One of the toughest challenges for a startup is evaluating various sources of finance and raising the money needed to get going. You are the entrepreneur, and you believe you have a great idea that you can transform into a successful business.
But convincing others of the worth of your idea is no piece of cake. If you are unable to raise capital finances, you might never be able to see your idea become a reality.
- Know exactly how much money is required.
- Consider the setup costs, the investment needed, working capital, and growth and development.
- Evaluate how long you need these investments for and what security you can offer.
Assessing Your Sources of Finance
When you have compiled this information, you can check out the different sources of finance available for startups and opt for ones that seem suitable for you.
1. Personal Investment
This one is a given. You have to make some personal investments, which could include your savings or other assets.
You cannot start a business without putting something of your own into it. In addition, others will hesitate to give you money if you don’t contribute. By not investing yourself, you will demonstrate your lack of commitment or even confidence in the venture.
2. Friends and Family
The second step is to reach out to people in your social circle and ask them either to invest or to lend you the money.
This process is often referred to as patient capital, which is money that’s repaid later when the business becomes profitable.
3. Angel Investors
This category refers to retired company executives or wealthy individuals who make direct investments in startups and small firms.
These investors are typically leaders in their respective fields. They contribute by means of their network of contacts and experience and also provide their technical and management knowledge.
However, you should know that in exchange for their investments, angel investors might monitor your startup management practices and might want a say in your business.
4. Venture Capital
This funding source is ideal for tech-based startups that have a high growth potential in communications, information technology, or biotechnology.
The venture capitalists basically invest in your startup in exchange for equity, so you have to share ownership with an external party. Venture capitalists also expect a high return on investment once the business is properly established.
Always look for venture capitalists who have a background in your business’s industry and can bring relevant knowledge and experience.
5. Business Loans
Business loans are the most common source of funding, not only for startups but also for small and medium-sized businesses.
Banks and other financial institutions offer many types of business loans in return for regular interest payments. They will need you to have a solid business plan in place. Your plan should show potential and have numbers to back it up.
Having a good idea is not enough; you need to have evidence to support it. In some cases, banks might ask you for something as collateral, but every situation is different. If you don’t offer collateral, they might charge you a higher rate of interest but this will help you in avoiding bad credit too.
This term refers to a university, company, or any organization that is willing to provide you with resources for your startup. These resources could include office space, laboratories, marketing, consulting, cash, or anything else you might need.
What do incubators ask for in exchange? They are aware that you are in a vulnerable position, so they will typically demand equity. The reason why is they see a lot of potential in your idea and want to profit from it in the future.
7. Grants and Subsidies
Bringing innovations to light is not always easy. As a result, some government agencies provide support to budding businesses.
Access to this funding allows you to cover different expenses, such as marketing, research and development, equipment, salaries, and improvement in productivity.
Technically, governments give grants to startups unconditionally and you don’t have to repay them. But you cannot use the grant money for any other purpose, or you will be vulnerable to legal action.
Once a government source has provided you with funding and you fulfill the terms of the program, that agency might offer you additional funding in the future.
As the name indicates, crowdfunding refers to getting funds from a crowd, i.e., the general public. Entrepreneurs typically use this option when developing a product that’s essential to people and not available elsewhere.
There are crowdfunding websites that enable members of the public to pool their funds to help various causes. Every member can contribute as little as $10, and the money can go a long way if many people add to it. Use a good crowdfunding platform, and advertise your cause to get more people to contribute.
Startups can use any of these sources of finance to launch their operations and offer quality products and services to people.
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