Entrepreneurship demands dedication, sacrifice and most of all, a good business strategy. Part of the business strategy is sourcing funds for your start-up business. The source of financing for your business directly impacts the future of your startup. In fact, 93% of most start-ups end up failing within the first year of operations due to insufficient financing and wrong choice of funding choice. Compass Accounting advises that you consider diversifying the sources of financing for your start-up in order to increase the chances of success.
The choice of financing depends on a number of factors including the size of the start-up and the nature of the business. You must also have realistic expectations as those funding your business need the reassurance of good return on investment.
The very first source of funding for your start-up should be from you. Potential investors need to see that you are just as dedicated to the start-up as you want them to be. When planning to start a business, you need to open a separate account and start setting aside some cash for your dream business. If your savings are insufficient, you could opt for love money by asking for financial help from friends and family. But remember, they too, need to be sold into the idea. For a better chance of funding, you should have a solid business plan that features realistic projections. If you’re lucky, your family and friends could give you interest-free money on the condition that you payback. Some may not require equity in your business. However, you need to be prepared for instances where your family members or friends want some equity in your business. Always consult a financial advisor on how selling your business equity works. Love money can also come in handy when you don’t meet the requirements needed by financial institutions for lending purposes.
Another viable source of funding is listing your privately-owned assets as collateral. Banks and other financial institutions need collateral before they can give you funds. Collateral acts as security so that in case a borrower defaults the loan; the financial institution can recruit the collateral and raise their money. Providing the bank with collateral doubles your chance of acquiring the funds. Banks offer several types of financing for start-up entrepreneurs. You could apply for a working capital loan, which finances the daily operations of your start-up. This is a short-term loan covers the expenses of revenue generation up to an agreed amount. You could also apply for a commercial mortgage, which finances the acquisition of the business premises.
Angel investment is another source of business funding for start-ups. Angels are wealthy individuals with a keen interest in investing in small privately-owned businesses. They usually have a strong network of retired business executives willing to invest in start-ups. In return, angels require a stake in the start-up of up to 30% equity. Some of the biggest companies in the world such as Google and Alibaba grew from angel investing. It is a viable choice as angels net your start-up with mentorship and useful industrial networks.
Government agencies can also fund your start-up business through grants and subsidies. Getting government grants and subsidies however require you to cover a certain percentage of the total amount. It is a tough choice of funding due to high competition from other start-up owners. Your start-up will be vetted based on its significance, innovation, need for the grant as well as the overall business approach. To better your chances of acquiring a government grant, have a well-documented project description with a detailed work plan and their full costs. Additionally, prepare details of the background and experience of the key managers involved. You may access different government grant programs from the Canada Business Network.
For technology-driven start-ups, you can explore venture capital funding. Venture capitalists invest in high-risk projects with the potential for high returns. They also offer mentorship and professional expertise to increase the chances of growth of the start-up. In return, venture capitalists expect start-up entrepreneurs to give up a stake of their company in equity form. They do this to secure the high-figure financing they provide as well as their interest. Venture capitalism is a bit risky as capitalists place a priority on recovering their investment over the company’s expansion.
Acquiring funds for a start-up is a legal matter that may leave you at risk of losing your business in case you’re unable to generate income within the specified time frame. Before sealing any deal, ensure you consult a financial expert and a lawyer.