How To Finance Your Startup - Win The Wealth Game

How To Finance Your Startup

By Dr. Daleen Smal | Online Business

Mar 03
Ways to Finance Your Startup Business

How an entrepreneur decides to finance his or her startup is going to be the most important decision. That’s because the structure of the financing option will be one of the key drivers behind the growth of their business.

According to research by Kabbage, about 30% of small businesses get started with less than $5,000. It also found that 58 percent got started with less than $25,000.

The finance option you choose for your startup can either make or break your business. While sizing up the choice, here are some of the business financing options to consider.

How an entrepreneur decides to finance his or her startup is going to be the most important decision. That’s because the structure of the financing option will be one of the key drivers behind the growth of their business.

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1. Attracting Angel Investors

Angel investing remains to be a large part of the fundraising activity for startups. When you talk to an angel investor be brief, concise, and most importantly, have an exit strategy. Attracting angel investors is difficult. Be sure to win over their interest by being realistic.

Don’t Follow A Fad

One of the biggest mistakes entrepreneurs makes when trying to attract angel investors is that they follow a fad. Be passionate about what you do. Assume that the angel investor you are talking to is experienced and will spot a fad. You need to present them with something unique, different, and sustainable.

Have A Solid Plan

You must have a solid marketing plan, market assessments, and competitive analysis. Even if you are a startup, you need to show near expert knowledge of your target market and the plan that you are going to follow.

Add Credibility

An investor wants to know that your business isn’t going to fold under pressure in tough times. Remember, their money is on the line. To put the investor at ease you can include some experienced people in your management team. Even having an unpaid, but experienced mentor on your team can give your startup the credibility it needs.

Key Points:

  • 30% of small businesses get started with less than $5,000.
  • Attracting angel investors is difficult. 
  • Assume that the angel investor you are talking to is experienced and will spot a fad.
  • You must have a solid marketing plan, market assessments, and competitive analysis.
  • An investor wants to know that your business isn’t going to fold under pressure in tough times

2. Ask Family And Friends

Although personal funds finance 77% of business startups in the USA, asking family and friends for funds is the third most used ways to finance your business. A survey conducted by OnePoll in conjunction with Lendio, shows investments by family and friends make up for 16% of funding startups.

Using the family to fund your business, you stand the chance of not only putting their financial future on the line but also your relationships with them at risk. Thanksgiving will be pretty awkward if you took a loan for a venture and it failed. That said, there’s no reason why you shouldn’t turn to family or friends to finance your startup.

Have A Plan

Many starry-eyed entrepreneurs make the mistake of asking family members and friends for money too early on. Rather begin with a formal business plan and work on the details before asking your family and friends to invest in your idea.

Give A Timeframe

Like negotiating a loan with a banker, you will need to give them assessments and evidence-based projection on when you will repay them. It will also make your family members know that you are taking their investment seriously.

Structure Of The Arrangement

Before you decide to take any money from family or friends, you need to work out an arrangement. Consider giving up equity, or pay the interest on the loan. All too often, the two parties are looking for different things. So, you both need to be on the same page.

Key Points:

  • Investments by family and friends make up for 16% of funding startups.
  • Using the family to fund your business, you stand the chance of not only putting their financial future on the line but also your relationships with them at risk. 
  • Begin with a formal business plan and work on the details before asking your family and friends to invest in your idea.
  • You will need to give them assessments and evidence-based projection on when you will repay them.
  • Before you decide to take any money from family or friends, you need to work out an arrangement. 

3. Take Out A Microloan

Having zero collateral or no credit history does not mean you are not eligible to get a loan. Let me come straight out and say I am not a fan of microloans. However, when answering the question “How to finance your startup?” many entrepreneurs opt for a microloan, so I'll discuss it.

These are small business loans that range from $500 up to $35,000. While banks do not bother with small loans such as these, entrepreneurs turn to microlenders or non-profit organizations. These institutions offer smaller size loans and usually need less documentation.

There are many microlenders in the US and elsewhere so it shouldn’t be difficult to find one. The downside is that the interest rates on microloans are often much higher than the loans you get from a bank.

Qualifications Of A Microloan

Every microlender will have its own criteria for who is eligible for the microloan. Normally, a borrower needs to be at least 21 years old, and be the sole business owner. You can also apply alongside a co-owner which will then make you co-borrowers.

Possible Disqualifications

A weak credit score will make the microlender reconsider giving you a loan. Certain factors will be seen as red flags by microlenders. These would include standing tax liens, filing for bankruptcy, or delinquent payments.

Key Points:

  • These are small business loans that range from $500 up to $35,000. 
  • The downside is that the interest rates on microloans are often much higher than the loans you get from a bank.
  • Every microlender will have its own criteria for who is eligible for the microloan. 
  • Certain factors will be seen as red flags by microlenders. 

4. Using Personal Funds

I am in favor of self-financing my startup. Unless I can find an investment that pays me a higher interest rate (after-tax) than what the bank charges me for a loan to finance my startup, I won’t take external funding.

Here are my reasons for holding this view.

Not Giving Up Ownership

People who offer external funding often require you to give up ownership. You get finance but outsiders now get to decide on the direction of your business. This may compromise your vision for starting your business in the first place.

In one single move, you may take away all the reasons why you wanted to be your own boss. Think carefully before you give your company and dream away. 

Keep Cost Lower

Whoever lends you money wants a return on their investment. They will add interest to the loan. Those interest costs will add to the financial burden you and your business have to carry. It may well turn out to be more than what you can afford.

Better Use Of Time And Energy

Every minute you spend to convince someone to invest in your business is a minute you could have used to improve your product or build a relationship with your customer. It is far better to invest your time in the people who will ultimately grow your business and fill your wallet – your customer.

Key Points:

  • Using external funding come at a price you may not want to pay. 
  • People who offer external funding often require you to give up ownership. In one single move, you may take away all the reasons why you wanted to be your own boss. 
  • They will add interest to the loan and this cost will add to the financial burden you and your business have to carry.
  • Every minute you spend to convince someone to invest in your business is a minute you could have used to invest in your customer.

Conclusion

The ways to finance your business will depend on aligning the financing structure with your capital needs and business opportunities. Financing depends on how big your opportunity is and the amount of capital that’s required to break even. Any small business financing strategy is going to depend on these two main factors. It will help you determine which option suits your business model.

I would rather choose to bootstrap my startup. It may take longer to start, my business may grow slower, or I might even have to temporarily take a second job to fund my startup.

Using your own money allows you to keep control over finances and your business. You are in charge of the creative aspects of your business. You decide where to use every cent in your business and are free to make wise moves in the best interest of your customers and your business.

Whatever you chose to do for financing your startup, make sure you make a wise choice, and understand the consequences. 

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Which methods did you use to finance your start-up? Share your tips in the comments.

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