Studies have consistently shown that new businesses fail in their first year due to one factor – insufficient financing. You can have the most fantastic idea or product. But, the company will fail if you do not have sufficient funding to take you through to profitability.
The best type of funding can vary depending on the nature of the business, and there is no “one size fits all” solution. You may or may not be willing to give equity or prefer traditional funding instead of some other methods. Only you will know what is going to be suitable for the business.
Your first priority is to put together a startup pitch deck presentation. Every investor will need this to assess accurate financial information from your business plan and how you apply best accounting practices. Next, you will need to show your potential investor your company objectives and goals. Finally, the project will need to detail how the business will develop marketing strategies, financial growth and operation progress.
We have collated a comprehensive guide to funding options for businesses to help you understand how to raise capital.
1Founder Funding
Of all the types of company financing available, founder funding is the quickest and most viable option if you have access to savings. Investing in your own company comes with additional benefits when seeking external funding. Any potential investor likes to know that you have “hurt money” invested. No investor will have an interest if you are unwilling to invest in the business yourself.
An advantage of this type of funding is that the funds can be injected when the business needs them.
Usually, this happens at startup with little or no revenue being generated and costs being incurred. The simplest method of founder funding is not to pay yourself a salary until profits allow. Instead, you could live off your savings until the business can afford to pay you a salary.
2The 3 Fs: Family, Friends and Fools
People in your family or social network could be a source of funding. They will likely have faith in you or your idea, but they are not professional investors. As such, they will not be in a position to give your company a professional assessment and will be working on trust.
This type of funding is quick and easy to set up, but investment amounts are not very high.
Even though they are family, friends, or fools, it is best to draw up a contract. The contract should cover the financing details, such as amount, repayment details and if interest is charged. Also, to maintain the trust of your friends and relatives, you should observe best practices with accounting for startups, making sure you can fully and transparently report on the use of (their) money.
3Business Angels
Angels are generally successful, experienced entrepreneurs who have funds available. Angels sometimes invest as silent investors, or some prefer to have a role in the overall management of the business. Angels typically invest in the $50,000 to $1,000,000 range but are sometimes willing to invest in groups to spread risk.
Angels often have a network of business contacts, so an angel from the sector you operate in could bring expert knowledge and business prospects.
There are also angel investment platforms such as AngelList and Crunchbase.
The first thing an angel or other professional investor will ask for is a copy of your pitch deck. Even though you’ll want to go through it with them, usually they will refuse because they simply don’t have time to review potential investments with everyone who approaches them. So, your pitch deck needs to stand on its own. That’s why you should rely on a startup pitch deck PowerPoint template to give your proposed company the best possible presentation.
4Crowdfunding
Although a relatively new financing option, crowdfunding has been trendy. Funding can be raised by pre-orders, loans, donations and convertible loans.
You may have a prototype that needs funding to go into production or a niche product that needs better exposure. Crowdfunding is easy to set up on existing platforms, but the promotional aspects and product offers are much more complicated. You could go it alone or find a crowdfunding specialist agency to guide you.
As the “crowd” investors are not professional investors, they shy away from anything too technical or complex. Still, they are drawn to consumer goods they understand.
5Subsidies or Grants
Subsidies or grants are available at startup and throughout a business’s lifespan. They generally are aimed to stimulate innovation, research and development, entrepreneurship or growth. In addition, almost every country and region have subsidies or tax assistance schemes.
If any funding options are available in your business sector or geographic region, take them every time.
The only downside is that there will be some administrative and reporting requirements, but this will become part of your everyday business management.
6Venture Capital
Whenever the subject turns to “how to raise capital,” venture capital is the most frequent topic that follows.
Venture capital is a funding option for businesses that have left the seed stage. These businesses are looking for fast growth instead of organic growth, such as going international.
Usually, a venture capital firm will need to see a proven product or market fit and steadily growing revenue streams. However, venture capital could still be an option even if your business cannot meet these criteria.
The great advantage of venture capital is that it can fund multiple rounds as the company grows and expands. This is especially helpful if you need to hire a dedicated web development team for an ecommerce site or SaaS product, where every growth stage means a new level of technology development and expense.
7Debt Financing: The Bank
There is a perception that banks do not fund entrepreneurs or provide startup funding, but this is not true. However, they will be looking for a lower risk profile and only fund small to medium-sized businesses. As a startup, you will likely be expected to offer up collateral against the loan for security against default.
The significant advantage of debt financing is that you will not need to give away equity in return for funding. Therefore, it will be a much cheaper funding option in the long term than an angel or venture capital investment.
8Factoring
Factoring (or invoice discounting) provides working capital by financing your accounts receivable. Suppose you have large clients, government departments or slow-paying customers. In that case, this is an excellent way to free up cash for your business. It can be run by yourself, or the factoring company can take over the total management of your sales ledger, including credit control and the risk of non-payment.
It generally works like this, you raise an invoice, and then you can “draw down” the agreed percentage of that invoice, around 70 to 80 percent. The final portion, minus fees, is paid to you when the client pays.
So if you have 100,000 sitting in accounts receivable, you could instantly access 70,000 of cash flow for your business. However, in the long run, it costs you $30,000 to access that cash quickly, so it’s a method best used for cash flow emergencies.
A better method, if possible, is to be strict on correctly invoicing and client collection management. Also, if your clients are small or good payers, then factoring won’t work.
9Leasing
Do you need to invest in significant assets such as machinery or vehicles? If so, lease instead of purchasing.
Leasing spreads payments and is often easier for a startup to access leasing than the loans needed for outright purchase. In addition, often, there are tax advantages from leasing depending upon what country you trade-in.
10Suppliers
Suppose your business is heavily reliant on a supply chain. In that case, you could try to negotiate more favorable payment terms with your suppliers. Try to negotiate supplier payment terms that are longer than your customers’ terms, thereby creating a positive cash flow. For example, if your purchase ledger sits at $100,000 in purchases per month on 30 days payment terms, an increase in these terms by 14 days frees up $50,000 in working capital. The alternative is to negotiate early payment discounts, although this will not release working capital quickly.
You will need to have a good relationship with your suppliers. If you are an important customer, you will be in an excellent position when negotiating.
More about Money
Sometimes startups are so focused on getting financing for their business that they can forget about the primary source of capital for all successful businesses: customers. And often, those customers could be buying more from your company if it offered financing. Moreover, this principle can work whether your business is large or small.
Buy Now, Pay Later
The advantage of offering financing to customers is that a third party will often carry the debt. For example, you might have a store card from online retailers such as Amazon or Wayfair, but those cards are issued and financed by banks, not by the sellers. When a customer charges an item to their store card, the bank pays the seller in full, and the customer pays the bank over time. Also, the bank assumes all of the risk, not the seller.
You can see how this would be an excellent way to increase cash flow for your business. Digital revolving credit for your customers helps them spend more and buy more frequently, making it easier for your sales to grow.
Use Technology Rather than Staff
One of the best ways to preserve capital is to spend as little of it as possible. So, before hiring a full-time marketer or sales team, look for technology tools that handle some of the heavy lifting, making it easier for founders to cover those areas in the early days.
Tech tools like lead generators and project management software can help you buy time to let your business breathe and grow before you take on heavier payroll expenses. In addition, they are an economical way to help you generate income from customers before increasing your costs with more payroll.
Last Word
We hope these pointers will help you identify the funding sources your startup needs so that you can begin to generate customer-driven income as soon as possible. Whether you bootstrap your operation from your savings or rely on creative means of financing from other sources of capital, careful planning, lean operations, and a bit of good luck will see you to a successful future.
