The definitive Guide to financing your Startup
Do you have a dream but not the money? There are a ton of options for financing your startup that you need to consider. The only question is which is the tight one for you?
Financing for your startup is probably the hardest part of starting a business. There are many requirements and hurdles you have to do to get people or organizations to take a chance at your unproven startup. You have to prepare documents, do projections and even do presentations depending on the amount of capital you need and your desire to keep ownership or control over your business.
This guide will help you decide which the best financing for your startup is.
Financing for your startup: Own Savings/Side Income
One way to get financing for your startup is to start with your savings. Hopefully, by the time you decide to start your business, you would have some money stashed in the bank already. You can also hustle on the side to boost your side income so that you get some financing for your startup.
Advantages of own savings and side income:
- You do not owe people money.
- You will spend your money cautiously since you have worked hard to raise those savings and side income
Disadvantages of own savings and side income:
- It might take some time to raise the capital you need
- You might lose out on the business opportunity if you take so much time to raise your financing for your startup in this manner.
- The amount that you can raise is quite limited
- You might not have enough emergency money left
Financing for your startup: Bank Loan
Banks will gladly loan money to businesses because they earn a lot from the loans they provide. Bank loans are also called debt financing. It offers some advantages, but they do have significant tradeoffs. You will have to consider this financing option carefully.
Advantages of bank loans:
- You can loan a greater amount from banks
- You can negotiate to pay it back on a longer term basis. This makes your monthly payments easy on your cash flow.
- Bank loan approval can be done within a month or even less
- Some banks provide specialized loans for new businesses, and so they can be more friendlier, and you have a higher chance of getting the loan approved
Disadvantages of bank loans:
- Lots of forms to fill up and credit checks since you are a new startup
- You will need to supply them with a business plan and business projections
- You have to give collateral as security for them
- They might insist on a shorter paying term for your loan since you are not yet an established company
- They might only provide you a loan smaller than you asked initially because they do not want to risk so much money
- The bank will give high-interest rates to compensate for the risk they are taking on your startup
- Your cash flows will be tied up to repaying the bank loan, and so your startup will be pressured to generate more cash for its other needs
- If your business organization type is a sole trader, you have unlimited liability. The bank can get your personal assets like car, properties, electronics if your business fails and can’t repay the loan.
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Some tips to secure financing for your startup via the bank loan route:
- Clean up your credit: make sure you do not have outstanding loans with other banks and lenders. Make your credit score as high as possible
- Make a powerful and effective business plan
- Wow, them with your cash flows. Show them that your business has good cash flow. So work hard on your cash flow forecast statement.
- Try to use your network and see if you have loan specialists in your network. Develop good relationships and stature with them.
- Highlight your experience in the industry of your business. This will make your request for financing less risky since you have experience and an expert in the niche you want to start a business.
What are the things potential lenders look out for? These are the 4 “C”s of lending:
- Cash flow: What is your ability to repay the cash? It is easier to get a loan if you are an employee because the bank sees it as steady cash flow. However, for a startup, they will think twice knowing that you do not have cash flow yet. So it is a good idea to start generating cash flows as early as possible before reaching out to lenders like banks or other financial institutions.
- Collateral: This refers to the value of assets that you are willing to pledge for assurance that you will repay your loan. If you have some assets like real estate or stocks or even cars, then you can pledge them as collateral so that your loan has a higher chance of getting approved.
- Commitment: Very often, the banker will ask how much personal money have you contributed to your venture. If it is a lot, then it tells the banker that you have a lot at stake in the business and you are committed to the success of it. If you are just going to ride on other people’s money, that might be a red flag to them. You will risk not having your loan applicant denied.
- Character: This one refers to your personal credit score and history with the bank. If you have shown good behavior in repaying your loans, this will give you a strong credit rating, and you will be known as a low-risk borrower, thus boosting your chance of getting your loan approved.
Financing for your startup: Venture Capitalists
Venture capitalists are investors. They give you some financing in exchange for a percentage of ownership in your startup. These investors are there for the medium term, and they want to get a good return on their investment.
Venture capitalists want a solid business model with high potential for growth so that in a few years, they can recoup their investment and roll it to another promising venture. They rarely stay for the long term. They tend to just ride the growth stage of a startup.
Financing from Venture Capitalists is also called equity financing.
