Last editedNov 20213 min read
There is no one size fits all approach to startup business funding. For some it means using their own savings, for others it means taking out a loan and appealing to investors. In this post we’ll take you through all you need to know about startup financing.
Personal investment
Using your own personal funds to get a business off the ground can be a desirable option for many. This is because it is far quicker and easier than applying for funding. It’s also a good way of showing how serious you are about your startup, as putting your own money on the line demonstrates serious commitment.
Of course, how viable this is as an option depends on your personal financial situation. For those without handsome savings, this option might not be realistic.
Even for those with ample personal finance to offer, it’s important that you are able to keep your personal and business funds in their respective lanes to avoid complications further along. It’s also essential that your assets, such as home and retirement funds, are protected in the event that things go south.
Asking friends and family
If you lack the necessary funds in your own saving pot, you might be wondering if you should reach out to friends and family for startup financing.
If you have relatives and close friends that are wealthy, it can be an appealing option to see if they’ll help you out with your startup business funding. However, it’s certainly an area where you should tread carefully as relationships can be negatively affected if the business doesn’t work out.
If you do decide to appeal to close ones for money, make sure you are honest and realistic about your expectations for the business, and clearly state how long it will take to pay them back. It’s also important that you establish whether or not they are giving you the money or lending it to you. That way you can avoid any misunderstanding and hopefully keep relationships healthy.
Business loans
If personal or familial investment isn’t an option, then how to get a startup business loan is likely a pressing question on your mind.
So, how to get a startup business loan?
Firstly, you need to decide what kind of business loan is best suited to your startup. There are several types of business loans available, and they each offer various benefits and drawbacks. Below are some of the options available for startup business loans:
Small business line of credit
This allows businesses to access funds from the lender as and when they need them. There is a cap on the amount of funds which can be obtained, but is nonetheless a useful way to manage a company’s cash flow. There is often a fee for setting up the line of credit, but interest is not charged until you begin accessing the funds.
Small business term loans
Term loans are usually a set amount and are intended for business growth, expansion or one-off expenditures.
Small Business Administration business loans
Several banks offer low-interest-rate loans for small businesses that are guaranteed by the U.S. Small Business Administration (SBA). The interest rate and repayment scheme tends to be very attractive on these loans, and the amount borrowed can be as high as $5 million.
Equipment loans
It is also possible for small businesses to buy equipment using an equipment loan. For this, you will usually be required to make a downpayment of around 20% of the price of the equipment, and the piece of equipment itself serves as security for the loan.
Angel financing
Angel investor is a term used to describe an individual who invests in a startup during the early stages in exchange for an equity ownership interest. Usually, angel investments accelerate the growth of startups, and they have contributed to the success of huge companies such as Uber and WhatsApp.
In order to attract the interest of angel investors, you will need to have a clear and promising business plan, show passion, commitment and innovation in your business idea. It also doesn’t hurt to have revolutionary technology or intellectual property in your possession.
The best way to get into contact with an angel investor is through networking and having good business connections.
Venture capitalists
Whereas angel investors invest their own money into startup businesses, venture capitalists are professional venture capital firms. They can provide capital and assist in helping new businesses reach customers, recruit employees and plan out their business strategy.
Venture capitalists are not easy to get on board. They usually want to invest in startups with a lot of potential who have already shown promise.
Crowdfunding
Crowdfunding refers to the practice of posting online and asking for funding for a start up business. There are specific crowdfunding platforms which can easily be found with a quick search on any search engine.
A benefit of crowdfunding is that it can help raise your profile as well as funds as the appeal circulates online. However, it relies on successful circulation and promotion in order to be successful.
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