piling up and legal compliances.
In addition, if your business is forced to close due to circumstances, you have no debts to pay since you build it only with your savings. However, bootstrapping only applies when the initial capital is small unless you have a massive budget to finance your startup.
2. Crowdfunding
Have you seen people on the internet source funds using different online platforms and websites? That’s how crowdfunding works. Crowdfunding is one of the new strategies to source funds from anyone worldwide, and it’s like a pre-selling contribution from your company through multiple people simultaneously.
When you’re planning a crowdfunding campaign, you have to lay out your business plans, goals, detailed description of business, how much you need, and other crucial details. Then, people will decide if they’re interested in your proposal, and they can offer a donation or pre-buy your products.
Crowdfunding isn’t a loan with interest but an investment. You allow people to share your company, and when your startup grows to be successful, their money will also develop, and that’s how you can repay them.
3. Angel Investments
Angel investments are offered by investors who help startups finance their businesses. They’re an organization that filters the capabilities of each proposal before investing. Also, they support startups in many ways through financial counseling, business plan polishing, and others that may help everyone succeed.
This may surprise you but the companies you know today are products of angel investments. Usually, angel investors emerge at the starting phase of a business, and they typically expect a 30 percent return in exchange for their money.
However, even angelic investors have a downside since they rarely invest a large sum of money to fund a startup.
4. Venture Capitalists
Unlike angel investors, venture capitalists are the natural risk-takers. They’re professionals who invest in companies that have huge potential to succeed. Also, they provide expert mentoring to help businesses on their path to success and act as an indicator to determine and evaluate where the business is going.
In addition, venture capitalists are usually more interested in small businesses already earning than those in the startup phase. Unfortunately, venture capitalists also have disadvantages, especially regarding their short-term loyalty.
There are also some venture studios focused on specific spheres. For example, if you need a partner that brings technical AI or/and B2B SaaS company building expertise, then AI b2b venture studios are what you need. They will invest necessary tech resources, a mix of talents, strategic management, and also initial capital in exchange for equity. However, this business model allows the founder to have a majority ownership stake.
These investors usually recover their investments after three to five years of investing. So, if your product takes too much time to enter the market, they might not be interested in investing in your company.
5. Small Business Administration (SBA) Loans
Small Business Administration (SBA) is created to assist those who want to start a business. Also, it’s usually offered by banks and other lenders. The good thing about SBA loans is that they have the lowest interest rates in the market, unlike regular banking loans. However, getting approved isn’t easy, and the process is usually long.
On the other hand, SBA loans are best for companies who need to refinance their debts and for patients with long-term financing. Also, be careful who you’re working with since many are just predators who want to extract all your money and plunge you into debt.
6. Invoice Financing
Invoice financing applies to startups that are already generating income. Companies may use their unpaid invoices as collateral to borrow money from a third-party factoring company. It means that if you fail to pay the lender, they may get your invoices and seek payment for these themselves.
The downside of invoice financing is that the fees to generate cash advances are too high. So, you might want to think about it first before signing any agreement.
7. Invoice Factoring
Similar to invoice financing, it works on startups already generating revenues. However, unlike the latter, invoice factoring works by selling unpaid invoices to a factoring company for an immediate cash advance.
Since unpaid invoices are sold to a lender, you don’t have to collect the payment yourself. They’re responsible for the collection of those payments. Like invoice financing, it’s also expensive compared to other financing options. So, think about it carefully before you sign an agreement. This is also to help you save from additional expenses you’d want to avoid as a startup.
Final Words
Establishing a startup is the first step in reaching your dream of becoming a successful entrepreneur. However, the path to your dream may not be as simple as you thought, especially when it comes to funding. Without proper funding, your business will hardly continue to exist.
When looking for a source of funds, it’s essential to consider their benefits and risks. Some of them may offer high-interest rates and fees that may put your business on the wrong side of the balance. Therefore, you can consider these tips can help you know what financing option is good for you. Also, you ask a professional financial consultant to determine what’s right for you.
