Sources of Financing for Your Startup

Diversifying your options is a well-known fact in business. Risking your business operations on one finance source, supplier, or client can lead to the death of the company.

Every startup needs finance to run its daily business operation. From buying machinery and tools, setting up office space, hiring and paying staff, purchasing assets, etc.

According to a study by RADMA, the source of funding affects a company’s performance. Therefore, do not make the mistakes most startups make by ignoring the pros and cons of different funding sources. When considering multiple financing sources, choose the one that suits you best. 

Choosing a proper funding source is crucial for an existing business and is even more vital for a startup. Bankers have never considered themselves the lone source of funding for businesses. If you show potential lenders that you’re seeking different funding alternatives, they’ll take you more seriously.

Whether you run a small or big business, you will surely need finances to keep your business operations going for an extended period. How you utilize your finances will determine if your business will be successful or valued at billions of dollars someday.

Here are some sources of funding for startups:

Personal Investment

To fund your startup, you can decide to take from your personal savings. This is one of the most common funding sources for those with small and medium-sized enterprises.

You can apply for a bank loan after exhausting your personal finance. Banks are generally predisposed to give loans to entrepreneurs they believe are dedicated to a project.

Family or friends

This is cash obtained from loved ones such as your spouse, close friends, or relatives. This loan typically gets returned to its source as the startup matures in revenue.

Nevertheless, before you borrow money from your loved ones, you must know that friends and relatives don’t always have a lot of funds. You also need to be stern about not giving them any equity in your business. You have to prioritize the repayment of their principal with interest.

The issue with giving loved ones some equity in your startup is that they tend to panic-sell if an adverse situation arises. This could drive down your share price, especially if they hold a significant percentage of shares.

You have to consider both the business and personal relationships of your loved ones. If you don’t think it’s worth risking, you can decide not to borrow from them.

Loans

Although businesses of all sizes use loans as a funding source, small and medium-sized businesses use them more frequently. You must realize that different lenders have different benefits, so you’ll have to research which best fits your startup.

If you need access to a quick loan within days, you can consider the payday lender’s option.

Typically, startups find it more difficult to get loans than existing businesses. Nevertheless, you can improve your chances of getting loan approval by having a stellar business plan and a great credit rating.

Venture Capital

Before considering going for venture capital as your lender, you must understand they’re not the best fit for some startups.

Venture capitalists are typically searching for technology-driven firms in industries that give high returns on investment.

Venture capitalists are given equity in return for the capital they offer your startup. They take the highest amount of risk out of all corporate lenders. Nevertheless, they get compensated by owning part of your company if you earn positive returns.

Venture capitalists typically gain their ROI when your business becomes public. Before you pitch your business idea to venture capitalists, you need to ensure that they have enough experience. You also have to be comfortable with their possible interference in company decisions.

Angel Investors

Angel investors are individuals with a lot of money that invest in small or medium-sized firms. They usually don’t invest in sectors they know little about. Some angel investors were C-suite executives in the past and can act as advisors to the company.

The benefit of an angel investor also goes beyond the funds they provide. They can give you access to high-net-worth individuals who can guide or invest in your enterprise.

Angel investors usually provide funds to a startup from $10,000 to $100,000. You can go for a venture capitalist if your startup incurs more overhead costs.

Angel investors like to get updated on information about the company. They can also request a seat on the board of directors.

Crowdfunding

Entrepreneurs can raise money through crowdfunding by requesting contributions from the public. In return, these investors can get a form of equity in the firm.

It involves a startup asking for funds from a lot of people. This contrasts with angel investors or venture capitalists since VCs and angels could be very few.

Conclusion

If you have a startup you want to fund, it is best to consider many options rather than limiting yourself to one and getting disappointed at the end of the day. Going with the right investors can massively propel your business forward since they can offer you great advice or surplus funds.

You can fund your business with your investment, loans, angel investors, and venture capitalists. 

Which of these financing sources do you prefer? Do you have tips for anyone? Please share your thoughts in the comments.