People like to say that we are living in a golden age of startups and they are not too far off the mark. Networking has never been easier, online resources have made marketing affordable and niche markets are finally getting a necessary voice. Still, in spite of all these favorable circumstances, one problem persists – founding business requires money, and finding money is just as hard as ever.
Let us take a look then at some of the most popular financing models so you can choose the approach that works best for your future company.
This method can be best described as borrowing money from friends and family. The reason why this method is so popular amongst inexperienced entrepreneurs is the loose terms of the agreement. You don’t need to do credit checks and you don’t need to repay crippling interest rates. However, there are some drawbacks. First, this model is also horribly ill-fitted for large-scale projects. And then, there is the fact that not all social circles are able to produce necessary startup capital.
The rise of kickstarter platforms in the early 2010s definitely changed the way how we look at financing. Today, you are able to bypass all the traditional institutions and parties and work directly with your future users on bringing projects to life. The risk is very low and the community makes it all the more interesting. On the other hand, the success of crowdfunding campaigns is far from guaranteed, they work only for certain types of projects, and, due to their crowd-driven nature, they lack flexibility.
Traditional business loans
Traditional business loans usually imply borrowing money from a financial institution like banks and government funds. Since all these organizations are well-established and you are making an agreement under very precise terms, this financing model is regarded as very safe and transparent. The main problem you will face is the fact that banks tend to be very picky regarding the parties they choose to work with and the interest rates become far less favorable once higher risk is involved.
Alternative business loans
Alternative business loans are designed to answer very specific needs. For instance, if you are experiencing cash-flow problems, you can resort to some easy business finance service that will give you cash advancement on your outstanding invoices so you don’t need to wait to receive the money from your client. The main problem with these microloans is that, although it is great for putting out smaller fires, you are rarely allowed to raise enough money to sort through more serious issues.
Venture capitalist is a term for a person or an organization that will provide you with the necessary capital in exchange for a proportionate part of ownership over the startup. Although it sounds very limiting, this financing model actually makes an excellent choice for companies that don’t own physical collaterals that can serve as a lien to loan. Also, the involvement of another party takes some pressure off the owner’s shoulder. The price you pay for this relief is a noticeable loss of independence.
On paper, angel investors are very similar to venture capitalists. However, unlike VCs that take very calculated risks, angel investors are much more flexible, open to risks, take involvement in the startup development in its earlier stages, and largely operate on the basis of personal preference. Since they are so personally involved, they often play the role of a mentor and provide entrepreneurs with coaching. Unfortunately, angel investors are as hard to find as you can imagine.
We hope this article will give you some general idea of the strengths and weaknesses of the most prevalent financing methods your business will most likely use to secure startup capital. See which one of them works for your particular company and if there is any way to combine several approaches to increase the chance of success. The time for starting a company has never been better. Don’t miss these favorable circumstances because you are unable to raise enough money.