In a recent study, about 90% of new enterprises fail in their initial year of operation. Lack of funds is one common reason. Money is the bloodline of any business operation. At every business stage, entrepreneurs often ask, “How will I finance my startup?”
As you finance your new business, this diversifies your financing sources to help you weather potential challenges. Also, this increases your chances of achieving better financing approaches to meet your startups’ specific needs.
Banks alone do not consider themselves as sole fund sources. Letting them know that you are using several financing options shows that you are proactive and resourceful as a business owner.
Whether you seek a bank loan, an angel investor or a government grant, all these financing sources have their fair share of pros and cons.
Below is an overview of the various startup financing sources and their features.
1. Love Money. This is the money sourced from a spouse, your parents, family or friends as a loan. The main goal of this funding is to help launch a business while seeking other funding types afterward. This is focused on building relationships instead of evaluating a feasible business plan.
- Flexible payment terms with less security.
- Faster funding process that is either interest-free or taken at a low rate.
- Have a longer repayment period.
- No assessment required for business viability.
- Nothing new except for the initial capital investment.
- Relationships may be damaged in case of a misunderstanding of business arrangement.
- The possibility that the investor will withdraw their capital anytime that can harm your business.
- Investors may get involved in the business even when not necessary.
2. Personal Savings. When starting a business, you are usually the first investor. It is either you employ your own cash or seek collateral on your assets. By doing so, you show your investors and that banks about your long-term commitment to your project and you are willing to take calculated risks. Using your own money, you have a personal view on how you take care of your business and a different perspective in managing it from the start.
- Full business control and may execute your plans in any way you want.
- Attain a sense of satisfaction while using your own cash or assets to fund your business.
- Once your business fails, all your hard work will go to waste.
- Being on your own, you might potentially miss out on some valuable insights from seasoned businessmen like angel investors.
- You might not have enough funds to sustain your business for a long period.
3. Venture Capital. This type of capital is a form of early-stage financing sought by companies with high-growth goals and significant requirements. Venture capital has stricter payback terms. The investors seek equity ownership when funding the company through stocks or securities.
Remember that venture capital is not applicable to all entrepreneurs. Venture capitalists are always on the lookout for technology-driven enterprises with high-growth potential in several sectors such as communications, biotechnology, and information technology.
- Expert advice and mentorship are provided by venture capitalists to help develop your business strategy.
- This provides enterprises credibility and better opportunities to a wide network of potential investors and business partners.
- Startups may be compelled to shell out a huge part of the business brought by the significant funding provided by venture capitalists.
4. Business Incubators. They are also known as ‘Accelerators.’ Their tasks are focused on the high-tech sector by supporting different development stages of development among startups. Also, the local economic development incubators are in charge of job creation, hosting, and shared services.
For the incubation phase, this can last for a couple of years. Incubators will engage potential businesses and other companies to share their offices, including their administrative logistical and technical resources. Businesses provided with this kind of support often work with state-of-the-art sectors such as information technology, multimedia or biotechnology.
- Incubators provide an environment that encourages and inspires investors.
- They are seasoned entrepreneurs who are always willing to share quality advice, good training, and needed mentoring to startups.
- Startups are taken seriously with better chances of getting the foot-in-the-door.
- They provide easy access to the many resources needed by startups.
- Incubators run like a business. Startup teams that are part of the incubators’ portfolio enable them to increase the risk to their investment.
- They have a keen eye on the equity stake and startups will find negotiations for equity ownership to be complicated.
- They are strict in their geographical location and selection criteria.
- There are bubble incubators who pursue only a hot trend and play poker with the startups.
5. Angel Investors. These consist of wealthy, experienced businessmen who invest their time and money in your high-growth business in exchange for equity. Oftentimes, they are the front liners who invest in the early stage of the business. Start-up financing is high-risk so angel investors need to ensure the return of their investments. These angels seek to multiply their investment by 5 to 10 times.
They are rich investors who hope for a significant return on their investment. Ideally, the biggest motivation for angels is to bring back and support young entrepreneurs to create their vision.
- Flexible business terms.
- Accepting high-risk ventures.
- Experienced angels provide valuable advice and guidance.
- Required option to convert debt to equity.
- Rapid business growth required and expected.
- Compelled to give up control of your business to some extent.
6. Government Grants and Subsidies. Acquiring grants can be tough with the presence of strong competition and very strict criteria for awards. In general, a startup needs to provide the following:
- Detailed project description
- Explanation of the project benefits
- Detailed work plan and a full list of costs
- Details of relevant experience and background of key managers
- Duly filled out application forms
Most reviewers will evaluate your proposal based on the following criteria:
- Expertise assessment
- Need for the grant
- Assist in improving lenders’ and borrowers’ relationships.
- Increase the chances of getting the approval of a bank loan when the grant is properly managed.
- Very strict qualification guidelines.
7. Bank Financing. This is the most common funding source for small and medium-sized startups. Business owners should be aware that banks seek companies with a soundtrack record and excellent credit standing. Their enterprises should be backed up with a solid business plan. Bank loans usually require a personal guarantee from entrepreneurs.
- Different funding options for banks based on the startups’ needs.
- Relatively quick funding process if you are qualified.
- You take control of your business.
- Need for a lot of documentation among banks, which are both tiring and time-consuming.
- Bank loans should be well-evaluated for the best option that fits your business needs. Otherwise, you might end up choosing a poor deal that could hurt your business.
- Bank loans need to be paid back regardless of their status, which may lead to the loss of the assets in case you fail to pay the loan right away.
An Emerging Fundraising Platform
As the technology progresses, consider a platform with a new vision and business opportunity that enables any enterprise to generate capital for their global projects at a low cost with fewer hassles and helps investors worldwide to invest in any available projects, manage their assets, and provide them with great trading tools. How would it look like for your dream business after five years or more?
Introducing AladiEx… It is a new fundraising platform that is powered by blockchain technology. This helps a million micro, small and medium enterprises (MSMEs) about their funding needs for the next five years. AladiEx’s goal is focused on helping investors to access funds that they need in boosting their businesses.
With several available options, selecting the best financing source can be a tedious process. Ensure to review your financial needs, qualifications, and the urgency of your business needs.
As your startup continues to grow, you may need to rely on many types of business financing. By comparing all of them, you can identify the combination of the best business funding sources.
With AladiEx about to kick-off, we are inviting you to be part of it. It has a unique platform that assists businesses in raising capital funds. This sets AladiEx apart from all other funding sources available. Take advantage of this innovative platform and get ready to revolutionize your dream business and share your own AladiEx success stories.
For more details, visit us online at https://aladiex.io today!
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TELEGRAM CHANNEL: http://t.me/AladiExchange
TELEGRAM CHANNEL: https://t.me/AladiEx