A great idea is a must-have for any new start-up. But an idea alone isn’t going to cut it. You need funding. Unfortunately, funding is one of the biggest hindrances to people with great start-up ideas. The good news is that there are options. In fact, there are six options that make up the bulk of the funding that goes to new start-ups.
Each of the six options is explained below. You may get by with just one source of funding, but you will likely need multiple sources to get your business from concept stage to profitability. Do not be afraid to use as many sources of funding as you need. But be wise about it.
Start by creating a detailed business plan explaining your great idea, how you hope to implement it, who your customers are, and so forth. There are plenty of online sources explaining how to write a good business plan. You will need one if you hope to get funding from banks and private investors.
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Also be sure to keep track of your finances in great detail. Investors are going to want to know how quickly you are spending money as opposed to making it – known as the burn rate – and when you anticipate running out of money if new funding is secured – aka the runway.
Known as bootstrapping in some circles, self-funding is a scenario in which you combine your own savings with additional investments supplied by friends and family members. This sort of funding mitigates the need to have to go to banks and private investors to get your start-up going. It has its pros and cons.
On the positive side, self-funding allows you to maintain complete control over everything you do. You lose some of that control when you go to banks and private investors. Self-funding also shows private investors that you are committed to making your business work. If you ever need their help, self-funding is evidence that you are serious about success.
The big disadvantage to self-funding is that you could lose everything. It is something to consider before you empty your savings and start asking friends and family for help. If your business fails, everyone loses.
2. Bank and Government Loans
Commercial loans are available from both banks and government sources. These loans work basically the same as any other kind of loan. You make an application, prove that you are a worthy risk, and agree to pay back the loan at a certain rate every month. Be careful of funding your start-up exclusively with loans as they carry a heavy load of liability.
3. Government Grants
Government grants are given to new start-ups as cash funds that do not have to be repaid. But there are a couple of catches. First, grants are terribly difficult to come by due to the intense competition for them. Second, grants are generally limited in their scope. Finally, the grant-writing process is complicated and time-consuming. You could put a lot of effort into grant applications only to see nothing from them.
4. Angel Investors
Angel investors are professional investors who specialise in early-stage start-ups. More often than not, they do not expect the money they put into a start up to be returned as cash. Instead, they ask for an equity share in the business. They earn on their investment as your business grows and starts turning a profit.
On the positive side, angel investors tend to be experienced business leaders who can offer you more than just money. They can provide the kind of guidance you need to keep your business on track. On the downside, granting angel investors an equity share of your business means they have some influence over what you do. Angel investors also tend to shy away from smaller opportunities; they are normally looking to invest £100,000 or more.
5. Venture Capitalists
Venture capital is similar to angel investing but with two important differences: size and timing. In terms of the former, venture capitalists tend to work in the millions rather than the hundreds of thousands. As far as timing is concerned, they also do not limit themselves to start-ups. They will invest in any opportunity they think is a moneymaker.
Like angel investors, venture capitalists also tend to have lots of experience that they can offer. They are going to want some measure of control over your business, too. Venture capitalists can structure their investments as equity interest or as loans.
The biggest disadvantage to venture capital is loss of control. Make no mistake; venture capitalists almost always require a seat at the decision-making table. They also tend to favour shareholder agreements that, legally speaking, take ownership out of your hands and place it into the hands of those who have an equity stake in the business.
6. Crowd Funding
Because angel investing and venture capital are both inaccessible to start-ups looking for less than £100,000, you may be left wondering how you’re going to manage with bank loans and self-funding. Well, there is one more option: crowd funding. The crowd funding model invites small investors from around the world to contribute any amount they care to invest.
Crowd funding, also known as crowd sourcing, brings together thousands of individuals who may only have a few thousand pounds (or even less) to invest. But there is an advantage to this. Each investor also becomes an unofficial member of the sales team. Investors are going to pitch your company because they want it to succeed. If you succeed, they earn a return.
The two biggest disadvantages to crowd funding are the fees that platforms charge and the possibility of losing some measure of control over your business. The crowd funding model is best suited to businesses that sell directly to consumers rather than focusing on a business-to-business (B2B) model.
There are sources of funding out there for your start-up. If you are looking to get a new business going, spend some time researching before you create your business plan. Then go out there and secure the funding you need to succeed.