Millions of entrepreneurs are joining the world of business every year. However, not all of them get to celebrate their first anniversary. Why do so many young businesses fail? There are many potential reasons why these companies fail but running out of money is one of the most common reasons.
Starting a successful business require plenty of capital to both launch and grow it. Indeed capital is a key ingredient for any business to flourish. Startups tend to crumbles when founders try to run them without adequate finance thus forcing them to seek financial backing.
So then, here are the 20 best sources for your startup funding.
Investors with a huge amount of money invest in edge business ideas. These investors scrutinize a business proposal individually or as a group in order to select the candidate with a perfect business idea they can invest in exchange for an equity stake.
Aside from the money, angel investors provide guidance founded on their own experience, and leverage existing contacts to get your startup business off the ground and open doors for you in the industry.
It’s quite a challenge to find and contact an angel investor because they keep a low profile. However, you can find them through other entrepreneurs, financial advisors or lawyers. Still, some angel investors have a network making it easier to locate them.
It’s important to note that angels meet on average 15 to 20 potential startup business owners and picks 1 to 3 deals per year where they invest between $25,000 and $100,000. So grabbing the attention of an angel is not an easy task. So an entrepreneur should perfect their pitch when they get an opportunity to make a presentation to an angel investor.
The elevator pitch should tell them why your product or services will be a hit, why you think you and your team are the right people to run the business and how much return on investment they can expect.
The downside of angel investment is that they anticipate a huge return on investment yet they offer low investment capital than venture capitalists.
A fledgling company can approach venture capital (VC) for investments in exchange for a stake in the company. VC firms tend to be selective when investing their partners’ funds and so they prefer startups with some traction and the ability to generate profits.
Further, VC firms invest in a new business with the hope to cash out their equity during acquisition or initial public offer (IPO). Therefore, they demand some level of managerial control that allows them to monitor the company’s progress thus ensure the growth and sustainability of their investment.
Still getting the attention of a VC firm is hard because they receive over 1,000 proposals every year and are keen on investing in businesses that require at least $250,000 and have demonstrated the potential for explosive growth.
Uber and Flipkart are some of the VC-backed startups and by having a designed exit strategy the VC firms can reap huge profits which they transfer to another young company.
Business Incubators and Accelerators
Business incubators specialize in nurturing businesses but accelerators focus on fast-tracking them. Therefore entrepreneurs access coworking space, mentorship, a network of relevant industry connections, legal services support and of course money when they join an incubator or accelerator program.
These programs work with new innovative companies with a high chance of disrupting stale industries. For that reason, the programs take the founder’s promising startup idea and grow it together to a business generating revenue.
Since the majority of incubators and accelerators are backed by venture capital firms they look for the future unicorn startup to fund. Therefore founders spend several months working closely with a team of mentors and in the end, they get seed money in exchange for a percentage of the company stake.
Joining an incubator or accelerator program involves completing a highly competitive lengthy application process. The requirements vary from one program to the other but the founders must be fully committed during the 4-8 months of training; otherwise, the business will take a downward spiral.
Several grants support startup ideas and businesses. The major challenge of this funding option is that it has a specific eligibility requirement and a lengthy process.
The following are some grant opportunities:
Small Business Innovation Research Program: This focuses on businesses undertaking research and development projects.
Amber Grant for Women: It was established to support women entrepreneurs. At least one female entrepreneur get a $500 grant every month and $2,000 every year.
Government Small Business Grants: The industry-specific grant is issued by the federal government. Therefore, you have to research to find out the available grant in your industry.
Fintech Funding Options
Financial technology (fintech) lenders provide lines of credit or loans of similar lending terms and amounts as government loans and traditional banks. However, the entrepreneur should consider the lenders’ application requirements, track record, customer support, service and loan terms before settling for this option.
Some of the fintech platforms offering loans to startup entrepreneurs are:
Lendio: This is a financing aggregate platform that has partnered with more than 300 lenders. Therefore Lendio doesn’t lend directly to businesses but instead, evaluates the borrower’s needs and then connect them with a lender the best terms for that particular condition. The downside of borrowing through Lendio is that the loan takes longer because the platform is a go-between or middleman.
