Startup Financing: 6 Practical Ways for Entrepreneurs | Starting your own company is a complex process. There are a lot of challenges along the way, especially when it comes to financing. Lack of funding is one of the common reasons new businesses fail in their first year of operation.
Every business has different needs depending on its industry and size; hence no financial situation is the same. You might need advanced technological equipment, such as laptops, computers, web hosting, anti-virus software, and even a Fortinet Cloud NGFW. Most importantly, it would be best to have competent people for your team and a place to work at. These cost a lot, which calls for the need for business capital.
What Is Capital?
The capital of a business is the money needed to fuel your business, and it is where you will get the funding for your day-to-day operations. It may also apply to something that grants its owners benefit or value, like financial asses of a business or individual, factory and its machinery, stocks, software, and company cars.
There are four kinds of capital: debt, working, equity, and trading capital.
Debt capital is obtained through private or government sources and can be borrowed from banks and other financial institutions. Working capital refers to the liquid capital assets for a company’s daily obligations within a year. At the same time, equity can be private and public, which is in the form of shares of stock in a company. Lastly, trading capital is money allotted to an individual to buy and sell assets.
Here are ways to finance your startup.
When starting your own business, your first investor should be yourself. This can be proof to investors that you are committed to growing your company. You can use your own savings or maybe with collateral from your assets.
- Love Money
Money from friends or family is usually one of the sources for your business funding. Investors call this patient capital. This can be from a spouse, family, friends, or your parents. But do you remember that family and friends rarely have money to lend? They may also want a share of your business. Money can also be a conflict and can affect your relationship with them.
- Venture Capitalists Might Be a Great Idea
Venture capital is given by investors in exchange for an ownership or a share of the company. Sometimes they ask for an active role in the business as well. They tend to ask for a seat on the board of directors, so be prepared to give your company a percentage of control and ownership. The rate of ownership to capital is usually based on the companies value.
Venture capitalists provide capital in return for equity instead of a loan or debt. Venture capital is appropriate for small businesses beyond their startup phase and is already generating revenue.
The downside of venture capital is they want to recover their investment within three to five years. They look for larger opportunities that are more stable in companies and have a strong employee team. If you are selling a product that is taking too much time to sell, venture-capital investors may not be interested in the risk of financing your company.
- Get an Angel Investment
Angel investors refer to wealthy individuals who have an interest in investing in upcoming startup businesses. They are often leaders in their industry who contribute experiences and technical skills, and knowledge and share their network of contacts with others.
It also has its downside: they tend to invest lesser amounts than venture capitalists. They will also ask for a ride to supervise the company’s management which is equivalent to a seat on the board of directors.
Funds for your business will be from people called crowd funders. They are not considered investors since they don’t receive a share of ownership nor expect you to pay them back. Crowdfunding is paid back by a gift as gratitude which can pertain to the product your company is planning to sell, putting their name in the credits, or perks like meeting the business owner.
This is an excellent way to set up funds to get your startup through its development stage to be pitched to investors. It’s a low risk for business owners since you are not obligated to return their ‘invested’ money. Be sure to read the fine print of different equity crowdfunding platforms since they have requirements such as payment processing fees.
- Partner Financing
Partner financing refers to another company funding the business in exchange for access to your products, staff, rights, and sales. You can choose a partner company that can be in a similar industry or someone interested in your business. This kind of capital is considered venture capital since it is usually in the form of an equity sale and not a loan.
Taking risks and finding external funding can make your company grow through contacts, market opportunities, events, and many other things fulfilled with the help of an outside source of capital. Talk to investors, know your company, and research how much your startup needs financially to grow.
ExecutiveChronicles | Startup Financing: 6 Practical Ways for Entrepreneurs