Self-financing comes with a range of benefits as when you invest in your business, you remain engaged with your business. An entrepreneur who is really into their business is an attracting factor and decisive factor that investors tend to look at.
FREMONT, CA: Money makes every business tick. Every revenue-generating idea needs strong financial backing to be a successful one. According to reports, 94 percent of new startups fail during the first year due to the lack of adequate funding. Without a fixed capital, the day to day functioning of a company becomes difficult. As a result, entrepreneurs always keep asking themselves 'How do I finance my startup'? The size of capital required varies from business to business, and the nature of your company decides when you need the funding.
Here are five financing methods that can be used by startups.
First-time entrepreneurs may not find it easy to find investors for their business. Most investors, before investing need to be convinced with a solid business idea and plan, which they believe will guarantee returns. In such cases, most entrepreneurs tend to self finance their ideas out of their pockets. Moreover, a self-financed business idea that succeeds tends to generate more attention than an unsuccessful one. Family and friends can also be of help under these circumstances, and in most cases, families and friends tend to be flexible with interest rates.
Self-financing comes with a range of benefits as when you invest in your business, you remain engaged with your business. An entrepreneur who is really into their business is an attracting factor and decisive factor that investors tend to look at. However, this method is suitable only when the initial requirement for capital is a small one. Some businesses require large amounts of money from the word go. In such cases bootstrapping or self-financing may not be a good idea.
One of the more recent methods, crowdfunding among startups has been gaining a lot of traction. In this method, an entrepreneur describes the business proposal, ideas for making profits, the amount of finance required, and purpose the investment will be used towards, on a crowdfunding platform. Consumers that like the business idea and are convinced by it can invest in the business.
One of the main advantages of using crowdfunding remains that it generates interest in your business, along with capital. As a result, your product also gets marketed at the same time it gets financed. By putting the financing into the hands of the common people, you can eliminate small-time investors and brokers who charge hefty rates of interest. If the campaign ideas are successful, it can also attract investment from venture capitals in the future. However, crowdfunding needs a robust design and plan of execution in order to work out in the right manner.
Angel investors are individuals that have a surplus of cash with them and are keen on investing in new startups. Angel investors can also be found in groups who screen through ideas before deciding to invest. With an angel investor, you have the added benefit of having a mentor on your side who can give shape to intentions and prevent new entrepreneurs from making grave mistakes with the capital. Top companies like Google, Yahoo, and Alibaba were all initially funded by angel investors. They usually work for a 30 per cent stake in equity and are ready to take significant risks for big returns. However, angel investors may not be willing to pitch in as much as venture capitals.
Venture capitals are the real deal. These are highly professional investors with serious business on mind. These are well-managed funds that invest in companies that show great potential for growth and returns. Most often, they invest against equity stake and tend to exit when there is an IPO or an acquisition. Venture Capitals can provide mentorship and expertise to new business and act as a litmus test to identify where the company is headed by evaluating the business from a sustainability and scalability point of view. These options are most suited for startups that are past the initial phase and into the profit-making phase. However, venture capitals are not ones to keep up on concepts like loyalty and fidelity, as they tend to invest for shorter periods and lose interest if the product does not show promised growth.
Banks are one of the most common ways of acquiring funds. They primarily offer two kinds of finances to businesses. The first one being working capital loans where the funds are used to run one complete cycle of operations to generate profits. The other is funding where the finance limit is decided based on the evaluation of existing assets. However, banks often charge high rates of interest, and there is a lot more that is at stake when a bank funds your business.