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How to Finance Your Startup in 8 Effective Ways

-- By Writer and Entrepreneur, Rajeet Singh

 

So you have your business idea, your business plan, (or business model canvas if you’re an early-stage startup (check out how to make your business model canvas here), and validated its need in the market, now you need the means to get it off the ground.

 

Ultimately the question of how to finance your startup depends on your circumstances and what kind of business you’re starting.

 

There are quite a few different roads available, some can be simultaneously walked down whilst others may give you all the capital you require plus a bit extra. Let’s take a look at some of these avenues.

1. Bootstrapping

 

Financing Your Startup - Bootstrapping

From the old saying ‘pull up your bootstraps’, bootstrapping means to finance your business yourself, without any outside help.

 

This options viability depends on your personal finances and the type of venture you’re starting. If you have a substantial amount saved and your business doesn’t call for a huge amount of start-up capital and initial running cost, it’s entirely possible to commence using just your own funds.

 

Bootstrapping is an effective financing method if you can afford it - you won’t owe anyone anything and you’ll answer only to yourself. It is important, however, to choose wisely and take into account possible worst case scenarios.

 

What happens if the business fails, can you afford to lose that much capital? How long can you afford to finance the business yourself without any sales coming in?

 

As the old saying goes, ‘don’t put all of your eggs in one basket’. If you’re going to bootstrap, be sure to use a sensible portion of your finances, not all of them, and always take into account living and personal costs.


2. Friends and Family

 

Seeking funds from friends and family is probably one of the first ports of call and can be an effective form of financing.

 

Financing Your Startup - Friends and Family

 

Friends and family know you personally, so they’re more likely to lend to you and far less likely to ask for interest on return, plus they’ll be more flexible on repayment timing. However, this method can be somewhat treacherous.

 

Often, family relations and good friends don’t make the best business connections. If the business doesn’t go so well, will you be able to pay them back? Are you willing to potentially sour a relationship for funding? If you’re asked for a slice of your business in exchange, are you willing to let that person have a say in your business, or pay out the same percentage in equity?


3. Bank Loans

 

Financing Your Startup - Bank Loans

 

It’s only logical to seek a bank loan when looking for finance. There are government schemes which help provide bank loans to start-up enterprises, depending on which country you live in – a simple web search will provide the information needed.

 

Bank loans, of course, come with interest added onto the repayments. It’s worth shopping around for the best rates and perks, as some come with added extra’s like accounting software packages and web building tools.

 

You’ll need a clear business plan and an idea of where your revenue will come from before a bank will even consider you, and many will require assets to guarantee the loan.

 


4. Angel Investors  

 

Financing Your Startup - Angel Investors

 

These are private individuals who have often succeeded in business themselves and are now looking to invest their own money.

 

An angel investor will want a share of equity in return for their investment and will often offer business coaching and mentoring, in part to impart their wisdom, in part to speed up return on investment.

 

It’s difficult to come up with hard rules on this type of financing – each investor will have their own preference of industry and their own business coaching style.

 

If you’re able to find one who takes a shine to your idea or you as a person, then not only could you get funding, but you’ll also likely gain a valuable asset to the business.

 


5. Venture Capitalists

 

Finance Your Startup - Venture Capitalists

 

VC’s are in business to make large amounts of money in relatively short time frames, so they go for big projects (we’re talking millions). It’s unlikely they’ll be interested in early-days and pre-revenue start-ups.

 

If you’ve got big plans and a hugely scalable idea though, it’s worth trying to meet a few VC’s. If you get one, their expertise, market contacts and sheer amount of cash could skyrocket your venture to dizzying heights – just make sure you have a viable exit strategy before you get into bed with a VC.

 

6. Credit Cards

 

Financing Your Startup - Credit Cards

 

Perhaps not the best method, but financing on credit cards can work if you’re sure that you’ll be making profit soon enough to cover the monthly repayments.

 

It’s best to shop around for the lowest rates, but be careful when it comes to spending on plastic, if you don’t strictly keep up with repayments the monthly charges can add up very quickly.

 

If this method must be used, it’s best in the beginning when you require small amounts of money for short periods, it’s by no means a viable long term option.

 


7. Grants

 

Financing Your Startup - Grants

 

Governments provide grants for a whole range of business ventures. Science, the arts and engineering are just some industries where grants are available.

 

It’s definitely worth searching online for what grants may be available to you. Application processes are usually quite long and you’ll have to jump through a few hoops, but securing a government grant can give your business serious credibility in the market place. A quick web search for ‘business grants’ will give you an idea of what could be available to you.

 


8. Crowdfunding

 

Perhaps the newest and most fashionable form of financing. Crowdfunding is where large amounts of people each give you small amounts of money which add up to (hopefully) large amounts of finance. Read our article on effective crowdfunding tips here.

 

Financing Your Startup - Crowdfunding

 

In return you’ll have to give them something, of course, depending on the amount a person gives. Small contributions could get them a mention on your site or your marketing, for larger pledges you could give out freebies, first chances to sample your product, or even shares and equity.

 

Crowdfunding success lies largely in how well you can connect to the general masses. If your business strikes a chord with people, for example something environmentally friendly or altruistic, or if you’re looking to provide real technological advancement for example, crowdfunding could do quite well for you.

 

The second important thing about reaching people through this method is delivery. People must be able to very obviously see your unique value proposition or be able to relate to you in some way. You can start a crowdfunding campaign here or through sites like crowdcube.com and kickstarter.com

 

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