For most entrepreneurs, obtaining enough capital needed for financing their startup is one of the biggest obstacles they ever encounter in their business journey.
Fortunately, in these modern times, there are a myriad of options to choose from in financing your startup. Depending on your objectives, resources and needs, you may be able to utilize one or more of the options which will be discussed in this article.
Before delving into the different ways you can obtain the necessary financial aids for your startup, it is imperative you understand the distinction between a startup and a small business.
A small business is one which tends to a relatively small and constant market, involves minimal risk and does not involve any innovative approaches and doesn’t seek market expansion eg your traditional restaurants, stores.. While a startup is a business which brings a new discovery or innovation to the market, it also involves more risk than a small business… and startups aim for global domination, meanwhile small businesses are content with an extremely small market.
It is noteworthy to know that the growth potential of your startup is largely dependent on the structure with which you register it.
For instance, a C corp in the long term will have more growth than an LLC or Sole proprietorship. One of the many reasons for this is that a C corp will allow you have an unlimited number of shareholders/investors, it also the right structure that allows for the launching of an Initial Public Offering (IPO).
Now that you’ve understood the concept of a startup, we will delve into 5 ways you can obtain money to use in financing your startup.
Note: this article is part 1 of a series; ‘Startup Financing’, meaning subsequent parts will be released each discussing 5 different ways you can utilize in financing your startup.
1. Angel investors
Angel investors are individuals whom invest in startups in their early stages for an equity stake in such startups. Usually, they are the first to invest in a startup even before VCs (Venture Capitalists).
Angel investors are usually experts in a certain industry or sector, hence, they tend to invest solely in such industries in which they’re experienced in. For this reason, it’s best you approach an angel investor who is focused solely on your industry.
The amount of money angels invest in a startup is usually around the range of $25,000 – $100,000, however it can go way higher. Recall the investor, Peter Thiel, made an angel investment of $500,000 for 10.2% stake of Facebook in 2004.
Angels also contribute to the growth of a startup in various ways, for instance, they offer counsel and advice on running a company, they may also expose you to their connections and contacts within the industry.
If you plan on approaching an angel investor to finance your startup, you need to have a perfect pitch deck which will help you grab their interest and attention to your venture.
Below, are a list of places where you can find some angel investors
2. Apply for a microloan
Microloans are loans which are issued to groups of people who otherwise would have no other access to financial services and are rather mostly unemployed or low-income individuals.
In our article How to Start a Microfinance Bank, we covered extensively everything you need to know about microloans.
Microloans are ideal for individuals lacking a good credit history or individuals whom lack collateral needed for taking loans. It is as a result of this that the interest paid on microloans is way higher than that of a typical bank loan.
Microloans are issued by Microfinance banks. However, microfinance banks give additional services which includes checking and savings accounts and also micro-insurance products. Some also provide financial and business coaching
Startups, other small scale businesses and individuals are the major beneficiaries of microloans and the loans are usually in the range of $100 – $50,000.
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If you wish to follow the microloans route in financing your startup, you’ll need to do a simple Google search for the microfinance banks located nearest to you. You may also choose from any of the microfinance banks listed below:
- CDC Small Business Finance Corp
- Banco Compartamos, S.A., Institución de Banca Múltiple – Mexico
- Banco do Nordeste – Brazil
- Bandhan (Society and NBFC) – India
Crowdfunding entails soliciting funds from a large number of people, typically through an online platform.
It works by posting the details about your project to a crowdfunding site with a perfect pitch to attract funders, if the members are interested in your Idea, they’ll donate to your cause in little amounts.
When using crowdfunding, you need to set your goal by specifying the amount of money you need for your project and also the time frame you intend on raising the money.
In order to attract people to fund your project, you may need to offer some incentives such as a discount, free product or service for the funders. There are a lot of options available when considering incentives to offer… you should also know that through crowdfunding, startups have been able to raise tens of thousands and millions of dollars
Crowdfunding sites have different terms of which you must agree to. For instance, some won’t pay you the funds donated if your goal isn’t achieved within the specified time frame. For instance, if you wanted to raise $5 million within 2 weeks but you could only raise $4 million within this time frame, you’ll forfeit the money and the funds will be refunded to the donors.
If you wish to opt in for crowdfunding in financing your startup you many choose any of the following platforms:
4. Love financing
Love financing involves soliciting funds from friends and family to finance your startup.
This is a common practice for entrepreneurs looking to finance their startup in it’s early stages.
You should however, not make the mistake of turning your friends and family into regular creditors as this may jeopardize your relationship, and it may also put their future finances in jeopardy.
Before making a move with this option, you should have a well laid out busines plan which you will present to your family or friends. You should never collect money for financing your startup from them without, putting a solid business plan into place with realistic future projections for your startup also detailing how they will eventually get their money back.
When soliciting funds from your friends and family, you should determine the basis on which the funds is been given; be it as a loan which will be repayed with interest or not, or an investment which will be in exchange for an equity stake in your startup.
- Read: Trust Funds: How to Leverage it to Protect Your Family Assets & Safeguard Your Children [+ Risks Involved If Mismanaged]
5. Sell your assets
If you have any form of valuable asset, it would be a very good idea to sell it as long as the money generated is being used in financing your startup.
Assets you may consider selling include your car, jewelry, real estate, stocks and bonds.
Although you have to into consideration the tax implications of selling some types of assets such as real estate. If you’re not careful enough you might find yourself facing unpleasant capital gains tax.
Selling your assets is a time tested and effective way of financing your startup. If you’ve got some assets which aren’t a priority to you, what’re you waiting for? It’s better to sell them, and use the money you gain in financing startup.
Financing and running a startup is no easy feat, it takes dedication and commitment to breakthrough.
Depending on your needs you may consider any of the options discussed in this article, even better, you may utilize all of them in financing your business.
Questions: Of the various options discussed, which are you currently utilizing or which are you considering to utilize?
I’m the cofounder of WealthOnPoint, and business is akin to me just as blood is to humans. Being an advocate of business literacy, I’m the go-to guy for matters concerning business, marketing & investments. My mission: I wanna take your business to higher heights, the question is; are you willing to let me?