Though promising startups are founded on role business models and innovative products, a steady cash flow is also necessary to turn their dreams into reality, especially when the companies are in their fledgling stages.
To gain a foothold in such a competitive market, startup funding is the lifeline for such entrepreneurs looking to improve technology and to recruit the right people for launching the perfect marketing strategy to run their business successfully.
Sadly, more often than not, sourcing money for a new venture is extremely difficult, and in some or most cases a business loan is impossible without putting up personal securities for that loan (and as such, unsecured business loans for startups is rare).
Funding Options for your company
The best finance option for your company depends on certain things. These could be the number of funds you need, the stage your business is in, and whether you are interested in selling a share of your company in return for money.
Many entrepreneurs either use their own money to finance their startups or take a loan from friends or families to plow it into their business. That being said, there are a range of other funding options also available, but business owners should understand that raising money for new business is not so easy and also time-consuming.
Those individuals who look to invest in startups in exchange for equity ownership are typically known as Angel investors. Success stories of many such companies making it big have spurred angel investors to accelerate funding in the hope of getting a sizable return.
To find a good angel investor, look for one who understands your business well as not only will they be more than willing to invest in your company but you will also be able to gain an insight into the marketing strategies of similar companies from them.
Crowdfunding is another method for raising funds for business or product promotion through multiple sources available on crowdfunding websites. All that is required is to put up a compelling company profile and the money you are trying to borrow on the crowdfunding site.
Interested investors will then donate to your campaign in return for offers and discounts on the services they are promoting. The key to successful crowdfunding is that the borrower is not burdened with any interest liability, giving away equity or parting with a share in the business.
Though not easy to convince, venture capital firms are great not only for capital but an introduction for potential customers and much more. They typically are on the lookout for startups with high growth potential, meaningful revenues and which have achieved some traction.
VCs usually get inundated with emails providing investment opportunities, so the best way to garner attention is by a strong Investor pitch through a trusted client, colleague, or another professional acquaintance.
Note, however, that the venture process is extremely time-consuming and includes a number of meetings, presentations, and final negotiations, which can take several weeks or even months to draft and sign.
For the limited initial finance required to run a startup, self-funding involves lesser complexities and documentation. You can delve into your own pocket, take loans in exchange for common stock or seek friends and family for short-term help at a cheaper rate.
This should work well, but what happens normally since these arrangements are based on mutual trust rather than signed agreements they tend to damage personal relationships. Moreover, the lender may demand the money back when you need it the most or worse still may ask for a chunk of the business share which you may find inappropriate.
Business loans can also be availed through traditional banks and other financial institutions. These facilities, though, mostly reject the loan applications as sole trader business is considered to be high risk.
To compensate for the risk, these facilities often charge much higher rates of interest and take many weeks to decide on accepting or rejecting an application.
Small Business or Sole trader loans:
Sole trader loans (which are a form of business loan) or small business loan (for any purpose) can either be acquired against a business or personal assets or as an unsecured loan without any collateral. However, borrowing money can be tough as lenders put sole traders in the high-risk category.
Unsecured business loans provide a certain amount of money upfront which needs to be paid back fully in monthly installments without having to give any asset for security. They normally care high interest as per definition in comparison to secured business loans.
Choosing the right funding source for your startup business
For any new business, it is imperative that at least some part of the finance needed will have to come from the entrepreneur’s pocket. Unless personal investment is not made, it becomes difficult to attract banks or other investors to put money in your startup.
A major decision for any business, new or old, is to decide the best source for the procurement of funds, keeping in mind the debt and equity ratio. This proportion will ultimately determine the capital structure for your business that will optimize the value of your firm. Some of the factors to be taken into consideration are:
- COST OF FINANCE: Any financial source carries a price tag, known as the cost of capital. In this case, it is seen that debt financing turns out to be the cheapest since the charges are tax-deductible expenses whereas dividend is not.
- RISK CONTROL: Every business is exposed to potential risks, which should be factored in while taking a loan. For example, if debt repayment is not made on the due date, there is a risk of legal action and even bankruptcy.
- FLEXIBILITY: Considering the dynamic business environment in which most businesses are being run today, a firm should be flexible enough to absorb any sudden shocks in the cash flow stream.
Funding frenzy is firing up new-age businesses
Despite the hit the global economy has taken amid the severe pandemic, risk investors have continued to pump more and more funds in new-age emerging businesses.
Increased global liquidity, a spate of initial public offerings (IPO) by the US tech companies, and a speedup in digital adoption have further accelerated the pace of funding making the venture capital world bullish as never before.
As more businesses signed up across the world for digital services, it significantly increased the company's user base. This made it extremely easy for startup businesses to acquire investor banking as a wider pool of capital became available.
Offers of investment pour in even before a product is launched as deal sizes reach record heights and close in quick time. In short, startups these days can raise more capital than planned as many founders today are second-time entrepreneurs who have gone through all this before.
When a company comes out of a crisis unscathed, the startup is viewed favorably and investors feel that it can weather the storm in the future as well. Crunchbase data shows that global venture investments reached $125 billion, an increase of 50% in Q1 of 2021 as compared to last quarter and a 94% overall increase over the whole of 2020.
Demand and supply of capital decide the size of the deal at any given time. Since last year, the supply of funds has been cheap, especially in the US market, with government support and zero interest rates growth of technology companies. Unsecured business loans may prove near impossible when interest rates grow in the years to come.