If some sources are to be believed, then all that a startup needs to get funded or to grow is a laptop with internet access! But those who have tried doing so may well tell you that it doesn’t always work out to be quite that easy.
Raising finance for a startup certainly takes some hard work. Whilst there are plenty of options out there for new business funding these days, getting your hands in it takes a solid business plan, plenty of determination, and sometimes all your powers of persuasion too.
If you’re looking for startup finance though, it pays to do your research. Finding the best interest rates, the most favourable terms and an understanding lender can take time. To help you on your way, here are a few suggestions for ways in which you can raise capital for your business:
The first option that many business owners ought to explore is their own family and friendship circle.
There are several benefits to trying this avenue as those who are near and dear to you are unlikely to ask for sky high rates of interest. Rather than seeing it as an opportunity to earn more money on their investment, they may just view it as a way of helping out a close friend or relative in need.
Loans from family members do not need to be structured like commercial loans, and borrowers of such loans do not have to follow a strict repayment schedule which makes debts to family members easier to repay. This flexibility – to repay the loan only when there is a steady flow of income – lifts pressure off you financially.
However, it is not always the case that a close friend or relative has the resources or the willingness to invest money in a business venture. You can also face uncertainty about how much they might ultimately be willing or able to lend, which makes it an unreliable source of funding.
Also, even if there is no interest to be paid, relations are at stake here. If your business fails to fly, and you are unable to repay the loan there is a high chance that bitterness and anger may result in cracks in the relationship. If the lender thinks you didn’t do everything you could to ensure the venture was a success, you could end up with a serious family conflict to contend with as well as a failed business.
Investors who provide funding in the early stages of a business and in return demand an ownership stake in the company are known as ‘angel investors’. Some popular businesses which secured funding through this method are Uber and Facebook.
Compared to banks, this is a relatively safe loan as the investment doesn’t have to be returned by the borrower if things go south. But what you also need to keep in mind is that you will also be sharing your profits if the venture performs well, as the company and its profits are no longer entirely yours.
Another advantage of securing angel finance is that the investor is often also willing to give you good advice or mentorship along the way, as they stand to gain or lose as much as you do. This can really make a difference to the outcome of your entrepreneurial venture.
The fact that a business owner doesn’t have to worry about paying interest or capital repayment makes it a good option for raising funds. The only trade off, which happens to be a big one, is that you are essentially handing over a slice of your business and saying goodbye to a chunk of your future earnings and decision making capacity.
Business owners must decide for themselves whether giving away a stake of their ownership is something that is acceptable to them or not. Another aspect that you need to take into consideration is that angel investors may have higher levels of expectations than other types of lenders, which can put immense pressure on you to deliver a good performance.
In essence, finance acquired through venture capital is quite similar to that obtained through an angel investor. The similarity between these two methods of financing is that each demand a stake of ownership in the business which they are funding.
The major difference between them is that an angel investor is generally a high net worth individual who puts their personal finance at risk when investing in a company, whereas venture capitalists are usually a group of rich private investors or financial institutions who specialise in financing startups.
Usually, VCs expect the venture which they have funded to be sold within four to five years as they will want to make their money back as quickly as possible. But compared to angel investors, VCs invest higher sums of money. It is also possible that VCs may demand a higher stake in your company which means you could be left with little to no control over your own business. This aspect makes approaching VCs a more risky proposition for small businesses.
As the business owner of a promising startup, another place you can look for finance is the internet. There are various online platforms where individuals and businesses provide details of their projects and pitch for backers to fund them. Depending on how promising the business idea is and how well you can pitch your idea, you can attract investment and loans from the public to cover the cost of your startup. This method of financing is known as ‘crowdfunding’ and it has gained considerable popularity in recent years.
These online spaces are still evolving on a daily basis but right now there are four different models. These are peer-to-peer loans, equity investment, rewards-based or pre-payment crowdfunding, and donation-based crowdfunding.
Many businesses which are unable to acquire finance through other mediums turn to this type of funding. Projects and ideas which are innovative and unique may be able to raise more money, and in an easier way too, through crowdfunding.
The ability of entrepreneurs to publicise their idea plays an important role in determining whether their business will get funded or not. It is also a good way to know the public’s response to your product or service even before it is launched and the money is pumped in.
Most entrepreneurs consider banks as a last resort when it comes to sources of funding, and often for good reason. Raising finance as a small business owner has certainly become easier compared to the days when the bank was the only option. The more options that become available, the better your chances of finding the financial backing you need. But the fierce competition that businesses must face in order to acquire this finance, could end up robbing you of the little comfort that convenience and choice can bring.