How to Efficiently Finance Your Startup

How to Efficiently Finance Your Startup

. 6 min read

Nowadays, there are many startup businesses with a lot of potential and innovative ideas. Unfortunately, a lot of startups never reach the point where they can become successful companies. The main reason is financing.

As a matter of fact, 38% of startups fail because they ran out of cash or they failed to raise additional capital. That’s why it is of vital importance for startup owners to have a clear financial plan for their businesses. Now, that’s easier said than done but there are ways to ensure that your startup company won’t suddenly run out of resources.

Some entrepreneurs funnel their own capital into their businesses. They will use any funds they earned from investing, crypto trading, or their full-time job. Fortunately, there are other ways you can properly fund your startup. That being said, here’s how to efficiently finance your startup.

Bootstrapping

This financial model is used by many entrepreneurs who have just launched their startup businesses. This means that the owner has little to no assets or funds. That also means that the business owner will use various techniques, such as pouring funds from their savings account, leveraging quick inventory turnovers, and other methods.

A good example is the preorder technique for products. Consumers will pre-purchase a product while bootstrapped startups will use those funds to develop the product, to begin with.

This is not the most efficient financing method for startup businesses but it does provide a lot of control to the owner. You don’t own a bank anything and you are not under pressure from investors to deliver feasible results as soon as possible.

You might borrow funds from friends and family every now and then but even such loans are more flexible than banks and other lenders. There are plenty of things that can potentially go wrong but bootstrapping startup owners are constantly hustling until their business becomes financially self-sustainable.

Taking a Loan

Most entrepreneurs will finance their startup businesses using loans or lines of credit provided by banks, alternative lenders, or friends and family. Loans are a great source of startup capital but there’s always a catch.

For example, banks will check the owner’s credit score and history before they approve or deny them a loan. If your credit score is bad and you do get a bank loan, you can expect high-interest rates and unfavourable payout conditions.

That’s why many startup owners choose alternative lenders who are more considerate than banks. Banks look at startup owners based on their creditworthiness. If they consider you to be a liability who cannot pay their dues on time, they’ll be quite upfront about it.

That’s why after tons of red tape you have to go through you may end up with a not-so-favourable deal after all. Alternative lenders, on the other hand, are more flexible and easygoing but never forget to read the fine print when it comes to unofficial contracts.

Venture Capital

Startups that have a great potential for growth and profitability usually end up on investors' radar. Venture capitalists are always looking for startups that can become quite profitable in three to five years' time. It is the get-rich-fast agenda of startup owners that interests venture capitalists.

However, even if your startup does, in fact, have great growth potential, you’d still have to convince venture investors to financially aid your business. You have to show them your strategies and plans that will get your startup where it needs to be.

If venture investors like your pitch they will pour virtually unlimited funds into your startup thus ensuring its proper growth and development. The catch is that your investors will ask for shares of your company once it’s ready to hit the stock market.

This officially makes venture capitalists major shareholders of your company, which also means they’re now involved in the decision-making process. A lot of startup owners aren’t very comfortable with giving up the control of their business to others but venture capital is one of the best financing models out there.

Angel Investments

Angel investors, like venture capitalists, look for startups with great potential. However, aside from growth and profitability potential, angel investors look for ideas that can benefit society and have a positive impact on the market.

The get rich fast agenda doesn’t really interest them. If your startup has an innovative product or service that will somehow contribute to the greater good, you’ll be able to get the attention of angel investors.

Like with their venture counterparts, you’ll have to convince angel investors that your business idea is viable and that your startup can get to the top with the strategies you have planned out. If you do manage to convince them, they will fund your startup business entirely.

In return, angel investors will ask for up to 25% ROI (Return On Investment) once your business achieves its goal. Angel investments don’t place nearly as much pressure on startup owners as venture capital does but that doesn’t mean you can sit idly by.

You’ll have more business flexibility and you won’t have to worry about someone taking a good share of your company in return for their aid. You will have to pay back what the investors have given you with interest but that’s a loan startup owners are willing to deal with for the chance that their company will reach success.

Crowdfunding

If you’re not fond of startup financing models that involve loans, you can always turn to the crowd. The age of connectivity has brought new ways for business ideas to become reality. Any entrepreneur who has trouble funding their startup but wants to avoid venture capitalists, banks, and other forms of lending, can turn directly to crowdfunding.

Crowdfunding is a reliable method of securing funds for your business by asking the crowd i.e. multiple lenders or individuals, to contribute or donate to your cause in exchange for a small share of your company, a small reward, or at times, nothing at all. Instead of trying to convince a single investor to finance your business endeavor, you’re basically asking the general public.

Crowdfunding platforms, such as Kickstarter, Indiegogo, GoFundMe, and others allow entrepreneurs to launch a crowdfunding campaign, in order to attempt to raise funds to finance their businesses or business ideas.

These platforms don't help businesses grow or develop, they just secure an opportunity for a business owner to try and secure the necessary funds from the crowd. The only catch is to set the capital and the time limit in which funds need to be raised.

The crowd will donate, depending on whether they like the idea or not, as much as they can or are willing. However, before you start a crowdfunding campaign, it's important to pick the platform wisely. Some platforms charge a fee for collected funds, others won't let you keep the cash unless you reach the limit you've set, and so on.

This is a great way to help you launch your startup business or secure the funds to reach the necessary milestone, such as developing a new product, for instance. Many business owners today rely on crowdfunding to help them pave the way for their company’s success.

Government Grants

Traditional lending and outside capital aren't the only reliable means to properly fund your startup business. There's also an option to look for grants. Grants are funds secured by governments and government organizations to help financially stimulate businesses that meet the necessary requirements, and qualifications and are eligible to receive a grant.

For instance, small businesses and startups focused on science, research and development are eligible for a government grant.

In the U.S, the SBA (Small Business Association) in connection with Small Business Technology Transfer (STTR) and Small Business Innovation Research (SBIR) offers grants to businesses in exchange for meeting the federal research and development goals. In Australia, for example, grants are provided to businesses by the Australian Government.

Grants are unlike any other startup financing method. As a matter of fact, business loans need to be repaid in full with interest while grants don't have to be paid back at all, or in some cases repaid only a small portion of the grant.

Furthermore, loans are approved by lenders, while grants are awarded to businesses. Businesses whose purpose aligns with national goals, such as network security or renewable energy, etc. have more chances of being rewarded with a grant.

Moreover, just because a grant doesn't have to be paid back it doesn't mean that the funds can be spent on anything. Instead, the capital has to be allocated accordingly to help grow and develop a business, hire employees, procure equipment and inventory, and so on.

That said, not just governments reward grants. Other sources, such as certain banks, nonprofit organizations, and other companies may also offer grants for businesses.

Closing Words

Financing a startup business, especially on your own, can be quite a challenge. However, there are a lot of solutions that can help you out but it’s important to consider your options beforehand.

The important thing is that you don’t have to be alone when it comes to financing your startup business. Once you find an ideal financing model, you can make sure that your startup business will eventually become as successful as it should be.



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Courtney Rehman

Part of the expertEasy editorial team, Courtney is from South Africa.

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