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.
It is essential to remember that careful planning is key when you wish to raise finances. You need to:
- 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.
6. Incubators
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.
8. Crowdfunding
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.
Pankaj Verma
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Very Interesting post. More than anything, patience is most needed. It’s more important to do smart work than hard work. therefore one should try to focus on reducing costs by keeping quality of services intact. I came across this blog a few days back on Due Diligence. It is always beneficial to check quality of an investment opportunity before spending funds on it.
Rightly said but there are too many restrictions or terms applied to using these means of funding. They mostly support USA and European countries and not Africa. I have searched for such funding programs that support Africa but found none. Funny enough, the more I search, the more I companies that give only USA startups and businesses business loans. Does anyone know any that can also fund startups in Africa?
Starting a business requires thorough planning including funding sources. Personally I do not encourage starting up a business with loan. As you may be required to start repaying when you are yet penetrating the market, sales are low, not at breakdown. Of course capital is secondary but no business will start without capital. So, please set aside some funds to start your business and perhaps you too it with loan.
Good list of financial sources for starting a start up. The most important thing is to make sure what you already have and what do you still need to buy/procure. A detailed list of things needed and how much it will cost versus the revenue and profit the business expects to make will be good for people who are offered to invest in your businss
Yes, indeed to start up a business must be a well planned move. You can wake up one day and dump your cash in any business.
Good article. But I would omit the very first 3 points as if they are of no help. No one would be searching for such article if they could invest in his own or borrow from friends or family. Anyway, thanks for writing such articles, definitely helps many youngsters with a dream of a start-up of their own.
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thank you for sharing this information …i was always curious of how the startups gets funding apart from angel investors…keep sharing 🙂
I would be happy if you could help us ! it’s very informative blog for finance startup thanks for sharing with us
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There are some web pages and apps where start ups can get some financing. From what I’ve seen it can be really successful for start ups
Awesome ideas from the web creators! It’s always nice to support something new and different in the market
I know kick start ups. Do you know any others?
I suspect you mean Kickstarter which is a crowdfunding site. Yes, there are many others including Indiegogo. Read Crowdfunding: What is It, When Can Small Businesses Use It – and When Doesn’t it Make Sense to learn more.
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Start-ups are really hard the first couple of years, it’s more of a personal investment. there will be times that you’ll be shelling out your own money rather than getting some in. patience is really needed when starting one
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If you can make the project blockchain related then ICOs can be lucrative ways to raise funds. Not viable for all projects though. Even Kodak with Kodakcoin are getting i on the act.
Thank you for listing down the different sources of finance.
Indeed, gathering capital can be the most challenging phase for a startup. It sets the tone of how your business will take its first steps.
Cheers!
Thanks for sharing this knowledgeable blog with us Pankaj. We all want to start a new business but the problem which always arises is to arrange the good amount of capital. I have started a new business which name is Epson-printer-support and after reading your blog my all queries relating to the startup of my business is now solved. Thanks for sharing such a helpful and useful blog with us. Wating for your future posts. Keep Sharing.
Thanks for clarifying the various funding options Pankaj.
Unfortunately, as you pointed out, far too many aspiring entrepreneurs,
have great ideas, but far short, when it comes to realizing and or
understanding how to seek out the most viable funding sources.
And sometimes they don’t initially choose the most advantageous
sources for their particular venture and their current skill set.
Thanks for opening our eyes, to the many untapped possibilities.
Happy to see valuable information about best finance source for startups.
Thank you for sharing this useful information.
Rammy
DMA Inc.