Christina Nawrocki FCCA explains five of the most popular ways to finance your start-up, including crowdfunding which has proven very popular of late.
One of the most intimating steps in setting up your start-up is having to ask for money. It can be an uncomfortable feeling when you have to approach someone else in order to finance your venture dreams, but what you’ll want to remember is that there are a lot of people willing to lend you the finance you need.
If you look into financing options for your small business or start-up, there are quite a few options and some are definitely riskier then others, but in todays business world there are several methods to attain funding. You’llwant to think of when and why you will need it and then source out your available options.
You have a great idea or you’ve already started a great business, but now you need to raise money, what do you do? Here are 5 of some of the top funding methods for start-ups and small businesses:
Crowdfunding is a non-traditional way to raise capital and it’s quickly becoming one of the most popular methods of doing so. Essentially this is a process of reaching out to a large group of people over the internet and asking them to help you raise funds for your start-up. Why do they want to help you? Most likely, funding will come from individuals who believe in your venture. Crowdfunding isn’t just about posting an idea and waiting for the money to come in, just like any other method of raising funds, you need to research the pros and cons of this process and decided if this is the best option for your business.
There are 3 types of crowdfunding classes:
Donation based: People who make donations out of good will.
Peer-to-Peer Lending: Lenders give money to borrowers in exchange for an interest payment.
Equity Based: Typically used for start-ups, investors are offered equity and partnership in an enterprise in return for upfront cash to get it started.
2. Investor pitch
If you started your own business you might think the interview process is over, finally! However, if you need to raise finance for your start-up you may have to go down the route of an investor pitch, this can be the most intense interview you’ve ever experienced. You’ll be asking an investor to take chance on you and your business, and with money involved this can be a difficult task. It is essential that you are prepared to give the best presentation ever and show the potential investor why they must invest in your business.
3. Traditional bank loan
Like other types of funding options, choosing the route of a traditional bank loan to fund your business is not without its pros and cons. Approaching a bank was probably one of the first options that you came up with when you started thinking ‘I need to look into some funding’, and this makes sense since banks are the largest lender.
Think of the reasons why you need a loan; location expansion, new equipment, maybe more inventory; these are just a few reasons why you might need some extra funding. Whatever the reason, you’ll have to ask yourself if a bank loan is right for you and the bank will have to decide if you’re right for them. Life would be simpler if we could just fill out a quick application, hand it in and be on our way with a envelope of money, unfortunately that’s not how the process works.
The bank will need to consider several things in order to decided to approve or deny your loan application like personal credit worthiness, your business financial stability (how’s your cashflowlooking?), and type of loan and it’s terms you’re applying for.
4. Family and friends
Asking for a loan is a difficult process, but what about if you need to approach family and friends which is often the case for start-ups? Sometimes bank loans or investor pitches don’t go as we planned and you’re left trying to figure out what to do next. Suddenly you have a great idea! Maybe your nearest and dearest would be willing to help, and chances are you’re probably right. Here’s where things get a bit complicated, you’re mixing your personal life with business and that sometimes can create tension. Here are ways that you can avoid a bad situation when borrowing money from family and friends:
Keep it strictly business, plain and simple. You might have known this person your entire life, but you need to treat this transaction in the same way you would with a stranger. You don’t want to feel taken advantage of and neither does the lender.
Set out a clear plan that addresses the exact amount of money you need to borrow and how the money will be used. And you can’t forget the most important part, when you will pay back the loan, don’t create doubt with a wishy-washy timeline.
Put it in writing to ensure clear expectations from everyone involved.
Communicate regularly, this one should be the easiest since they are your family and friends. Let them know your successes, and any obstacles, to involve them in the journey they’ve helped to finance.
5. Angel investors
Angel investors are individuals who invest their money into a company usually during the start-up stages. For angel investors, it’s not just about making money, it’s about investing in something they believe in too. If you achieve funding through an angel investor you will likely share a vision and have similar ideas; however, remember that they will have a say in how things are run.
The content of this post is up to date and relevant as at 26/07/2018.
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