Starting a business has never been easy; 9 out of 10 startups fail, and, with the intense competition out there, it’s becoming increasingly challenging for new companies to set themselves apart from the competition.
While there are various reasons startups fail, 29 percent do so because they run out of cash. Lack of adequate capital makes it incredibly challenging for a business to run its operations and grow to stay in the game.
The process of securing funding is complicated, making it impossible for new businesses to sustain themselves. However, many entrepreneurs make the mistake of restricting themselves to trying to secure financing from a limited number of sources when, in fact, so many others exist.
So, as a new business owner, if you’re wondering how to secure funding for your startup, here are the different sources you can explore.
Equipment plays a massive role in a business’s success and growth; the lack thereof could hinder a new business’s ability to compete. Equipment financing involves using a lease or loan to borrow or purchase assets, whether that’s an appliance for a restaurant or a transport vehicle.
It’s an excellent option for businesses to spread the cost of an asset over a period. Additionally, it’s ideal for startups that operate in high-tech industries where equipment becomes obsolete very quickly. In this case, it’s not financially feasible to keep selling old equipment and purchasing new ones, making equipment financing a viable option.
Angels are one of the most essential sources of early-stage capital and are often the first funding source a startup gains access to. Angels are described as individuals who invest in early-stage companies in exchange for an equity ownership interest.
Some of the biggest companies today – Uber, Facebook, and WhatsApp – got their start with angel investors’ help. In the U.S., 70 percent of seed round investments are valued at less than $250k.
An angel investor typically looks at the founder’s integrity, passion, and commitment. Your business idea should also be realistic and have the potential to grow in the market. These aspects need to be supported by a concrete business plan and interesting intellectual property or technology.
Popular websites such as Kickstarter and Indiegogo were formed based on crowdfunding. This funding source is the practice of raising finance through several funders, often through the websites, as mentioned earlier.
Crowdfunding simultaneously helps entrepreneurs secure funding and promote their products and services. The key to a successful crowdfunding campaign is to provide incentives to funders in the form of rewards, discounts, or a share in your company. Additionally, you also need to have an engaging story about your brand, product, or service to convince people that investing in your business is an excellent idea.
Many startups seeking funding turn towards venture capital (VC) firms. These venture capitalists provide startups with much-needed funding, strategic guidance, network connections, and potential customers.
In 2018 alone, $254 billion was invested globally into approximately 18,000 startups, a 46 percent increase from the previous year. 52 percent of this funding occurred in the United States.
Obtaining funding from venture capital isn’t easy since these firms typically want to invest in big opportunities that demonstrate high growth potential and have shown this through some traction.
It’s important to note that venture capitalists are heavily involved in startups and can offer direction to a new entrepreneur. At the same time, entrepreneurs may lose some control of their business to these VCs.
While recent decades have seen the emergence of new funding sources for startups, traditional sources remain popular. One of the most common ways to obtain financing for your startup is through bank loans.
A popular option for small and medium-sized businesses, bank loans often offer customized repayment and personalized service. There are plenty of options to choose from, and you’re likely to find a bank that can meet yours and your business’s needs.
To successfully get a bank loan, it’s essential to have excellent credit and a good track record. Your business idea also needs to be backed by a concrete business plan, and you’ll need to give a personal guarantee to secure the funding. You should keep the interest rate into account before deciding and determine whether you’ll have to give collateral.
Lastly, you can always fund your business idea yourself if you have the resources. This is the most common way people raise financing for their business, and, this way, you’re telling investors how serious you are about your business idea. It also demonstrates your ability to take risks since you’re putting everything at stake.
If you can invest your assets and savings into your business, it can lead to specific advantages. You can retain control of your business and won’t have to give it up during the premium stages, which is not possible in other funding sources such as VCs and angel investors.
There are many sources you can explore to raise funding for your startup. It’s vital to explore each one of these to determine which is the best way forward for you and your business. Additionally, it’s also essential to back any pitches with a solid business plan, so investors also have faith in your business the way you do.
Lastly, securing funding is a long and tedious process that can result in initial rejections. However, it’s important not to get disheartened. Remember, if you have a robust business idea and you’re able to convince people to believe in it too, you’ll be able to raise capital in no time!
Which source of funding do you think is best for a startup? Are there any other sources one should explore? Let us know in the comments below!
John Pearson is a serial entrepreneur and writer who is passionate about helping small businesses launch and grow. His work has been featured in Huffington Post, Entrepreneur, and Forbes.