16 Mar
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9 min read
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Relentless effort and caffeine are not the sole fuels that keep startups running. Even if the establishment stage is overlooked, the most creative startups still need minimal financial resources for their growth and development.
Possessing the minimal required financial resources allows the startup to miss no opportunity, whether it is to hire a rare talent or imperative pivoting to enter new markets. The key points to finance new businesses are mentioned in the following.
Aside from obvious directions such as corporate or personal investment, startups can finance themselves in various ways. Each method would eventually provide the startup with the resources it needs, but they vary in the mechanism.
These loans are often the first or second choice for many small businesses seeking to finance themselves. Small business loans are like personal loans, that is, you receive a specific amount with a certified interest rate.
These types of loans can be applied for at banks and financial institutions, and many such opportunities are available at Small Business Association (SBA). However, you'd better have reliable business credit just as in the case of personal loans. This will help you get a considerable amount in loan at a lower interest year and reduce the final costs of the loan.
Note: Aside from SBA loans, short-term loans also work out for some startups in some cases Which startups are small business loans ideal for?
Any new start-up with good credit (that manages its finances responsibly and wisely) would be a good candidate for this type of loan.
Just make sure that you have planned how the funds are going to be spent before taking the initiative to receive the loan. Wasting a small business loan is an extremely costly mistake. Besides, a second loan would be rare to be granted shortly after the first loan is granted.
Many startups go through various periods of funding during which they search for various types of funding resources. These periods are classified into three groups, each corresponding to one stage in a startup business’s life:
Financial resources are often traded for company shares at each funding round, meaning that the investors expect their investments to return. Funding rounds are quite convenient to get startups up on their feet or help take their products to the shelves.
Many companies with the initial capital or even some lacking it pursue round funding. If you have a strong business plan and do not mind trading the ownership of a small part of your business, you can get ready for round A funding.
Venture or risk-taking capitalists are private investors that finance new businesses. These investors are often part of larger venture capital companies where board members choose the businesses to support by vote.
Startups selected by these companies will be contacted by a VC with a funding proposal. These capitalists tend to buy startup shares and expect to gain a form of payment in the case of the startup’s success. However, there are unsuccessful investments leaving such capitalists at loss too.
You may consider this option if your startup is beyond the idea development stage and offers an acceptable product. Venture capitalists are willing to "trade" but would not take unnecessary risks. The startup must be ready to present its products or services to the market and only lack the necessary funds to do so to attract these investors.
Angel investors are usually wealthy people willing to spend a portion of their resources on supporting high-potential startups. Contrary to VCs, angel investors act alone and are not members of other firms or boards. However, similar to VCs, they expect a return on their investment as they purchase a part of the shares.
These angles can afford mistakes in their investments which makes them a safer option compared to traditional loans, but business owners must note that they are selling their stocks and may not have complete control over their startup anymore.
If you plan to attract angel investors, you must make sure that your business is organized and planned to move forward, angel investors are usually a part of the seed round funding and provide the financial resources for the initial stages of a business’s growth.
Thus, this method suits businesses that have something more than a mere idea, but it must be noted that such investors are scarce and are not necessarily similar to an organized venture capital firm. Even a family member or acquaintance with adequate capital can be a potential angel investor; however, the complications and risks of this type of funding are on you.
Crowdfunding is a getaway used by many businesses with a novel idea and minimal capital. In this type of funding, private investors purchase the products or services of the company before they are made available to the market which allows new business owners to get their required funding.
Crowdfunding can be carried out through holding digital or local events; however, Kickstarter or Indiegogo are among the most common ways to do so. Users of these platforms view several ideas and support the most attractive ones every day.
You are considered a good candidate for crowdfunding if your products are services are customer-oriented. However, you must devise a precise plan of the required funds and how it is going to be spent beforehand. Many platforms such as Kickstarter require you to specify your development and financial plans to provide the users with the transparency needed to invest.
Equity crowdfunding is similar to crowdfunding in the sense that you are searching for funding from a large group of people, but contrary to traditional crowdfunding, you would be selling your firm stocks instead of products or services.
Since this funding method involves the sales of equity rather than viable products or services, equity crowdfunding is more suitable for businesses at their early stages. This type of funding can be the way to fund your business if you do not mind selling stocks and are confident in your idea.
Business incubators, also known as accelerators, are groups helping startups with a bright future. These centers are usually established and funded by other companies that seek to help new businesses reach their full potential. Aside from financial aid, incubators provide the startups with an environment to work and offer them counseling as well.
These centers are found almost everywhere, so if interested, conduct comprehensive research on the local and global options to discover and choose the best alternative.
All startups at their early stages can benefit from the advantages of incubators. People with strong teams and ideas take the most advantage, but even small startups that are not on their roll yet can get a lot of help from incubators.
The same funding technique does not suit everyone since each business is unique in its features as is your startup. For this reason, you have to contemplate the position of your business and consider which option you are more comfortable with. Each startup can choose the best way of funding by conducting an accurate analysis of its current state.
If still in doubt, contact a financial consultant or seek help from financial institutions, then you can make the best decision for funding and shift your focus to providing customers with your products and services.
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