Top Financial Options for Funding Startups

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Top Financial Options for Funding Startups: Starting your own business can be quite exciting with all the financial freedom advertised. However, the path to get funding for your startup is not an easy one.

Top Financial Options for Funding StartupsIt is estimated that more than 95% of startups fail within the first five years of being established. With so many overwhelming odds against startups it is imperative as an entrepreneur to identify the best funding option.

Unlike mature companies that have established funding options, the case is different for startups. For one, they have yet to establish themselves as a brand with the necessary structures for growth. Startups are also considered as a risk by investors.

Capital is a very vital component in the growth of any business. Without it many businesses find themselves unable to fund their various projects.

Here are some funding options you may consider for your startup:

Bootstrapping 

Bootstrapping is often the first option available to startups. It consists of funding your business through personal savings or gifts from family and friends. When entrepreneurs bootstrap, they are able to maintain control of their company without necessarily selling shares to outsiders. It is also a cheap form of credit as you may not be charged interest by family and friends for funds received. On the downside, bootstrapping may not provide enough cash for the company and it can place unnecessary financial risk on the business owner. There are many successful companies out there that have emerged out of bootstrapping.

Crowdfunding 

Crowdfunding is the practice of raising funds from multiple financiers mainly through the internet. The entrepreneur is able to leverage their large network of followers in social media networks or websites to raise small amounts from people. The investors can invest as little as $10 towards whatever project the startup needs. Startups have been able to raise millions of dollars through crowdfunding with the trend expected to continue in the future. The best part is that anyone can pitch their idea to waiting investors. One of the key benefits of crowdfunding is the entrepreneur’s ability to access a diverse group of investors through social media channels. On the downside, crowdfunding can tarnish your startup reputation if you don’t reach your funding goals and have to return any pledged funds to investors.

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Venture capital

Startups can also seek funding through venture capital (VC). VC is a type of private equity where investors invest their capital in startups that have potential for long term growth. The venture capitalists not only provide funds but they also provide strategic and technical assistance to startups. Venture capital is not that easy to obtain for startups as they are subjected to more stringent terms than other forms of funding. Some examples of VCs include investment banks, well off investors, and large financial institutions with an appetite for startups.

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Venture capitalists tend to focus their investment on various metrics. They can go for startups in certain industries like SaaS, software, mobile or fintech or provide funds based on the stage of growth of the company (early-stage seed/Series A funding). They also can provide various rounds of funding depending on revenue. Before you can approach a VC, make a background search on their type of investments and see whether these align with your company goals. It is sometimes confusing distinguishing between a venture capitalist and private equity. The key difference is that private equities tend to invest in larger and mature companies with a long history of growth.

Venture capital provides the requisite funds required for the growth of a company. The investors win by getting equity in a company with potential. Some of the VCs provide additional help through technical and strategic expertise which is vital to propel a startup to a mature company. However, it does have its downsides. For example, the startup founders may lose control of the company as it is partially owned by the VCs (whose capital is at stake). This means they may demand some changes be made to the management of the startup. For the VC it may take some time before they start receiving returns on invested capital.

Venture capital is a pathway any startup can pursue especially if they do not have cash flow to support the loan or don’t have sufficient assets to act as security. There are different types of venture capital investment. The first is the pre seed funding. This is given at the earliest stages of development when there is an idea and concrete business plan. The next set is seed funding. This is given when the startup seeks to launch its first product. Early-stage funding is for when the startup has developed a product but needs additional funds to boost marketing, production and sales. Startups can receive different rounds of funding like Series A, B, or C.

Angel investors

There is often some sort of confusion as to the difference between an angel investor and venture capitalist. An angel investor can be defined as a wealthy investor who is willing to invest in a startup. Venture capitalists are often composed of wealthy investors within a company or firm. Another difference between the two is the amount of capital invested. Angel investors tend to invest anywhere between $200,000 and $500,000. They also consist of family, friends, or wealthy college acquaintances. Venture capitalists have the potential of investing up to $10 million in startups. Their resources can even be higher than this.

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Angel investors tend to consist of wealthy individuals with excess cash to invest while venture capitalists tend to be companies with the requisite expertise to carry in depth due diligence in the company, they are investing in. The venture capitalist composition is one of professionals. This allows them to offer various technical expertise to the companies they are investing in. The decision as to which one to go with will be determined by your financial needs, goals and at what stage your startup is in. For the most part angel investors fund early-stage investments while the venture capitalist can even fund more developed companies with adequate revenue streams.

Incubator and Accelerator programs

Incubator programs are a great resource for startups as they provide them with the necessary mentorship, funding and networking opportunities to accelerate their growth. The programs may also consist of office space, business skills training and access to professional services. The incubator programs are key to the growth of early-stage businesses as they play the role of a parent guiding their child through the business space.

The key difference between the two is that accelerator programs are available for shorter periods and offered to startups with a more developed business plan. The accelerator programs will provide funding, office space, network opportunities and mentorship.

Funding for startups under incubator programs can be in the form of grants, loans or equity investments. They also offer mentorship programs that are run by experienced entrepreneurs in the business space. With mentorship programs young startups get a helping hand from someone who has learned the ropes and succeeded. Incubator programs will often host various networking meetings where startup founders can interact with industry titans and get the requisite expertise.

The seed money given by incubators ranges from $20,000 to $150,000. Some of the incubators are attached to universities but in recent years we have seen interest from private companies and public institutions. One of the best-known incubators is Y Combinator that birthed the popular file sharing company Dropbox. The success rates from incubator funding are quite high due to mentorship and nurturing of the business.

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Small business loans

The other alternative for funding your startup is to get a small business loan. These loans are offered by traditional lenders and are a great way to fund product development, research and various marketing and sales efforts.

Startups can use line of credits to finance growth in their companies. Line of credits have a limit on accessible funds but they are vital for financing a company’s cash flow and salaries. Financial institutions offering lines of credit will start charging interest the moment you draw down funds with subsequent deductions for the principal and interest. Most of the lines of credit will require the company to make annual renewal alternatively the borrower will be required to pay it in full.

Additional funding can be obtained through working capital loans. These are debt instruments that enable the startup fund to meet their various working capital requirements. The working capital loans tend to be short term (30 days to a year) and range from $5,000 to $100,000. Financial institutions may not offer them secured or unsecured. Due to the lack of credit history by most startups, institutions may require some sort of collateral to issue the loans.

SBA small business loans are low interest rate loans offered by institutions like the US small business administration. The loans range anywhere from $30,000 to $5million. Startups can take advantage of SBA loans due to their attractive terms and fact that SBA guarantees them.

Small business loans can be acquired from various lenders like large commercial banks, direct online lenders, local community banks and bank lenders backed by SBA guarantees.

Equipment Financing

If your startup requires a lot of machinery then you can opt for equipment financing. With this kind of financing the equipment you are purchasing acts as collateral. The best part is their little preconditions when applying for this kind of loan.

Final thoughts 

Starting a business can be scary with all the uncertainty about the product’s success. With failure rates very high, most of the startups do not see life beyond the fifth year. Having a good source of funding will ensure the survival of the business. Each of the sources of funding we have mentioned is not tailor made for all businesses. One will need to evaluate their objectives, interest rates charged, and other factors before they settle on one.

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