Kabbage: The firm runs an eCommerce business and so it’s concerned with the online seller status but not credit score or collateral. Therefore, your selling history, customer feedback, turnover, cash flow statements and other accounting data are used when approving these unsecured cash advances.
PayPal: The company lends based on the existing business earnings through its side. So to qualify, a business should be operating a PayPal business account and sales are made through it. If so, the lender processes the loan without collateral and even if you have a low credit score.
OnDeck: The lender appraises your loan application based on the health of your business. That means they consider the annual revenue when customizing the loan and the repayment period.
Business Bank Loans
A traditional business loan is one of the widely available options. Bank loans have stricter lending standards and lenders have set aside funds for SMEs but not for startups.
It’s advisable to shop around for a bank loan because financial institutions offer different interest rates, loan amounts and the repayment period. Further, you can talk to a financial advisor to get insight on how you can increase your chances of your loan application being approved.
Although a personal loan attracts a high-interest rate it’s a perfect option for entrepreneurs that are not able to access all other ways of raising capital.
A borrower can apply for an unsecured loan from lenders using their payslips and use the funds to start a business. The loan is usually capped between $10,000 and $100,000 but even though the loan amount is relatively small it may be a viable option for low-cost business ideas.
Non-Banking Financial Corporations (NBFCs) Loans
The concept of microfinance was embraced by small-scale entrepreneurs that cannot access conventional bank loans or capital.
For that reason, borrowers with poor credit ratings turn to NBCFs whenever their loan application is rejected by conventional banks.
An overdraft allows you to continue making payments even when your account balance is zero but up to the limit your bank sets which is known as a facility.
A business overdraft is a perfect option for companies that have seasonal activities that contributes to a short-term cash-flow deficit.
The downside of a business overdraft is that it has high-interest rates compared to conventional loans. Apart from interest, some banks charge an overdraft fee which is an extra cost to the borrower. Another risk is that the bank can ask you to repay the entire amount at any point.
Business Credit Cards
There are some entrepreneurs that use business credit cards as a source of capital. Actually can credit card providers set their limit as high as $10,000 which you can use and pay back within the interest-free period.
On the other hand, a business credit card shouldn’t be used to set up a business because it has strict repayment periods (30-45 days) and high-interest rates (An APR of 20% and above). Any default can ruin your credit score.
Trading businesses can opt for this facility as opposed to overdraft because you can pay it off on a monthly basis. Indeed you can boost your purchasing power instantly using this temporary short-term option.
A business that is already generating revenue can improve its cash flow or quickly raise funds through invoice finance. This is a perfect option for service companies whose invoice payments terms are more than 30 days.
This is to say that a third party will take the unpaid invoices, pay you up to 85% or more of their value and the balance once the client pays the invoice minus a fee.
Although this method of raising funds has a charge, it’s helpful when you want to cover gaps in cash flow. Also, it helps you avoid incurring debts in the event the customer fails to pay their invoices.
However, you have to give proof that these customers have been consistent in paying their invoices and your business generate substantial revenue.
It involves the use of existing assets such as a vehicle or property as collateral to secure a business loan. The loan amount is pegged on the value of the assets.
Alternatively, a business can dispose of an asset (vehicle or property) to an asset finance company especially when it’s struggling to make repayment for another asset (vehicle or property). Therefore, the asset finance company will repay you a lump sum and allow you to lease the said assets for an agreed period.
Starting a business from one’s saving is a better option than from loans. Alternatively raising capital from friends and family is also a reasonable source of funds because they lend at a better rate and flexible repayment duration.
Bootstrapping or self-funding involves the use of saved up funds or that which is obtained from friends and family. So, an entrepreneur can approach a member of family or close friend that supports their idea and get a portion of the capital needed to start up their business.
The advantage of borrowing people in your life is that there is little to nil bureaucratic obstacles and flexible interest rates.
Although it’s a new concept in the startup ecosystem, crowdfunding sites brings many people together to fund a promising business opportunity. So the startup founder or young entrepreneur approaches these interactive social platforms seeking funding in exchange for equity, future products at a discount or just debt.
