Financing a startup business is the first step toward realizing your dream. Finances determine the stock size or equipment you purchase to get things going. There are various methods entrepreneurs use to finance their businesses. Some of the common are borrowing friends, personal savings and venture debt. Here’s a breakdown of the best financing options for startup businesses.
Many people opt to finance their business from their personal savings before looking into other options. Personal savings is a long-term goal and requires discipline to achieve. This is why personal savings are also referred to as bootstrapping. The advantage of personal savings is that one does not need to pay back. Further, one may choose to dispose of personal assets to help reach the capital required to start the business.
However, using personal savings is risky because if the business doesn’t succeed soon to give you returns, the owner has to explore other options. Failure to which the business fails. At this point, one has to explore other financing options.
- Friend and family
You can borrow capital from close friends and family. You can borrow money from your loved ones and refund it as soon as the business picks up. Other family members will give you money as a gift or allow you to repay on interest-free arrangements. This option is limited to your loved ones’ financial ability.
You also must be careful to return the money because failure to repay can strain your relationship with your family. Additionally, some friends who lend you the money may demand to be part of the business when this was not your initial plan.
- Venture debt
Venture debt is a means of funding unique business ideas with significant returns in the market. Venture debts specialize in digital and communication devices, prototype development and bio-technology. The business does not need to repay the loan; however, the venture debt lenders may demand control over a significant share of the business.
- Angel investors
Angel investors are a safer financing option for your business than the other two methods. Angel investors give you funds because they believe in your business idea. Angel investors leverage supporting startup businesses. You can approach several potential investors and sell your idea to them so they can lend you some amount. If the business succeeds, you need to allow the angel investors to have equity shares. You need to consider giving up some ownership rights when approaching angel investors to finance your business.
Here, the business owner floats an idea to potential funders. The investors examine your business proposal and determine suitability in the market. Crowdfunding helps new businesses to get off the ground by providing the required capital.
The members contributing money in a crowdfunding option may form a communication platform where they scrutinize business ideas to determine their viability. The crowdfunders may decide not to ask for equity shares but can ask for other forms of reward, such as a discount or free samples.
A business idea requires sufficient funding to actualize in the market. Personal savings and borrowing money from loved ones cannot provide all the finance requirements of a new business. Consequently, a business owner may require exploring other options, such as venture debt and angel investors.