Advantages of venture capitalists:
- You can raise a good amount of money, e.g. millions of dollars
- You can get expert advisory from the venture capitalist team that will work with your startup to make it successful
- Your partnership with them can boost the brand of your startup
- You do not have to have an actual product or business running to get venture capital. Sometimes the coolest ideas win the venture capital so it can be put to the test in the real world
Disadvantages of venture capitalists:
- They can be ruthless by seeking a large ownership position on your startup because of your desperation for capital
- Because of their controlling interest, they can exert influence over your decisions and maybe their decisions are not what you have in mind for your business
- They might exit earlier than expected and so they can get their investment out easily
- It is a competitive industry; many startups are vying for venture capital
- You need to present a pitch to them and convince them to put their capital into your business
- Finding venture capitalists might be difficult and if you do find, setting up a meeting with them to present your idea can be challenging
- You need to prepare well for your presentations
The 11 slides that you need to have in your pitch according to Guy Kawasaki:
- Title Page: Your business logo and your contact information
- Overview: A concise summary of what your business is all about
- Problem or Opportunity: What solution are you providing to a problem in the real world?
- Unfair Advantage: How is your business better than the others trying to solve the same problem as you are? This is your competitive edge.
- Demo: How does your product work? How is it better than the alternatives?
- Sales and Marketing: Do you have customers in line? Strong network? Pitched to other investors already and it looks promising?
- Competition: Having competition means the market exists and there is potential to make money in that market
- Business model: How does your business make money? Don’t get fancy. What are the different ways that your business generates revenue?
- Forecasts: This is where you present your conservative estimates yet at the same time, it shows the venture capitalists the potential of the business and the potential return on their investment. It has to both excite them yet stay rooted in reality.
- Team: Who are the distinguished and capable people in your team? How will they bring value to your startup and how will they make it succeed?
- Status and Milestones: What has your startup achieve so far? What are the new developments and upcoming projects and plans?
Financing for your startup: Angel Investors
This financing option is similar to venture capitalists except they are more informal and less cutthroat than venture capitalists. They might also provide a smaller amount of capital. This is also a form of equity financing
Advantages of angel investors:
- Easier to locate and get their attention
- There are angel investor clubs around the world
- It is not as intimidating as presenting to venture capitalists
- They do not interfere as much as much as venture capitalists do
Disadvantages of angel investors:
- The capital you can raise might be smaller than what venture capitalists can provide
- They can be picky so your industry might not be what they are looking for
- It can still be time-consuming to get capital from them
- You still need to present them your pitch and business model
- You need to prepare well for your presentations.
- They can take some ownership of your business
Here are some financial questions that angel investors can throw at you.
- How much capital do you want to raise?
- How long will that amount of capital last?
- What is the amount of cash you are burning monthly?
- Do you have detailed financial projections for the next two years?
- What are the key assumptions underlying your projections?
- Describe the key cost components for the product or service.
- What is the unit economics?
- What are the likely gross margins?
Financing for your startup: Crowdfunding
Crowdfunding can be a fun and interesting way to fund your startup. There are platforms like Kickstarter and Indiegogo that gives you the opportunity to pitch to the whole world and collectively help you fund your enterprise.
Advantages of Crowdfunding:
- If you successfully do a crowdfunding, venture capitalists are lining up to provide you with more financing to help you grow faster. They see successfully crowdfunded businesses as lower risk ventures because it shows there is proven demand and market for your product.
- No ownership or control is given up unlike shares or another equity financing
Disadvantages of Crowdfunding:
- You have to get people’s attention and be creative
- Storytelling helps a lot
- Your product or service has to be cool, useful, unique and innovative to get people’s attention
- You have to deliver a finished product to those who crowdfunded you
- It is possible that your successful crowdfunding campaign will not translate to mainstream success because people on these platforms are early adopters of many things, especially technological products.
Here are three websites where you can do your crowdfunding campaign:
Great tips to create a successful crowdfunding campaign:
- Prepare. Flesh out your idea well and make sure all areas of it are covered. The more detailed you get, the more it builds trust with viewers that it is not a scam or a poor product. It cannot be half-baked. Plan it out just like how you would prepare for a pitching session with venture capitalists.
- Get good with social media
Be on the right social media platforms to promote your campaign. Use videos, visuals to get people intrigued so that they will visit your campaign page and help finance your venture.
Invest in professionals
If you are going to make videos, hire someone really good to produce the video. It is going to be a great investment because the video will attract many people to view your product and it will stick in their minds.
