When it comes to starting a business, one of the most important questions you need to answer is how you will find the money to fund it. There isn't one method that suits all startups, there are in fact a lot of different ways you could find the finances you need to kickstart your business. How you choose to fund your business can have a big impact on the structure of your business and the way of operating, so it's important to know about the different ways of funding a business and choose the one that suits you best. In this article, we will go through 5 of the most common and effective ways to fund your startup.
Bootstrapping, or also called self-funding, is the process of kickstarting a business with personal saved up funds or funding from close people like friends and family. More than 90% of startups choose this method because the current costs to start a business are at an all time low and because there are no bureaucratic obstacles. Some of the disadvantages of this way of funding are that it takes more time to save up enough money and this method usually works well with small scale businesses and not so much with large scale companies. However, there are a lot of advantages to taking this approach. Some of them are the fact that it's easier to get your friends or family to loan you money because they already believe in your dream, while convincing investors that your idea is valuable might be a hard task to accomplish. Another advantage is that you don't have to give up any control, the business is all yours and you get to retain full control of it.
This method essentially boils down to pitching an idea to a community of people who are willing to support your cause in exchange for a small gift or the chance to be the first to get their hands on your products. In order to get funded this way, you need a strong idea that will stand out from your competitors and will get picked to be funded. When the crowd funders decide to support your idea, they will donate the funds you need to get started. Crowdfunding creates public interest and helps with marketing, especially if you're good at engaging the audience on social media. It would be even better if you already have a big following on social media platforms and your followers know, like and trust you, therefore are willing to donate the needed funds to get your startup going. This way of funding is good because the risk is low but you have to keep in mind that you're going to need a very compelling idea to pique the interest of the crowd funders.
Angel investors are individuals with a high net-worth who are interested in supporting startups and make huge investments in them. They are even willing to give millions of dollars to startups that meet their qualifications, in exchange for equity ownership of the business. The ownership is usually 1050% of the total equity, but the terms can be negotiated, depending on the particular investors. The angel investors are experienced business people and in addition to giving you the required funds, they will also guide you and assist you along the way. It's also important to note that these investors are mostly oriented towards tech-based ideas and they have helped to start up a lot of successful companies such as Google, Yahoo and Alibaba.
Venture capital is offered in exchange of an ownership share of the company and an active role in the management of it. The people who offer venture capital are professional investors who invest money in startups that are qualified and have a scalable and proven business model. These types of investors focus on high-growth companies, they look for big opportunities where a large profit can be expected. In addition to this, they also look to recover their profit in a timeframe of 3 to 5 years, so if your product is taking longer than that to appear on the market, this might not be the best choice for you. However, if you have a well developed business plan that won't take too long to execute, and especially if you're building a tech company, getting funding from venture capitalists might be the best route to take.
Banks can be pretty careful when it comes to giving money to a small business and it can be quite difficult to qualify. However, there are steps you can take to increase the chances of getting a business loan from a bank. Having a detailed business plan, a detailed sheet and financial projections at least for the next 5 years will help you have a good estimation of how big the loan should be and banks are more likely to take you into consideration when they see that you know what you're doing and you're properly organized and prepared. The best way to go about this is to explore different offers from a variety of banks so that you make sure you get a loan with the best possible terms.
As we've already established, capital plays a big role in every business, it's the essential ingredient in the formula of success. Each of these funding options requires time, effort and commitment from your side, there is no magical solution and no easy money. Every funding decision is a big trade-off between ownership and control, as well as between short-term and long-term costs and paybacks. However, if you explore your options carefully and have a good plan in motion, you will be able to find the funding option that will work best for your startup.
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