So entrepreneurs can go to crowdfunding platforms to share their challenges or pitch their business ideas to a community of investors or individuals willing to invest in an idea or support a cause.
As a result, the platform runs a crowdfunding campaign to drive investors or donors to raise funds to fund the business idea. However, it returns the pooled funds to the crowd funders if they fail to hit the required amounts. It also takes a cut of the raised money to finance its own operations and sourcing for potential business opportunities.
Since not all crowdfunding campaigns are successful, it’s important for startup founder to accompany their pitch with a good story. It should emphasize founders’ personal commitment, stress the cash, effort and time invested in the business.
Aside from a PowerPoint presentation, the business owner can add a video appeal to make it more persuasive to crowd funders. This is due to the heavy competition in crowdfunding platforms.
Crowdfunding creates public interest for the business thus giving it free marketing in addition to the required capital. The source of funding can also attract venture-capital investment in the future.
The following are some of the popular crowdfunding platforms.
Small Business Administration (SBA) Loans
While SBA doesn’t lend to small businesses directly, it has a wide range of guarantee programs for loans processed through qualifying credit unions, bans and nonprofit lenders.
Entrepreneurs can access up to a $5 million SBA loan and use it to either launch a new business or expand the existing one. Further, it is guaranteed by owners with at least a 20% stake in the company.
On the other hand, entrepreneurs cannot use the loan to repay delinquent taxes or change business ownership.
Peer-to-Peer (P2P) Lending
Modern technology provides different methods of raising capital. P2P is an excellent option that an entrepreneur can use to borrow funds from individual investors via a P2P lending platform instead of a traditional bank.
To get started with borrowing from a P2P platform, an entrepreneur posts their loan details such as the loan amount and the reason for borrowing. Next, a potential investor scrutinizes the request and offers to lend a part of the loan. The process continues until the platform receives the entire loan amount and disburses it to the borrower.
Next, the entrepreneur makes fixed monthly payments while the platform repays the investors according to their share of the amount lent.
This new method of raising capital has more benefits than traditional bank loans such as lower interest rates, greater flexibility and fewer fees.
On the other hand, the borrower has to fill an application and submit financial information that peer to peer lenders use to appraise the loan request.
Still, your credit score matters and has a significant effect on the loan amount and interest rate. Also, the P2P platforms report your loan history to credit bureaus, so if you default to make payments then your credit score will be hurt.
Tax relief is an indirect source of funding that entrepreneurs can take advantage of when considering raising capital for growing their businesses. It involves reducing tax bills in order to free some money that you can use to finance something else.
SMEs can access a variety of tax reliefs such as employment allowance that allows qualified employers to lower national insurance liability to a certain threshold. Still, you can take advantage of the annual investment allowance (AIA) that allows you to extract the cost of eligible items from your profits before tax.
Additionally, you can take advantage of the seed enterprise investment scheme (SEIS) which provides huge tax breaks to entrepreneurs who invest in your business. As a result, you can get up to $150,000 through SEIS.
Merchant Cash Advance
Entrepreneurs that take most of their sales through a card terminal can raise funds in exchange for a portion of their daily credit card income. So the merchant cash advance provider gives you a percentage of your average monthly sales.
This is a perfect option for seasonal businesses because it allows them to repay their loan based on the sales thus shielding them from cash flow fluctuations. Although the requirements for merchant cash advance varies from one card terminal to the other, the majority considers companies that have been in operation for at least 6 months and makes sales of about $3,500 per month. They also deduct payment from the monthly sales until the entire loan is paid off.
SMEs can participate in different business competitions to raise capital to fund their expansion. The ample funding the winners receive together with guidance, mentorship, support and press coverage can boost their business growth.
Actually, the winning business can receive Up to $1 million based on the companies sponsoring the competition. Further, these competitions target startups and early-stage businesses engaged in specific projects or industries.
An entrepreneur can sell their products before an official launch in order to raise money. A product pre-sale builds consumer confidence and allows the company to evaluate its product demand prior to the official launch.
The majority of electronic giants such as Samsung and Apple allows consumers to pre-order or pre-purchase their products before the official lease in the market.
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