Most Reliable Ways to Fund Your Startup
Many entrepreneurs venture out to start their own business and become their own boss. Being your own boss offers great flexibility and promise of a lucrative career, but it also brings many risks and responsibilities along the way.
The biggest issue that entrepreneurs face is financing their startup. It’s no secret that many startups fail because of either bad financial decisions or lack of proper funding. In fact, 8 out of 10 entrepreneurs fail within 16 to 18 months due to a financial crisis, which makes a total of 80% of startups that fail due to the lack of funds.
It’s important to understand that funding a startup isn’t just about registering a sole proprietorship and launching your business on the market.
As a matter of fact, there are a lot more costs and expenses to cover before you get a chance to test your startup on the market. For example, you need conduct market research, create a marketing campaign, develop a minimal viable product (MVP), obtain licenses and permits, and so on and so forth. Everything costs money and if you think that you can skip a few steps in order to cut costs, your startup won’t survive for very long.
There are many factors that determine business success, but the most important factor is securing sufficient funds, to ensure your startup even has a chance to reach success.
Here are a Few Most Reliable Ways to Fund Your Startup
#1. Angel Investors
Finding an angel investor for every startup that struggles with finances is a dream come true. Angel investors can quickly finance a startup and cover the expenses, which results in immediate business development and growth – assuming they’re willing to invest in your startup that is. The fact of the matter is that angel investors aren’t willing to hand out cash to just anyone.
Sure, normally they ask for a 20 to 25% return on their investment once they decide to support you, but you have to have a good winning idea and a great pitch in order to get them interested in the first place. However, don’t confuse angel investors with venture capitalists, because where angel investors seek a return on investment, venture capitalists seek partnership and shares of your company in return for their support.
If you want to secure funds from angel investors you have to show them you can handle the economy’s ups and downs. Furthermore, you’ll need to do a lot of research and provide them with solid business and marketing plans.
You’ll also need to develop competitive strategies to convince them you can handle the competition on the market and show them social proof that people are actually interested and willing to buy your products or services.
Last but not least, you need to be passionate about your business and have the willingness to go with your idea to the end. The “get rich fast or die trying” attitude simply doesn’t bode well with angel investors and they will turn you down immediately if they even suspect that you’re just trying to find a fast way to get rich.
Invoice factoring is another reliable but expensive way to fund your startup. Basically, factoring is an alternative funding method where a business sells some or all of their receivables, such as outstanding invoices, to the factoring services. The invoices are sold for a discount or a fee in return for upfront cash.
The main reason why this method is expensive is that factoring services usually charge a percentage of the total amount to give you cash in advance. For instance, if you pay a 2% fee for 30-day upfront cash, it’s the same as around 24% annual interest fee.
However, this method is extremely beneficial when you need to collect payments from invoices, but you cannot wait for 30, 60 or 90 days until payments are due. In addition, it’s a good way to get instant cash and improve your cash flow.
Factoring gives you faster access to cash and there’s a lot less documentation involved than traditional lending. Still, some factoring companies may take customer accounts, as well as their creditworthiness into consideration before deciding to purchase your invoices. They may also consider how long have you been in business and your revenue status.
#3. Business Loans
Many entrepreneurs will turn to banks to secure a loan for their startup or small business ideas. However, as good as a bank loan can be, it’s no secret that banks are known for not playing well with others on occasions.
Banks can easily turn down an entrepreneur for a business loan for a number of reasons, leaving them without the means of financing their business. So, what happens when you can’t get a bank loan? It’s simple enough really, you turn to alternative lenders to try and secure a loan from them. There are various alternative lenders across the globe.
For instance, there’s a Small Business Association (SBA) in the US that helps small business secure a loan. They’re also quite picky when it comes to securing loans, but they’re more open-minded towards good business ideas than banks.
In addition, the SBA doesn’t give loans per se. Instead, they revise your proposition and secure loans from other lenders, such as micro-lending institutions, banks, community development institutions and other SBA partners by guaranteeing on your behalf that the loan will be paid in full.
Another good example is Australia. Australia has more than 2.1 million small businesses that create more than 4.7 million jobs. Those small businesses account for 97% of all business in the country. The way those businesses secure funding is through alternative lenders who offer more flexibility, such as not needing a credit history, lesser restrictions and almost instant loan approvals.
Any entrepreneur can consult with a small business loan specialist and secure short term business loans in Sydney. That way, entrepreneurs can have a reliable source of funding without having to worry about being rejected by the banks.
The age of the Internet has connected almost everything and everyone online. This new connectivity has also brought new ways for business ideas to become a reality. Any entrepreneur who has trouble funding their startup, but wants to avoid venture capitalists, banks and other forms of lending, can turn directly to crowdfunding.
Crowdfunding is a reliable method of securing funds for your business by asking the crowd i.e. multiple lenders or investors, to contribute or donate to your cause in exchange for a small share of your company, a small reward or at times, nothing at all, instead of trying to convince a single investor to do the same.
Crowdfunding platforms, such as Kickstarter, Indiegogo, GoFundMe and others allow entrepreneurs to launch a crowdfunding campaign, in order to attempt to raise funds to finance their businesses or business ideas.
These platforms don’t help businesses grow or develop, they just secure an opportunity for a business owner to try and secure the necessary funds from the crowd. The only catch is to set the capital and the time limit in which funds need to be raised. The crowd will donate, depending on whether they like the idea or not, as much as they can or as much as they are willing.
However, before you start a crowdfunding campaign, it’s important to pick the platform wisely. Some platforms charge a fee for collected funds, others won’t let you keep the cash unless you’ve reached the limit you’ve set and so on.
Traditional lending and outside capital aren’t the only reliable means to properly fund your startup business. There’s also an option to look for grants. Grants are funds secured by governments and government organizations to help financially stimulate businesses that meet the necessary requirements, qualifications and are eligible to receive a grant.
For instance, small businesses and startups that are focused on science, research and development are eligible for receiving a government grant. In the US, the SBA (Small Business Administration) in connection with STTR (Small Business Technology Transfer) and SBIR (Small Business Innovation Research) offer grants to businesses in exchange for meeting the federal research and development goals.
Grants may sound like business loans, but they have little to none in common. Whereas business loans need to be repaid in full with interests, grants don’t have to be paid back at all. Also, loans are approved by lenders, while grants are awarded to businesses. A business whose purpose aligns with national goals, such as network security or renewable energy etc. has more chances of being rewarded with a grant.
Furthermore, just because a grant doesn’t have to be paid back it doesn’t mean that the funds can be spent on anything. Instead, the capital has to be allocated accordingly to help grow and develop a business, hire employees, procure equipment and inventory, and so on.
Moreover, not just governments reward grants. Other sources, such as certain banks, nonprofit organizations and other companies also offer grants for businesses.
Startup businesses have the most difficulties finding the right funds to sustain themselves until they reach success. However, there are ways to secure sufficient funding to help grow and develop a startup business. Still, the key to reaching success is knowing how to handle those finances and avoid making mistakes that can easily ruin a business.