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New Venture Finance

MIT Stata Center_051118
(MIT Ray and Maria Stata Center, Jenny Fowter)
 

Don't Compare Yourself To Others.
There's No Comparison To The Sun and The Moon.
They Shine When It's Their Time.

 

 

- Overview

Making a list of initial costs is the first step when you need funds to start a business. Cut any unnecessary or excessive expenses to identify the basic requirements of your startup, and get a realistic idea of how much money to request. Bare-bones estimates minimizes the financial risk lenders and investors must take when extending funding.

There are two types of funding you can pursue:

  • Equity, or selling shares in the company in exchange for capital
  • Debt, which involves an advance of money paid back over time


Each method has its perks and drawbacks, but ultimately, keeping control ensures that you’ll profit the most.

 

- Finding Starup Funding

It's tough finding startup capital to open a small business. Consider following financing methods to determine the best option for getting your business up and running. 

Startup funding for small businesses is particularly elusive - as most traditional business loans require one or more years in business - but that doesn’t mean it’s impossible to get your hands on.

 
  • Startup Loans: Loans are the first funding source most entrepreneurs think of when seeking startup funding. If you have a fantastic credit score, a low debt-to-credit ratio and a history of making on-time payments for all your expenses, you might be able to convince a bank to finance your startup. However, keep in mind that it could take weeks or months to find out if you’re approved, and for how much. Online fintech lenders offer startup loans with streamlined application processes. This minimizes the work on your part, as you won’t have to perfect your business plan or sweat over projecting your profits before applying.
  • Business lines of credit: When the funds from a business loan are gone, you have to apply for a new one to get more funding. That’s not so with a line of credit. Startups with big plans for the future can benefit from the way this type of financing “revolves.” Your available credit is replenished each time you pay back what you draw. You only pay interest when there’s an outstanding balance. For this reason, a credit line is often less of a financial burden than a loan.
  • SBA microloans: Government-backed loans from the Small Business Administration (SBA) are available through intermediary lenders in amounts up to $50,000. SBA loans tend to pose a lower risk to lenders than traditional funding.
  • Equipment financing: If you need startup funding to purchase equipment, then consider equipment financing a top option for funding your venture. Equipment financing for startup businesses is particularly apt for your situation because of its self-secured nature. Because the equipment you purchase will act as collateral for the very funding you use to purchase it, equipment loans will be easier to qualify for, even if you don’t have much time in business.
  • Invoice financing: Through invoice financing, you’ll be able to access an advance for a portion of your business’s outstanding invoice value. This form of startup funding will rely on your business already having at least one invoiced customer, but many invoice financing companies will require you to have very little time in business to be eligible for funding. 
  • Venture capital: Startups in industries with significant growth potential may be candidates for venture capital. To get the attention of these investors, your business must stand out from the numerous others requesting funding. Find venture capitalists who share and believe in your vision, and put together a stellar sales pitch to wow those looking for something distinctive to support in 2020. As mentioned above, be sure to consider other options (which allow you to keep control of your profits and company) before selling equity.
  • Angel investors: Other entrepreneurs who have built successful businesses are sometimes willing to invest a significant amount of money to help others get their startups off the ground. In exchange for a share in your company, you get not only funding, but also expert guidance. Many angel investors have a history of helping startups grow. These angel investors expect returns on the funding they put into your startup, so you’ll need to focus your energy on making your business profitable. However, keep in mind that taking on angel investors means forfeiting a portion of your profits. This isn’t something you can easily redeem, so be sure to thoroughly consider this. 
  • Personal savings: Believe it or not, over 90% of startups get going without the aid of outside funding. Intrepid entrepreneurs figure out how to raise funds for a business startup and avoid the hassle of dealing with third parties. Consider selling off possessions you don’t really need, or making strategic investments to boost your available capital. You can also start your business as a small-scale side hustle while working your current job. Over time, you can grow it slowly until it’s big enough to support you.
  • Crowdfunding: Thanks to platforms like Kickstarter and Indiegogo, it’s no longer awkward to ask strangers for money to start your business. In fact, it’s actually quite common. Because crowdfunding through online platforms is becoming more popular, you need a compelling story to convey the “why” of your business to potential backers. Rewards-based crowdfunding sweetens the deal with perks for everyone who supports your efforts. Equity crowdfunding is also an option if you don’t mind sharing stakes in your business. Both require promotional work on your part to get the word out and, and compel potential investors to take the plunge.
  • Friends and Family: If friends and family are on your side, they might be willing to help make it happen. You probably won’t get a ton of startup cash this way, but every little bit helps. Just make sure you lay out the conditions of each offer in writing. Is it a gift, or are you expected to pay back the amount within a given period of time? Even when you know someone well, it’s best to establish repayment schedules as you would for a regular loan to avoid any misunderstandings.

 

 

 

[More to come ...]


 

 

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