Starting out

Understanding financing options for start-ups 

When you’re starting a business, you need to find a way to foot a range of expenses, including product development, marketing, expansion, and day-to-day operations. 

Start-ups are typically forced to operate on the leaner end of the spectrum – at least to begin with – which is why further funding is often a must. The question is: Where should the money come from? Here are three common financing avenues start-ups can dip into.

Business loans

Many start-ups decide to apply for business loans in the early stages of development. It’s a reasonably flexible way to inject money into your business and can be used for any purpose, including for hiring or buying equipment, marketing, research, and general overheads.

As with any funding arrangement, you’ll be expected to pay the loan back – with interest – so doing your due diligence and reading the fine print is worthwhile.

It’s a competitive market for lenders, which means businesses have several options to choose from. In addition to your traditional banks, there’s also the option of going with a private lender (such as FinTech) if its offering better suits your needs.

But regardless of who you go with, you should consider your current financial position before you apply for a business loan. You should also get expert advice from a professional financial advisor who may be able to help your business succeed.

Business grants

There are also various business grants that may suit your start-up. They often come with a lengthy application process and can be very competitive, however, if you’re successful it can be a gamechanger.

The Entrepreneurs’ Programme and Export Market Development Grant (EMDG) are just two of many examples. Additionally, the government also offers a range of incentives for businesses conducting operations in certain fields, such as the Research and Development tax incentive, including low-interest loans, subsidies, tax benefits and allowances.

 

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Crowdfunding

Crowdfunding platforms such as Kickstarter have also become a viable financing method for businesses. Because crowdfunding is based on peer-to-peer donations, it’s not only an opportunity to raise money for your business, but can also present a great marketing opportunity to help build a loyal fanbase and brand recognition.

Setting up a crowdfunding campaign is as easy as creating a profile, describing your business, outlining the amount of money you would like to raise and what you would like to use it for. Users who are interested in your start-up can then donate and, once you’ve hit the target, the funds are yours.

It’s worth noting, too, that you may miss out should you not meet your campaign goal in time.

Crowdfunding works best when you do your due diligence, set realistic expectations, monitor your campaign, and deliver on what you promised. It could be a great option to get your start-up off the ground with a short-term cash injection.

Angel investors and venture capital

If none of the above options sound right for you, you could also look at angel investors or venture capitalists. Generally, they serve a similar purpose: to give budding entrepreneurs the financial means to take their business to the next level. Usually in exchange for some kind of equity in the business.

An angel investor can be a wealthy individual (or group) who has achieved a degree of success and wants to reinvest in a sector they’re interested in. More often than not, they’re also willing to put their own skin in the game and provide mentoring opportunities in addition to funding.

Venture capitalists, on the other hand, work on behalf of venture capital firms that invest other people’s money in emerging businesses.

Here are some key differences to remember:

  • The start date of the investment often varies. Angel investors generally like to get in on the ground floor and provide advice when the business needs it most. Venture capitalists, on the other hand, generally prefer to invest at a later stage to hedge their risk.
  • Angel investors tend to invest less (since drawing from their own funds) while venture capitalists need to commit to a substantial investment to maximise returns.
  • Decision time can vary as well. As angel investors are spending out of pocket, they can make things happen quickly. Conversely, venture capitalists have an obligation to perform due diligence on behalf of their investors.

The key thing when you do secure that dream elevator pitch is to be prepared. Keep in mind, investors want you to succeed, but they also sieve through dozens of pitches daily as part of their role.

Start-up financing isn’t the easiest of feats. Understanding your options and using the tools at your disposal is the best way to find a solution that makes the most sense for your business, so your venture can move forward with confidence.

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