Diversifying your start-up financing for a new business is always a good idea. It allows you to find the right financing for your specific business needs and shows potential lenders that you are proactive.
Most new businesses need financing to start and push their operations until they are profitable. However, you must determine your business needs before applying from the available sources.
Some businesses, such as manufacturing or processing, are more capital intensive and require large amounts of money. Retailers may not need as much funding and, in some instances, can sail through with personal financing.
Equity Financing vs. Debt Financing
Financing for most start-ups is categorized under debt financing or equity financing.
Debt Financing
Debt financing involves taking funding from creditors with an agreement to repay the loan at a future date.
This type of financing also attracts interest. It can also be secured or unsecured. Secured debt requires collateral in the form of a valuable asset while unsecured debt does not.
Equity Financing
Equity financing involves exchanging a percentage of the business ownership for financing. As a result, the investor enjoys a share of the business’s profits equivalent to their ownership stake. This type of financing is a permanent investment in a business and does not get repaid in future.
Sources of Start-up Financing for Your Business
Here are some great sources of start-up financing that you may consider for your business:
Personal Investment
When starting a business, most entrepreneurs invest some of their money in collateral on personal assets or cash. This demonstrates your long-term commitment to the business to the potential investors. Personal investment can be in the form of:
Bootstrapping
This is self-funding with little capital, personal wealth, and few assets such as your home. Bootstrapping allows you to retain 100% control of your start-up, and you do not owe any debt. On the downside, you also carry all the financial strain.
Some methods of bootstrapping include:
- Refinancing your home
- Home equity loans
- Home Equity Line of Credit
- Personal credit cards
Family and Friends
Borrowing from family and friends can also help you get start-up financing. It gives you the advantages of flexible repayment terms compared to bank loans and faster access to money. It is also less expensive to repay.
Venture Capital
Venture capital is not ideal for all businesses. Most venture capitalists are typically interested in financing tech companies, communications, biotechnology, and other businesses with high-growth potential.
This type of financing also has a high return on investment when the business starts selling shares. When looking for venture capitalists, consider those with relevant experience in your sector.
Start-ups with the potential to generate significant revenue are highly sought after by venture capitalist firms.
When they provide financing, these firms shoulder a significant portion of the risk. To protect themselves, they also demand a high level of business control in the form of equity.
Angel Investors
Angel investors, such as Idris Sami, are rich individuals or retired executives who directly finance small start-ups. They are often experienced with a wealth of contacts and the technical or management expertise to help you run your business.
Angels invest in your business from the early stages, and their financing can range from $25,000 – $100,000. In return for risking their investment, angels reserve the right to supervise your start-up’s management practices.
These investors are driven by the start-up’s growth potential, capacity to mentor entrepreneurs, and giving back to the community.
Angel investors contribute valuable networks to new companies. However, they keep a low profile, and it might be difficult to meet them. Consider working with specialized institutions to meet potential angel investors.
Business Incubators
Also called accelerators, business incubators help start-ups by allowing them to operate in their workspace and use their technical resources. Additionally, incubators offer training, guidance, and even potential financing.
A business incubator might offer your start-up their laboratory for research, testing, and development. Accelerators can include universities, government agencies, individual companies, and industry organizations, among others,
Crowdfunding
This financing option allows entrepreneurs to ask the public for contributions in exchange for equity.
A small private start-up pitches their idea to a large number of people, typically on digital platforms such as GoFundMe, Fueladream, and Kickstarter among others.
Some forms of crowdfunding include:
- Equity crowdfunding: Investors receive shares in return for financing.
- Debt crowdfunding: Investors lend start-ups money at high interest rates to mitigate their lending risk.
- Reward-based or donation crowdfunding: In this case, investors offer financing in exchange for tokens or receipt of the final product or service.
Government Grants and Subsidies
State and federal governments often support new businesses and young entrepreneurs through grants, subsidies, and loans. Business owners can also apply for donations or awards from government agencies.
While you do not have to repay government grants, you must meet the stringent criteria and beat the high competition.
Some grants require you to match the amount you are awarded while others require entrepreneurs to raise as much as 40% of the total start-up capital.
To qualify for government grants, you must provide:
- A detailed project description
- Proof of the benefits of your business idea
- Detailed plan with complete costs indicated.
- Proof of relevant experience and background
- Completed application forms.
Bank Loans
This is the most common financing avenue for many start-ups. Banks offer numerous benefits such as personalized service and repayment plans. However, they also prefer to finance established businesses rather than invest in start-ups.
To increase your chances of securing financing through bank loans as a start-up you must have the following:
- A well-structured business plan.
- Good credit rating
- Profit forecast
- Expected maturity dates.
- Detailed explanation of your business model
Banks may offer you:
- Working capital: This is financing to help you survive a full revenue cycle. In this case, your debts and stocks are leveraged to their maximum capacity.
- Funding: This is the process of securing funding by providing a business plan, valuations, profit forecasts, and other project reports.
Summary
There are many new ways to generate funding for new businesses. However, you must evaluate scalability and profitability based on your business model and unique start-up needs. This allows you to choose the best source of financing.
Even if you have been turned down by a bank, there are numerous options available. You can choose from government grants, angel investors, venture capitalists, or even family and friends.
While no funding option suits all business needs, we recommend doing some research in the different sources to find out which one is best for your start-up.
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