HOW TO FINANCE A START-UP-” By Creative Thinking.”
Every startup needs access to capital, whether for funding product development, for initial rollout efforts, acquiring inventory, or paying that first employee. Most entrepreneurs think first of bank loans as the primary source of money, only to find out that banks are really the least likely benefactors for startups. Thus “creative” really means maximizing non-bank financing.
While sizing up the alternatives, there are many, but they are not easy. The most successful entrepreneurs are the ones who think creatively, not only about their offering, but also about how to acquire cash, and never say never. They have to sell themselves, more than their product, to close on every alternative source of funding.Some of the sources can be:
- Personal financing: We may not think this is very creative, but amazed at the number of “wannabe” entrepreneurs who haven’t thought about saving any money before they start, or wouldn’t think of using their own savings to start a business. Most of the investors will not put money into a deal if they see that you have no “skin in the game.”
- Personal credit lines: We can go for a secured personal credit line based on our personal credit efforts. Credit cards can usually be acquired with even less history. The advantage is that one can retain total ownership and control, as long as they make minimum payments.
- Family and friends: These are people who believe in you, without waiting to see if your idea works, or waiting until you have real customers, revenue, and hard assets. These commitments can always be positioned in writing as promissory notes, or so-called bridge-loans, which convert to equity at a rate determined by later investors.
- Peer-to-peer lending: This is a process whereby a group of people comes together to lend money to each other. It’s been around many years, in examples like small business groups or ethnic groups supporting similar efforts. In the startup context, look for a successful entrepreneur peer willing to fund similar new ideas.
- Crowdfunding: Here one can use the power of the Internet to find a crowd of like-minded people, with small amounts each, to back their efforts. This approach is now spreading beyond non-profits, pre-sales, and memento rewards, to soon include the ability to make small equity investments.
- Microloans: There are many private companies and non-profits that offer small loans, up to $35,000, to promote entrepreneurship. Get in contact with them too.
- Vendor financing: If we need tangible products for inventory, many manufacturers and distributors can be convinced to defer our payment until the goods are sold. This really means an extension of the normal 30-day payment terms to a period of months or longer, depending on our credit worthiness and extra fees.
- Factoring accounts receivables: In high volume startups starting to scale up, this will provide cash on your sales immediately, rather than waiting for 30 to 60 days or longer for payment.
- IRA financing: Investment Retirement Account funds are another alternative funding source available today for startups. You can’t use your own self-directed funds for your startup, but many others are willing and able to loan you money from theirs, for the right terms, if they believe in you and your cause.
These are “ Creative Thinking” of financing a start-up, yet there are coneventional ways like Angel and venture capital investors etc., where they prefer lesser risk in business model, real revenue and customers, ready to scale etc. which may not be seen in new born start-ups. So, creative way is best for finacing and growing a startup.
