Regardless of how excellent your business idea is, you need funds to turn it into a revenue-generating venture.
One statistic from Entrepreneur shows that 20 % of entrepreneurs close their businesses in the first year of operation, and the lack of adequate funds to fuel their operation is one cause of this failure.
The question “How can I finance my start-up?” is one that many entrepreneurs ponder over, and the answer largely depends on the type of business you want to start.
You may need to diversify your finance sources to help weather potential downturns and enhance your chances of favorable financing. Bankers will consider you a proactive entrepreneur and are likely to extend credit to you.
Once you know you need funds to jumpstart your business, here are some valuable sources of finance you can explore.
If you are planning to quit your job to start a business, I wrote a whole article about how to get your finance in order before quitting your job.
8 Practical Ways to Finance Your Start-Up
Starting a new business can be overwhelming, particularly for funding; here are the most common ways to finance your start-up:
1- Bootstrapping or Self-Funding Your Start-Up
As a first-time entrepreneur, you should have saved some cash to help you start your business. Before seeking other funding options, you need to put in seed money.
You may struggle to get funding if you do not show some traction and commitment to the business. You can use your own savings or sell the idea to family and friends to help you raise money. They will likely charge you flexible interest rates, but they first want to see you invest in the start-up.
Investing your money in the business shows you are committed to your vision. You may need money from your savings to fulfill business requirements such as securing a license, renting the business premise, and buying the first stock.
If it is the first time you have heard about crowdfunding, don’t worry, we will explain it here. Crowdfunding is a method of raising funds from multiple funders, often found on crowdfunding websites.
You can raise capital for your start-up with this method by starting a crowdfunding campaign. How can you do that?
Set up a profile on your favorite crowdfunding site, and tell funders about your company and the business you engage in. You will also indicate the amount of money you want to raise.
Investors who love what you want to achieve can contribute to your campaign for an agreed reward. The reward could be a product discount depending on what they contribute, one of the products or services you offer, some form of ownership, or a profit share in the business.
To succeed with your crowdfunding campaigns, you must create a compelling story about your company, product, or services. The campaign should also offer attractive rewards to entice funders to donate.
Reward-oriented crowdfunding is ideal for start-ups because you will not give away part of your business ownership unless you run equity crowdfunding. You are simply offering part of your products or discounts on those products.
Your business will not be weighed down with principal or interest repayment, thus allowing you to run and grow your start-up stress-free.
Of course, crowdfunding sites will charge you some processing fees to run your campaign, which you may pay upfront or be charged as a percentage of your raise.
Best websites for crowdfunding:
3- Venture Capital
Venture capital may be an ideal source of funds for tech-driven start-ups and companies with good communications and information technology growth.
Venture capitalists will give you money in exchange for an equity position in your business to help you pursue a promising but risky project. Settling for venture capital means relinquishing part of ownership and control of your business to external parties.
Venture capitalists are strategic investors who expect a significant return on their investment. Besides the money, the best venture capitalist for your start-up should bring relevant knowledge and experience to help you with operations.
You should also remember that venture capitalists focus on the investment efforts using several criteria, including:
- Technological industry: digital media, mobile, software, SaaS, semiconductor, and mobile devices
- Stage of the company: some venture capitalists invest early seeds, while others wait until your business has achieved significant revenue.
- Geography: some venture capitalists are geo-oriented, giving funds to New York, Silicon Valley businesses, etc.
Therefore, before you approach a venture capitalist for funds, learn if their focus agrees with your company and development stage.
You might also enjoy reading: 8 Long-Term Growth Metrics Every Start-up Should Track.
4- Angel Investors
Angel investors are wealthy people or retired company executives ready to invest in other entrepreneurs’ small businesses directly. These investors are often leaders in their expertise, offering start-ups their experience, management and technical know-how, and network of contact.
These investors love to finance the early stages of a start-up, investing between $25,000 and $100,000. What do angel investors get for risking their money? They gain the right to supervise your business management practices. They are often on your company’s board of directors to ensure transparency.
However, they will likely keep a low profile. You can meet them through search websites or specialized associations.
5- Sell Assets
You can raise funds for your business by selling assets. For instance, If you have shares, real estate, bonds, or stocks at a particular company, you can sell them and use the money to finance your start-up.
Alternatively, you can sell your car and instead use a bike. You will save money for insurance, car repairs, gas, parking, and other expenses. You can channel the amount saved to your start-up to help you buy equipment and inventory.
6- Small Business Grants
Small business administration (SBA) loans were established in 1953 by congress to lend money to small businesses directly. SBA can guarantee start-up loans from credit unions, qualifying banks, and non-profit lenders.
Some of the popular programs that start-ups can take advantage of include:
7(a) Loan Program:
You can use these loans to launch your start-up or expand an existing venture. You can access up to $5 million with the 7 (a) loan program to jumpstart your business.
However, 20% of the funds must come from your pockets, so ensure you have some seed money.
You must meet the SBA standards for your business to qualify for a 7(a) loan. One requirement to remember is that the SBA will not pay the loan if one partner in your business with 20% or more equity is on parole, probation, or indicated.
Additionally, SBA will not guarantee your business loan if you have previously defaulted on government loans.
Interest rates under 7(a) loans vary from one lender to another, your credit history and your loan size. If your loan is below $150,000, you will incur zero fees; however, loans above $150,000 that mature within a year or less attract a fee of 0.25% of the guaranteed loan.
The fees increase to 3% if the guaranteed portion is between $150,000 and $700,00 longer than a year. A loan figure above $700,000 attracts 3.5% fee.
SBA also offers microloans using a specific non-profit community lending organization. The microloan program is for businesses that need up to $50,000 for launch or expansion.
As an entrepreneur, you can use this financing method to purchase new equipment, inventory, and supplies or use it as working capital for your start-up. Like the 7(a)-loan program, you cannot use it to repay debts.
7- Small Business Credit Card
Some credit card issuers have ventured into the small business market and offer entrepreneurs benefits such as airline mileage points and cashback rewards.
The loan issuer often looks at your credit history, individual credit score, and a guarantee from the borrower. Late payments or loan defaults will adversely affect your credit rating.
You can make applications for the business credit card online or through your bank. Some popular small business lenders include Chase, Wells Fargo, American Express, and Bank of America.
Some small business credit card issuers do not need personal guarantees, meaning the card will not affect your credit score ratings. An excellent example of such a lender is Brex which offers to fund technological companies.
8- Business Incubators And Accelerators
You can source funds from accelerators and incubators if your business is in its early stages. These programs found in major cities have helped many start-ups yearly.
Although some people use them interchangeably, incubators and accelerators have subtle differences. Incubators help to nurture your business, providing tools, training, and network. On the other hand, accelerators facilitate you to run or take the leap for a big move.
Since the programs run between 4-8 months, you will need to set aside time and commit to working on your business. It will allow you to connect with investors, mentors, and fellow entrepreneurs.
If running a successful start-up has been your dream for a long time, but you have never actualized it because of a lack of funds, this article has highlighted several ways you can raise money for your start-up.
You can raise money from your savings or family and friends at a reasonable interest. Other ways of raising capital include:
- Venture capital
- Ange investing
- Small business loans and credit cards
- Business incubators and accelerators.
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