This will make them share your videos to others and can become viral. Once it becomes viral, that can lead you to have a successful campaign in a matter of days. Even venture capitalists might get intrigued and look to contact you.
Create a solid, value-packed website about your venture
This is important because you also want journalists and media to get hold of your project and be able to share it through their writings and network. Make it professional looking and easy to navigate. The information there should be complete so that they can quickly grasp what’s in store if they help promote or fund your project.
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Build interest early, leverage on your following
If you have a strong social media following already, try to leverage it into getting some attention for your venture. Some of them might be superfans of yours and will gladly back your project as well as promote it heavily. If you do not have a following yet, start as soon as possible. Get your venture out in the open and build some interest before you start a campaign.
Keep your followers and backers in the loop at all stages. This boosts trusts and gives them something to look forward to. Give them short video clips as to what’s happening or even go live on social media to give behind the scenes commentary on your project.
Be personal. Show off your personality.
It is important you let your personality shine in your writing and media. Don’t be afraid to be yourself. You will attract your tribe, and they will be the ones to crowdfund your business idea.
Make your rewards appealing. Understand your backers. What are they like? What interests do they have? You can use surveys to find out more about them. In this way, your rewards will entice them to back your creation.
Financing for your startup: Government grants
Sometimes the government in the quest to boost economic activity in the area or region will entice people to start their own business funded by government taxes in the form of government grants.
Grants are one-time financial assistance given by the government.
Advantages of grants:
- You do not have to repay them
- You do not lose any ownership
- Sometimes the governments adds other incentives like tax holidays just to boost entrepreneurship in an area
- The government also gives advisory and strategic services in addition to the financial assistance
Disadvantages of grants:
- Sometimes the government has stringent requirements to be eligible, e.g. you have to locate at a particular place, or you have to hire from a select pool of unemployed people in an area or it is only for certain industries.
- The grant might only be a small amount
- The conditions set might be detrimental to your startup in the long run
Financing for your startup: Microloans
Many organizations and private companies and lenders provide microloans to startups which need financing. You just have to be resourceful in looking for them and finding out their requirements.
Advantages of microloans:
- Not as stringent process as bank loans
- There are plenty to choose from. If one declines you, you can approach another
- A good way to supplement if you already have established savings or side income
- You do not lose any ownership
- They cannot make decisions for you
- Might not need collateral unlike bank loan
- Lower interest rates and better payment terms compared to bank loans
The disadvantage of microloans:
- The amount they provide might be too small for your needs
- Payment repayment might be shorter duration because of smaller amount of loan
Financing for your startup: Credit Cards
Credit cards can be strategically used to provide some financing for your startup. If your cash flows are strong, you can be courageous to use this form of financing because you can repay back the amount before the due date.
Advantages of credit cards:
- You can have multiple credit cards from different banks so you can raise a decent amount of financing for your startup
- Using the credit cards often has rewards, like mileage points, free gifts, and discounts. If you use this strategy, choose credit cards that fit nicely with your lifestyle and needs.
Disadvantages of credit cards:
- Massive interest rates if you fail to pay back the amounts on time
- There’s a limit to the amount you can charge to the credit card so it might not reach your financing target
- Your credit score can be ruined if you have multiple credit cards going out of control
So select carefully the type of financing for your startup. How you finance it will have a big impact on the way you run your business as well as the cash flows. Think about whether you will appreciate outside advise or decision making or you want to keep total control over your startup.
Proper planning is necessary. Make realistic financial projections so that you really know how much money you need to start and sustain your startup.
Bootstrapping is a good way to start a business but sometimes you need major capital at the start to turn your idea into reality. If you get lots of venture capital, that means your business idea has merit and you should do your best to grow it to its best potential.
What’s important to track is really cash flows. Cash flows reinvested in your business can sustain it. Also, remember that if you take on debt, your cash flows will be redirected to paying it off since they have first lien on your revenues. But on the other side, if you choose equity, you will lose part ownership and control over you company.
A good startup will try to have a variety of financing sources so that they can complement each other and together are able to raise a good amount necessary to run a good business. It will also balance out the need for strong cash flows and some outside assistance and advisory.
With all the options out there to finance your startup it is important for you to take the time and learn about all of them. Now you have the knowledge to decide for yourself what will fit your situation the best. And don’t forget you can always mix and match to your heart’s content. The goals should always be to get the money to build something great, not to follow one path just because you feel like you have to.
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