If you are planning on launching a startup, you should be aware of the struggle involved in getting any funding for your company. Typically, startups do not have the credit needed to secure a loan immediately, nor do they initially have the investor backing when starting up. So where does the money you need come from?
The answer to this question is to be creative! In different stages of business you will get your money from various different locations. To decide which option is best for you, you need to understand the options available for your startup:
OPTION 1: BOOTSTRAP
When your company is new, you don’t have a lot of options. At this stage, you may need to “bootstrap” and use your own personal assets to keep your startup alive. Since you are already personally invested in the company, you know how much you want to risk and what you might get out of it. You are the only one who can truly affect the return you get from your own investment, as you will either work hard to get it back or not.
OPTION 2: FRIENDS OR FAMILY
IF you need more funds than bootstrapping allows, or if you do not have the necessary assets to launch your company, you can ask family members and friends to assist you. Generally you will want to ask for a an investment, not a loanm as you may not know when you will be able to repay them. If you are able to in the future, it’s a good gesture to give these investors something in return for their gifts. Note that when raising funds from friends and family, they will likely be investing in you as the entrepreneur as opposed to the business idea. Be aware of this reality and be cautious not to take advantage of this “emotional investment”.
OPTION 3: MERCHANT ADVANCES
In order to really grow and expand or to have the money available for operating expenses, you will need some source of financing later on down the road. This could come in the form of bank loans and venture capital, but it can also be given as a merchant advance. Merchant advances are money given to you based on your future predicted cash flow. For example, a seasonal business might need an advance on their income to make a significant change during the off-season, so if they get a merchant advance they can make the necessary changes, slowly pay off the lowered payment rates during the off season, and fully pay off the debt by the time peak season is in full swing. Merchant Advances like this can help you pay for some new developments that will increase your cash flow or can help you get through seasonal swings or temporary off seasons.
OPTION 4: CROWDSOURCE
If your idea is a good one and your business plan is convincing, there’s a good chance you can make funding for your next stage of growth by crowdsourcing. There are many legitimate crowdsourcing websites in operation right now, such as Kickstarter, Indiegogo or Tilt, that allow you to raise money on a business idea before you even launch. Not only will you raise funds, you will also develop your first customers – the people who will champion your product because they are the early adopters. Throw your idea out there and see how many people bite and choose to buy and invest in your product or service!
OPTION 5: ANGEL INVESTMENT AND VENTURE CAPITAL
Once you have demonstrated sales, a proven business model and strong growth, angel investors and venture capitalists may begin to get interested in your company. One way of finding investors is to search online and see if you can find any who like to invest in your industry. Contact them and provide all the information they may ask for about your business. Another way to find investors is to attend networking or industry events. Investors come to these events to meet entrepreneurs like you in order to expand their portfolio. If you get a follow-up meeting, it’s your shot to convince the angel to invest in your business.
The difference between the two options is that angel investors will be individuals, often successful business people, who are investing their own personal funds into a potentially rewarding business opportunity. Venture Capital, however, is invested by firms or companies that use other people’s money. They raise that money by offering investors a chance to take part in a fund that is then used to buy shares in a private company.
Funding is a difficult issue for any startup or small business. Don’t let yourself get too discouraged. Look for these types of financing options in your various stages of growth and try to grow your business through them.