Starting a new business can be very difficult because of all the things you’ll have to put in place before the venture can generate any real returns. The most important of these elements is capital. There are several ways by which you can get capital, and each of them has their unique advantages and disadvantages.
This guide discusses six of the ways you can finance your new business and the things you need to consider when exploring each one.
Bootstrapping is a process where you use funds you have on hand to launch your business. This is usually money from your current income source, as well as your savings. After you launch the business, you then use the revenue it generates to run operations, and slowly expand the business. Bootstrapping is only suitable in situations where you have enough money saved up to launch the business you have in mind.
Even after launching, the process of growth and expansion is often long and tedious. At some point, you’ll need to find another source of capital or the business may never become profitable. Very often, businesses that rely solely on bootstrapping close up because they are not able to generate enough revenue to stay open.
Borrowing From Friends And Family
There is a long list of successful businesses that started with borrowed money. You can get your friends and family to lend you the money required to get your business off the ground and pay them back when the business becomes profitable. Because of the bond and relationship that they share, loved ones are usually more inclined to offer support, however they can.
Very often, the entrepreneur combines whatever was borrowed with available savings, and that is used to launch the business. However, like bootstrapping, this method of financing often requires more capital input later on, if substantial growth is desired.
You can think of crowdfunding as a larger version of getting capital from family and friends. With crowdfunding, you get small amounts of money form a large pool of individuals. This money is then used to launch your startup. The individuals are usually connected with via social media and websites dedicated to connecting investors with entrepreneurs.
There are different kinds of crowdfunding, and each has different requirements on how, or if, you will pay back the raised capital. The three major types of crowdfunding include:
This is usually person to person lending, and the agreement to pay back is between you and the lender
This is generally for causes, even though it can be used to launch a business. You don’t have to pay back capital generated through donation crowdfunding
With exchange crowdfunding, you’re raising money with the promise that once you develop the product, or reach a milestone, you’ll give the donors your business’ product.
Angel Investors And Business Partners
This is the option that gets the most media attention, and it involves finding someone who believes in the business idea enough to invest their own money. Very often, angel investors leave you to run the business by yourself, choosing to put their trust in you and your business plan.
On the other hand, business partners tend to be more hands-on, and they desire to run the business with you, either actively or passively. Mentorship and advice from a seasoned entrepreneur can be very valuable for a startup, and business partners can provide that.
Getting a start up loan is a convenient way to get your business off the ground. In the United Kingdom, startup loans are available to new businesses at low per annum interest rates. Getting a startup loan also has additional benefits for any startup entrepreneur. For example, applicants will receive free access to mentoring and exclusive business offers for 12 months after they are granted the loans.
Because of the nature of new businesses, startup loans are unsecured, which means that you won’t have to put up any collateral before securing the loan. However, three factors are considered when your loan application is being processed, and those are:
Creditworthiness refers to your prior credit history. When applying for a startup loan, you will be required to undergo a credit check. This will review your financial behavior and credit score, and see how likely you are to repay the loan.
Even though they are unsecured, you will have to pay back your startup loans when they are due. As a result, you will be required to submit a personal survival budget that outlines your expected sources of income, as well as key expenses that you incur. This will be to ensure that the loan will be spent exclusively on the business.
Since you will be required to pay back the loan, you will also need to demonstrate that your business will generate enough money to pay back. This demonstration will include proving that there’s enough demand for your products and that the goals in the business plan and forecast can be reasonably achieved.
Grants are government-sponsored schemes that offer cash rewards, as well as equipment and tools to entrepreneurs and small business owners. They are usually to incentivize entrepreneurship and to support startups and existing businesses. The cash rewards offered depend on the scheme, and they can range from a few hundred pounds to several hundreds of thousands.
Grants are often the most desired means of funding a startup because they don’t require you to pay interest on the money. Many grants also only need you to pay back a small portion of the original sum. However, the competition for grants is always stiff because of their attractive nature. Several startups and established businesses compete for the available ones, and only businesses that can deliver valuable outputs get them.
Which Method Of Finance Is Best For You?
All six finance methods are great options suitable for different circumstances. Ideally, you should go for options that can help you raise the highest amount of capital; that would be start up loans, angel investors and grants. However, these have strict requirements, and they may not be useful to you if you’re unable to meet the requirements. If you are unable to meet the requirements, bootstrapping, borrowing from friends, and crowdfunding may be better options for you.