Financing Your Startup
Why does it always seem that when you really need funds, nobody is willing to give them to you; but when you are successfully flowing cash, all forms of lenders are peppering your inbox?
Mostly this is down to risk. Lenders are driven by risk, they are not equity investors looking for the next big success, who will have a portfolio with a few winners, some steady growth, and some failures; they are driven by stability and a certain return of funds.
Think of it from their point of view, the margin they are making between the rates they borrow and lend at are so small, that they can ill-afford any losses – one loan that goes bad, would probably require 100 other loans for a year to make up for it. Like the hare and the tortoise, slow and steady wins the day for banks and other lenders.
So, how do you get the necessary funds to start up?
This is like asking, “how long is a piece of string?”.
It will depend upon so many factors: what are you selling, what assets do you have, how long before you are cash positive, and so on and so forth.
The answer is really: where can you get your hands on the necessary funds, how much do you need, and what are you prepared to give in return?
Hit Your Network
Perhaps you have some funds already saved up; if not, ‘friends and family’ can be a good option. These are people who trust you, and who probably won’t take your home if things don’t go as planned, or will be more tolerant on a repayment schedule.
Explain to them what you need the money for, how it will support your business, and make sure to tell them in advance what’s in it for them – interest payments, a share of the profits, or the eternal gratefulness of their daughter or nephew!
One final word: repay your debts, even if they are not chasing you for their funds, people remember and it will affect you if you need to go back in the future, and will definitely affect your personal relationship.
It’s easy to borrow but harder to repay; when it comes to time to repay and you’re feeling stressed, don’t forget how grateful you were when they provided the funds.
Free Money Is Good Money
Are there any grants available for your business, either government, industry, or other organisations? This is the best funding, because, as the heading says, IT’S FREE!!
However, you may have heard the phrase “there’s no such thing as a free lunch” – there will be strings attached, and criteria you need to satisfy to qualify; spend time on the application, and if possible have a face-to-face meeting with the organisation to explain your business, and ask for their advice.
Grants may be for social entrepreneurship, minorities, industries, geographic locations, starting a business, or many other reasons – put in the effort to research, and ask for help.
Or perhaps a prize? See if you can enter any industry competitions, particularly aspiring or ‘less-represented’ entrepreneurs. It’s not only cash into your business, it’s a good affirmation for you or your product, and can be used as marketing or PR for your company.
Just don’t buy awards (many companies now are selling them for status) – that impresses nobody, and adds to your funding requirements.
Lend Me A Hand
Borrowing is a good way to finance future cashflows, but you will have to repay the capital and interest.
Each lender will have their own terms, you can pay interest each month or a balloon payment at the end, there is convertible debt (can convert into equity), and there may be monthly payments or a single repayment.
Check the terms! Especially, the rate and term (length of the loan), covenants (what you have to maintain, e.g interest cover or profitability), and any personal guarantees – you are guaranteeing your personal assets, e.g house, car, etc against the loan, and if not repaid these could be taken from you.
Lenders will be interested in what collateral you or the company are providing, so that they can minimise their risk.
Asset Based Loans are becoming more common, as is factoring invoices; also crowdsourcing can be used, either a traditional lending platform or project funding, usually taking pledges in return for something, commonly a discount on the future product. More on all of this in a later blog.
Equity! This is the most expensive form of financing, if your company is successful – the investor will own a portion of your company, and therefore may get a return far more than the money you received from them – you are repaying them, for their faith in you and your uncertain business.
Sometimes the hare beats the tortoise, and when he does, he wins big! The higher the risk, the higher the reward they expect. Investors will be considering the risk of the investment, what they can potentially make, their trust in you and your team, your product or service, how it fits with their skillset or portfolio, and many other criteria.
Think of the Dragons’ Den or Shark Tank TV programmes – how much do you need and what percentage of your company are you willing to give away? And remember, for an investor, people are usually the #1 consideration; the right team will find a way to make the business successful, even if the initial idea doesn’t come to fruition.
Examples of investors would be private investors, angel financing, private equity funds, or banks’ investment arms… or potentially friends and family, completing our circle of funding.
Good luck with your new venture, and we’d love to hear about your successes or challenges in funding your business.
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