Starting a business is challenging and can hardly be done without capital. One of the biggest preoccupations of an entrepreneur is how to raise the financial resources that are going to be necessary in order to maintain the business of the ground while the revenues are still marginal.
The two most common solutions go around getting a loan that the entrepreneur is going to have to repay within a period of time (debt), or selling a part of the company to an investor (Equity). Both of those options have their pros and cons and the best one will depend on the nature of the business, the current financial conditions and the prospects of revenue. In this article, we will go around all the main options and alternatives for start-up businesses financing.
1) The Entrepreneur’s savings
The most dangerous but also the most common way of raising capital is to do it on your own. Some entrepreneurs don´t hesitate to sell their car or their house in order to start a business they really believe in. This can be a good thing later in order to attract future investors, as it shows a high degree of involvement. It is not recommended to invest all types of savings, especially if the entrepreneur has a family to sustain.
2) Friends and family
A common solution in fundraising, especially in the earliest phase of the business, is to reach out to family and friends assistance. The entrepreneur must take the time to educate them about the risks that they are taking. He shall also be aware that the failure of the business may cost him more than financial losses. By going for that solution, the owner must be careful that the deal is well structured and checked by a legal professional. Friends and family must be treated like real investors.
3) Angel investors
Most successful companies usually arrive to that stage of issuing ordinary shares to angels or Venture Capitalists’ in return for their capital. For that, the owner will have to promote his business based on the business plan and every type of projections he can make. This process can be time-taking but rewarding if the entrepreneur eventually manages to build a trustful relationship with experienced investors that are not only going to provide the company with money but also pieces of advice.
4) Business loans
Bank and traditional lenders will be a great option if the companies´ business plan announces great and realistic prospects and if the entrepreneur`s profile offers some kind of financial security (which, for banks, means collaterals in case of failure). It is also preferable for business owners that don´t want to give up equity shares. The objective, in that case, will be to negotiate the lowest interest rates, within the longest period of time.
Crowdfunding is one of the newest ways to raise capital for a business. A few companies have established themselves as references in the crowdfunding business (Kickstarter, Gofund.me, Indiegogo, etc.) and each one of them present specialties that will fit the type of business and stage the companies finds itself in. This can, for example, imply the purchase of an early version of the product or service from early consumers.