Launching a business is super exciting—but it’s also full of challenges.
One of the biggest challenges all entrepreneurs face is getting their startup off the ground in the first place. Unless you’re able to finance your startup, your business simply won’t have legs.
Understanding your finances and having a proper financial plan in place before you make a start is key to building a solid foundation that allows your startup to flourish.
In this article, we’ll be taking a look at everything you need to know about financing a startup, from how much money you might need, to what financing option is the right one for you.
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Determine How Much Funding You Need
When you’re running a startup, it’s really important that you answer the big questions, such as how much funding you will need. Or you can create an invoice to get funds.
Naturally, each business will have its own individual financial needs, but we recommend you have at least 6 months’ worth of costs in your pocket before you seek out funding for your startup. And having a solid plan in place will show that you’re prepared to boost your business’s growth.
It’s also a smart idea to determine what types of costs you’ll need. These will include both one-time and ongoing costs, as well as essential and optional costs, and fixed and variable costs (such as rent).
Other expenses to consider include office furniture, basic supplies, technology, insurance and permit fees.
Can You Self-Finance Your Startup?
If so, this is an excellent way of financing your startup because it means you’re in total charge of your business and get to make the key decisions.
It also means you won’t have to repay any loans.
Many entrepreneurs prefer to self-finance their startup for these reasons, but naturally it’s only really possible if you a) understand your costs and b) have enough money to cover your costs. If you haven’t, self-finance can really slow down your business’s growth.
If you can’t self-finance your business, don’t worry—there are still lots of options that we’ll continue exploring below.
Try Revenue-Based Finance
Revenue-based finance is a funding method that swerves the traditional debt and equity-based methods, and instead puts capital in the hands of startups who will then give a percentage of their revenue to investors.
It works like this: A startup is given an advance by an investor who has agreed on a profit share percentage (maybe 5% per month).
And when a startup has a high revenue month, the repayment term is slashed.
More and more startups are indeed turning to revenue-based finance to help them get started, especially those who find it hard to secure funding from banks.
Pitch to Venture Capitalists
A venture capitalist has what most startup needs—capital.
More to the point, they have cash that they’re ready to invest in startups.
Venture capitalists are usually part of a large investment firm that seeks a stake in a startup firm’s equity in exchange for funding.
But while you can approach venture capitalists at any time, you will first of all need to do your homework. Here are some tips:
- Research the group’s background. Who are they and what are their priorities? What kind of companies do they usually invest in and what equity do they ask for?
- Understand your finances. Get your financial house in order before you start pitching so that you can easily field questions that reassure the investors that you know exactly what you’re doing. What’s your working capital and cash flow?
- Know your market. It’s not enough that you’ve got a really cool product. When pitching to venture capitalists, you need to clearly articulate how your product benefits your customers. Remember, 42% of startups fail because people don’t want or need their products.
Consider Taking Out a Bank Loan
Lots of entrepreneurs prefer to go down the fairly conventional route of applying for a bank loan to finance their startup. But while it’s been the conventional route for a number of years, it’s not always the easiest route.
That said, applying for a bank loan is open to anyone launching a business, but it’s essential that your finances are in order before you apply, and that you understand your credit history.
You should always be transparent when applying for a loan, too, explaining exactly why you want it and how you will use it.
Do You Qualify for Financial Support?
Savvy entrepreneurs should always be looking at numerous ways they can finance their startup—and this includes checking to see if you’re eligible for financial support.
This might come in the form of a grant or local community scheme that’s designed especially for new businesses.
Before you start your business, check your central and local governments, as well as business support organizations to see if you qualify for financial help.
There are lots of ways you can finance your startup, and none of them are technically wrong. What’s most important is that you thoroughly research each option before a) deciding that it’s the right one for you and b) forging ahead. This is especially important if you’ll be pitching your business idea to a bank or other type of investor.
Whatever you decide to do, setting a budget ahead of time, figuring out your estimated costs and getting your financial house in order will help you immeasurably.