You have come up with a startup business idea, validated it, written a business plan and completed the marketing plan. You have gone the extra mile to memorize your elevator pitch and your small startup is already registered under the required business structure. You may have a viable product and almost ready to go to market with it. Are we forgetting something here? Of course! The money is not yet in the picture. A startup needs capital in order to get started. Financing is the most important aspect of a startup in addition to the business model and the products being sold. The fate of your startup is usually determined by the ability to raise enough capital to sustain the business in the early stages before you can break even.
According to research, inadequate financing comes second after poor management in the reasons why most startups fail. Most of the time it comes down to cash flow and we have situations where startups are forced to close their doors for a couple of months before the money comes flowing in again.
Before you rush to get your startup up and going, it is important that you take a careful look at the type and amount of funding you require to avoid having issues later. Once you have determined that, you must decide on how you will be financing the business. Lastly, you need to determine a source of capital at an affordable cost. There are some questions you need to ask yourself in order to determine how much funds you need to get started.
First, how much do you need to start the business? Do you have personal funds or assets to finance the start-up phase of your business? Are there family and friends who would be willing to invest in your new business? Do you have personal credit that allows you to obtain lines of credit? Last but not least, you need to know whether you have a relationship with financial institutions.
There are several different kinds of capital that are needed to get your business started and successful in the long run. Startup capital is the money needed to initially get the business up and running. This includes looking to buy a reception desk counter or leasing equipment needed for the business. Working capital on the other hand is the money needed for the day-to-day operation of the business. This usually depends on the kind of business you have.
There are two fundamental types of startup business financing.
1. Debt Financing
Also known as startup business loans, this is where you borrow the money you need to get started and agree to pay it back at a stated interest rate. Most business usually opt for this mode of financing to get off their feet. So long as you pass the lenders requirements, you may obtain a line of credit. The benefits of this mode of financing is that you do not have to give up ownership of your business. However, you are required to pay back interest and the lender will need to have personal guarantees.
2. Equity Financing
With this mode of financing, you sell partial ownership of your company. Well, this is usually the option for those startups that are unable to get debt financing from traditional lending institutions. Investors usually put in their money in exchange for an equity ownership stake. These investors range from friends and family, venture capitalists and angel investors. For friends and family, the funding is quick and convenient. However, you should be prepared for ugly confrontations if you lose their money. Angel investors are more patient about their investment but can be very hard to find. Venture capitalists on the other hand are interested in startups that are ready to sell within 3 to 5 years and prepared to share control of the company. They also provide networking opportunities, however, in addition to the funding.
Whether you go for debt financing or equity financing, it is important to understand factors that will affect your decision. This includes the experience of the management, the amount of funds you need and your ability to repay. It is important that you go through your options and give yourself the best opportunity for success. So long as you are willing to put some effort into getting the initial funding for your startup, you will be successful in no time.